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.