Contribution Limits and Retirement Account Type - Please Clarify

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pangea33
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Joined: Mon Jan 16, 2017 11:57 am

Contribution Limits and Retirement Account Type - Please Clarify

Post by pangea33 »

After searching some old threads, I found similar questions. I just want to make sure that I am clear on what I understand about contribution limits. These are intended to be very general questions, please forgive me if I missed the obvious.

Age 42, married, filing jointly, with an employer sponsored 401(k) where I've maxed out the employer match of $3799.92 ($316.66/mo.) Also have a Roth IRA that i've begun maxing out at $5,500/yr, but have not opened a Roth for my wife yet. My current intention is to max out my personal contribution limits, then open a Roth in my wife's name.

Please clarify the following:
  • My contributions are limited to $18k inclusive of my Roth, but are NOT impacted by the $3800 employer match? ($21,800/yr)
  • Is there a compelling reason to hit the Roth max for my wife BEFORE maxing out my 401k, or is that a case by case basis?
Thank you for any assistance. This forum has been an awesome resource as I try to wrap my brain around the world of personal finance.
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CyclingDuo
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Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by CyclingDuo »

pangea33 wrote: Fri Sep 29, 2017 8:43 am After searching some old threads, I found similar questions. I just want to make sure that I am clear on what I understand about contribution limits. These are intended to be very general questions, please forgive me if I missed the obvious.

Age 42, married, filing jointly, with an employer sponsored 401(k) where I've maxed out the employer match of $3799.92 ($316.66/mo.) Also have a Roth IRA that i've begun maxing out at $5,500/yr, but have not opened a Roth for my wife yet. My current intention is to max out my personal contribution limits, then open a Roth in my wife's name.

Please clarify the following:
  • My contributions are limited to $18k inclusive of my Roth, but are NOT impacted by the $3800 employer match? ($21,800/yr)
  • Is there a compelling reason to hit the Roth max for my wife BEFORE maxing out my 401k, or is that a case by case basis?
$18K refers to your contributions only (not impacted by your employer match), and does not include the ROTH. You can do $18K in the 401K, and $5500 in the ROTH. Those numbers jump to $24K for the 401K and $6500 for the ROTH at age 50.

The latter question would be case by case based on your combined incomes, tax rate, and the cost of the funds you have available in your 401K. In some scenarios, after the match has been met, contributing the max to both ROTH's first, then if there is money left over to contribute, go back to the 401K and add that additional money. There are a lot of factors at play, so an answer of "it depends" may not be what you are looking to hear.


Thank you for any assistance. This forum has been an awesome resource as I try to wrap my brain around the world of personal finance.
"Save like a pessimist, invest like an optimist." - Morgan Housel
niceguy7376
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Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by niceguy7376 »

Your 401k contribution limit is 18K without employer match.
You can have a separate roth IRA limit of 5.5K

As for which to hit first: upto limit in 401k or roth ira - case by case basis. Type of options in your 401k; trying to have multiple buckets (401k, roth ira etc); some people having roth ira as emergency bucket (5 years after initial roth is opened) are different variables that you need to consider.
an_asker
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Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by an_asker »

pangea33 wrote: Fri Sep 29, 2017 8:43 am After searching some old threads, I found similar questions. I just want to make sure that I am clear on what I understand about contribution limits. These are intended to be very general questions, please forgive me if I missed the obvious.

Age 42, married, filing jointly, with an employer sponsored 401(k) where I've maxed out the employer match of $3799.92 ($316.66/mo.) Also have a Roth IRA that i've begun maxing out at $5,500/yr, but have not opened a Roth for my wife yet. My current intention is to max out my personal contribution limits, then open a Roth in my wife's name.

Please clarify the following:
  • My contributions are limited to $18k inclusive of my Roth, but are NOT impacted by the $3800 employer match? ($21,800/yr)
  • Is there a compelling reason to hit the Roth max for my wife BEFORE maxing out my 401k, or is that a case by case basis?
Thank you for any assistance. This forum has been an awesome resource as I try to wrap my brain around the world of personal finance.
Roth IRA limits and 401(k) limits are mutually exclusive. The rule of thumb is: 401(k) up to the match, then Roth IRA to its limit, then 401(k) to its limit. There are a few exceptions to this rule (bottom line, you will need to spend some time weighing your options):

exception 1 - if you are in a low income category where you are at the point that you are struggling to make your ends meet, starting off with the Roth would be a better idea, as it will act like an emergency fund. Without having to pay any penalty, you can withdraw any money that you contributed. Any withdrawal from a 401(k) will be taxed (note that the Roth IRA contributions are all after tax) and penalized.

exception 2 - if your income puts you barely over into a higher tax bracket (and you are struggling to make your ends meet), put just enough in the 401(k) to lower your tax bracket, then follow exception 1 above!

exception 3 - if, after you have contributed to 401(k) up to the match but can bring yourself to a lower tax bracket if you contribute some more to the 401(k), do so and then start your Roth IRA.

There is another animal called the Roth 401(k). I don't see your having referred to it, but it contributes to the confusion because it shares the contribution limit with the 401(k). In other words, you are limited to $18,000 (for 2017) total for the traditional 401(k) plus the Roth 401(k), if you have one of each.
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pangea33
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Joined: Mon Jan 16, 2017 11:57 am

Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by pangea33 »

Thanks for the quick replies. My goal with the multiple buckets is an effort to dial-in distributions at retirement in a way which will minimize potential tax liability. That horizon is such that I haven't got anything beyond a slowly lifting fog at this point.

I appreciate the clarification on the multiple accounts. The separation between 401(k) & Roth gives a LOT of room above my current contribution levels ($10k) before I have to worry about bumping into any limits. My provider does have a Roth 401(k) available too, but it was adding additional confusion and can't touch the 0.16% ER I am getting from the Vanguard Target Funds for my Roth IRA.

That will give me time to get all the necessary details in order to ask appropriate questions. I understand that a full description of my portfolio will be necessary. I still am not fully clear on how to provide all of the relevant details at this stage.

I'll just try to keep learning from the wiki and return when I can articulate a well-prepared question!
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Earl Lemongrab
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Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by Earl Lemongrab »

Some people have said the limit on your contributions to a 401(k) is 18k. This is inaccurate, or rather incomplete. This is the limit for employee deferrals and/or Roth contributions. However, you can (if the plan allows) make further contributions on an after-tax basis. This works like non-deductible contributions to an IRA, no deduction for the contribution and the earnings are taxable. Some people can and do use this for the "Mega Backdoor Roth", where they make after-tax contributions then roll them out to a Roth IRA.

If your plan allows that, then it's an additional benefit to look into.
retiredjg
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Re: Contribution Limits and Retirement Account Type - Please Clarify

Post by retiredjg »

One further clarification....your $18k limit for employee deferrals can go to traditional 401k, Roth 401k, or a combination of the two. That may be the source of your confusion.

As already mentioned, your $5,500 IRA limit is a separate limit and can go to traditional IRA (where you may or may not get tax-deferral) or Roth IRA or a combination of the two.
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