Maxing Roth and maxing the match - Investment help

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Topic Author
Mtangler25
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Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Thu Jan 10, 2019 5:44 pm

Fellow Bogelheads,

I have some questions regarding the best way to maximize my investments.

Currently, I have three investment accounts. I am 24 graduated college December 2017.

1.) Employer sponsored Simple IRA
- Contribution limit is $13k and my employer matches 3%

2.) Personal Roth IRA
- Three fund portfolio through Schwab, I have all Schwab funds to keep costs low. The only fund i am missing is the international index fund, but i am planning on adding it.

3.) Health Equity HSA
- Maximum contribution is $3,500. Currently have $2,000 in cash and around $400 in VTTSX. I plan build my cash up to $4k which is my deductible (yes it's that high)

I just became eligible after 1-year with my company to invest in the SIMPLE, but here is my question.

I can afford to invest $7,300/year. Currently I have $230 deducted from my paycheck and invested into my SIMPLE. I have $150/month withdrawn from my bank and deposited into my Roth at Schwab. and I have $200/month deducted from my paycheck and deposited into my HSA.

After reading around the forum, I think I might be doing this wrong. Should I essentially flip the amount invested into my SIMPLE to my Roth? this would allow me to max out my Roth and essentially contribute a little north of 3% of my salary into my SIMPLE, which would be essentially matched 100% from the 3% match from my employer?

is this a feasible idea? I originally decided to invest more in my Simple to get more out of the 3% match, but this strategy doesn't allow me to max out either of my retirement accounts. and I want that max contribution every year!

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arcticpineapplecorp.
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Re: Maxing Roth and maxing the match - Investment help

Post by arcticpineapplecorp. » Thu Jan 10, 2019 5:49 pm

this is the recommended order of prioritizing investments at the wiki:
https://www.bogleheads.org/wiki/Priorit ... nvestments
Here is a general account funding priority that often works well for many people (not all points will apply to everyone):

Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),
Pay off high interest debt (a guaranteed high return, the next best thing to free money),
Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),[1][note 1]
Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique[note 2]), depending on eligibility and personal circumstances,
Contribute the remainder of the maximum employee contribution to the work-based plan,
Contribute to a taxable investing account,
Contribute to non-deductible IRAs (may be better than taxable in certain circumstances) or annuities.

If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA.

An investor's tax bracket may influence the decision as well: those in higher tax brackets should consider higher contributions to a tax-deferred plan (e.g. traditional 401(k) or IRA) rather than a post-tax plan (e.g. Roth 401(k) or IRA); see Traditional versus Roth for more guidance.

Health savings accounts: Use of an HSA requires participation in an IRS qualified high deductible health plan (HDHP) at work. Look at your particular health care needs to decide if you may be better off with a traditional health care plan or an HDHP plus HSA. If the latter, then using the HSA as an investment account can be advantageous.
source: https://www.bogleheads.org/wiki/Priorit ... nvestments
does that help answer your question?
"Invest we must" | "By God, If John Q. Public doesn't get the word after two Swedroe books, two (Bill) Bernstein books, and four Bogle books, he (she) has only himself to blame!"

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Thu Jan 10, 2019 5:54 pm

Yes, thank you very much!

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Thu Jan 10, 2019 5:54 pm

What is your salary? I assume you are single. The salary would give us an approximate idea of your tax bracket. If you are in 22% bracket and contributing more to the SIMPLE IRA would let you drop a bracket, that is the preferable course of action. If you are, and going to be, in 12% bracket, irrespective of max contribution to SIMPLE, the maxing Roth would be the right answer

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Thu Jan 10, 2019 5:59 pm

lakpr wrote:
Thu Jan 10, 2019 5:54 pm
What is your salary? I assume you are single. The salary would give us an approximate idea of your tax bracket. If you are in 22% bracket and contributing more to the SIMPLE IRA would let you drop a bracket, that is the preferable course of action. If you are, and going to be, in 12% bracket, irrespective of max contribution to SIMPLE, the maxing Roth would be the right answer
Salary is $50k, single (kind of). I am engaged and will be married this September

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Thu Jan 10, 2019 6:27 pm

The status as of Dec 31 of this year is what matters. Based on your response I would say your tax status is Married Filing Jointly. What does your fiance/fiancee earn? If your salary alone supports both of you, then I would suggest
1. Max HSA
2. Max the SIMPLE IRA

This would get your adjusted gross income below the $38k threshold and makes you eligible for Savers credit which is free money from the government. That is like another 8% match thrown in on top of your employer match of 3%

The advice will, of course, change on the amount of your fiance/fiancee's earnings

krow36
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Re: Maxing Roth and maxing the match - Investment help

Post by krow36 » Thu Jan 10, 2019 6:29 pm

An advantage of your IRA is that you choose the financial institution (FI) and so you can invest at rock-bottom cost. Using Vanguard, Fidelity or Schwab etc., you can buy index funds with expense ratios of less than 0.10%.

What FI is your employer using for your SIMPLE IRA? Is it a Form 5305 or a Form 5304 SIMPLE IRA? In either case, there are possibilities for transferring your contributions to a low-cost FI. :happy

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Thu Jan 10, 2019 7:16 pm

5034, however. My employer wasn’t willing to open a separate plan through multiple financial institutions. So I opted out of Oppenheimer, which is the FI that my company chose. And I chose TD Ameritrade. My first contribution hasn’t hit my account yet so I haven’t chosen my funds yet. I wanted to go with a vanguard or Schwab but both institutions require an employer to open a plan with them. So, here I am with ameritrade and I can choose any fund I want. Unfortunately Vanguard and Schwab Funds are subject to commission, ameritrade offers a plethora of other funds for no fee and no load. I am still choosing between T Rowe Price, Ishares, and State Street. The funds I will choose will either be a target date or I’ll go with the Bogelhead 3 fund portfolio.

So I would rather my funds go into my Schwab account until I can rollover my SIMPLE in two years to whatever FI I want. Which is why I think picking a T Rowe Price target date fund for the interim seems to be my best option.

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Thu Jan 10, 2019 7:19 pm

lakpr wrote:
Thu Jan 10, 2019 6:27 pm
The status as of Dec 31 of this year is what matters. Based on your response I would say your tax status is Married Filing Jointly. What does your fiance/fiancee earn? If your salary alone supports both of you, then I would suggest
1. Max HSA
2. Max the SIMPLE IRA

This would get your adjusted gross income below the $38k threshold and makes you eligible for Savers credit which is free money from the government. That is like another 8% match thrown in on top of your employer match of 3%

The advice will, of course, change on the amount of your fiance/fiancee's earnings

Dec 31 is 2019? Or 2018?

She is currently in Nursing school in an accelerated program. She is unable to work and do school because of the time commitment. She lives with her parents until a few months before we get married. So, she earns nothing.

Olemiss540
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Re: Maxing Roth and maxing the match - Investment help

Post by Olemiss540 » Thu Jan 10, 2019 7:28 pm

Mtangler25 wrote:
Thu Jan 10, 2019 7:19 pm
lakpr wrote:
Thu Jan 10, 2019 6:27 pm
The status as of Dec 31 of this year is what matters. Based on your response I would say your tax status is Married Filing Jointly. What does your fiance/fiancee earn? If your salary alone supports both of you, then I would suggest
1. Max HSA
2. Max the SIMPLE IRA

This would get your adjusted gross income below the $38k threshold and makes you eligible for Savers credit which is free money from the government. That is like another 8% match thrown in on top of your employer match of 3%

The advice will, of course, change on the amount of your fiance/fiancee's earnings

Dec 31 is 2019? Or 2018?

She is currently in Nursing school in an accelerated program. She is unable to work and do school because of the time commitment. She lives with her parents until a few months before we get married. So, she earns nothing.
2019. If you get married the LAST day of 2019, you get to claim Married filing jointly on your 2019 taxes for a greatly reduced tax bill. What is your COMBINED expected GROSS income for 2019?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Thu Jan 10, 2019 8:26 pm

Mtangler,

I will go on a limb and assume that you WILL get married this year, your fiancee WILL NOT earn any money this year and you WILL file Married Filing Jointly (for 2019)

With these assumptions, I project that your tax bill will be zero for this year, based on some reasonable projections

1. Standard deduction of $24k
2. Max contribution to HSA of $3.5k (make it!)
3. Health care premiums assumed taken pretax from your paycheck of $5k for the year; part of the year for you alone, part of the year for the two of you
4. Contribute to Simple IRA of at least $6.5k
5. Contribute to a Roth IRA of at least $2k

1 through 4 will leave your taxable income at $10k, tax bracket of $1k, canceled out by Savers Credit of $1k

I put there condition 5 because I am not sure if the same 6.5k used to reduce your income can also be considered as having contributed to a retirement plan. But I do know IRAs are definitely considered. So you need to contribute at least $2k to get the max savers credit of $1k. I suggest Roth IRA because there is no point in contributing to traditional IRA.

Beyond these, it is up to you to save wherever you want to.

krow36
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Location: WA

Re: Maxing Roth and maxing the match - Investment help

Post by krow36 » Thu Jan 10, 2019 9:14 pm

Mtangler25 wrote:
Thu Jan 10, 2019 7:16 pm
5034, however. My employer wasn’t willing to open a separate plan through multiple financial institutions. So I opted out of Oppenheimer, which is the FI that my company chose. And I chose TD Ameritrade. My first contribution hasn’t hit my account yet so I haven’t chosen my funds yet. I wanted to go with a vanguard or Schwab but both institutions require an employer to open a plan with them.
I guess you realize that your employer is required by IRS regulations to allow you to select your desired FI for your Form 5304 SIMPLE IRA? I understand why you, as a recent hire, might be reluctant to push for your rights in this matter. I wonder if your employer realizes that he is breaking the law? I also wonder if the broker using Oppenheimer has encouraged your employer to restrict employees’ FI choice? It is to the broker’s financial advantage to have all employees use expensive funds because part of the fees go to the broker.

The requirement of opening up a SIMPLE IRA with your chosen FI is not a valid reason to turn you down. The FI has to verify that your employer has a SIMPLE IRA and that you are an employee.

Using a Self Directed Brokerage Account (SDBA) might be lower cost than using Oppenheimer funds, but I doubt if it as low-cost as would be the case if Vanguard, Schwab or Fidelity were your FI. Does the TDA SDBA have an annual fee?

Topic Author
Mtangler25
Posts: 54
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 1:42 am

krow36 wrote:
Thu Jan 10, 2019 9:14 pm
Mtangler25 wrote:
Thu Jan 10, 2019 7:16 pm
5034, however. My employer wasn’t willing to open a separate plan through multiple financial institutions. So I opted out of Oppenheimer, which is the FI that my company chose. And I chose TD Ameritrade. My first contribution hasn’t hit my account yet so I haven’t chosen my funds yet. I wanted to go with a vanguard or Schwab but both institutions require an employer to open a plan with them.
I guess you realize that your employer is required by IRS regulations to allow you to select your desired FI for your Form 5304 SIMPLE IRA? I understand why you, as a recent hire, might be reluctant to push for your rights in this matter. I wonder if your employer realizes that he is breaking the law? I also wonder if the broker using Oppenheimer has encouraged your employer to restrict employees’ FI choice? It is to the broker’s financial advantage to have all employees use expensive funds because part of the fees go to the broker.

The requirement of opening up a SIMPLE IRA with your chosen FI is not a valid reason to turn you down. The FI has to verify that your employer has a SIMPLE IRA and that you are an employee.

Using a Self Directed Brokerage Account (SDBA) might be lower cost than using Oppenheimer funds, but I doubt if it as low-cost as would be the case if Vanguard, Schwab or Fidelity were your FI. Does the TDA SDBA have an annual fee?

I realize my employer is most likely confused and how he has his SIMPLE IRA plan set up. And you are correct, not quite comfortable rocking the boat at the 1 year mark. I understand that it is my retirement and I most certainly do take it very seriously. Hence the reason I joined the forum. So, I figured I would cut my losses and go with an SDBA through Ameritrade, for two years then I can rollover.

TD Ameritrade does NOT charge an annual fee, which is why I was comfortable going that route. As far as the funds being as low cost at Vanguard and Schwab, no, the expense ratios are definitely higher but they are significantly lower than the over 1% ER and 5.75% load AND an annual fee of $25 which is what the Oppenheimer deal is.

The funds I am looking at for at least the next two years through TD ameritade have ER’s under 1% and no load! And they are commission free.

The solution is not ideal, but I am making the most out of it. Or at least trying. I know you have answered a lot of my SIMPLE Ira questions as of late and I am eternally grateful!

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 1:48 am

lakpr wrote:
Thu Jan 10, 2019 8:26 pm
Mtangler,

I will go on a limb and assume that you WILL get married this year, your fiancee WILL NOT earn any money this year and you WILL file Married Filing Jointly (for 2019)

With these assumptions, I project that your tax bill will be zero for this year, based on some reasonable projections

1. Standard deduction of $24k
2. Max contribution to HSA of $3.5k (make it!)
3. Health care premiums assumed taken pretax from your paycheck of $5k for the year; part of the year for you alone, part of the year for the two of you
4. Contribute to Simple IRA of at least $6.5k
5. Contribute to a Roth IRA of at least $2k

1 through 4 will leave your taxable income at $10k, tax bracket of $1k, canceled out by Savers Credit of $1k

I put there condition 5 because I am not sure if the same 6.5k used to reduce your income can also be considered as having contributed to a retirement plan. But I do know IRAs are definitely considered. So you need to contribute at least $2k to get the max savers credit of $1k. I suggest Roth IRA because there is no point in contributing to traditional IRA.

Beyond these, it is up to you to save wherever you want to.
Tax is not my forte, so I am a little confused one some of the suggestions.

First is line item #1. “Standard seduction of $24K” I am not quite sure what you mean by that.

I am not sure what the savers credit is either.


My health insurance costs are fairly lower than 5k, my employer covers 75% of the premium, which leaves me with about $120/month of pre tax deductions for the year.

My fiancé will graduate in August, we get married in September. She has to pass some nursing certifications to become a RN. Which takes about a month, so she plans to be hired by November.

i will be the only source of income from about June-November. This year consisted of lots of saving for short term, while still trying to max out my Roth, I was close but not quite there.

Does this change any of your suggestions?

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 1:49 am

Olemiss540 wrote:
Thu Jan 10, 2019 7:28 pm
Mtangler25 wrote:
Thu Jan 10, 2019 7:19 pm
lakpr wrote:
Thu Jan 10, 2019 6:27 pm
The status as of Dec 31 of this year is what matters. Based on your response I would say your tax status is Married Filing Jointly. What does your fiance/fiancee earn? If your salary alone supports both of you, then I would suggest
1. Max HSA
2. Max the SIMPLE IRA

This would get your adjusted gross income below the $38k threshold and makes you eligible for Savers credit which is free money from the government. That is like another 8% match thrown in on top of your employer match of 3%

The advice will, of course, change on the amount of your fiance/fiancee's earnings

Dec 31 is 2019? Or 2018?

She is currently in Nursing school in an accelerated program. She is unable to work and do school because of the time commitment. She lives with her parents until a few months before we get married. So, she earns nothing.
2019. If you get married the LAST day of 2019, you get to claim Married filing jointly on your 2019 taxes for a greatly reduced tax bill. What is your COMBINED expected GROSS income for 2019?

Not very much, she most likely won’t be working until November , see below for my explanation.

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BL
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Re: Maxing Roth and maxing the match - Investment help

Post by BL » Fri Jan 11, 2019 2:26 am


craimund
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Re: Maxing Roth and maxing the match - Investment help

Post by craimund » Fri Jan 11, 2019 5:57 am

Mtangler25 wrote:
Fri Jan 11, 2019 1:48 am
lakpr wrote:
Thu Jan 10, 2019 8:26 pm
Mtangler,

I will go on a limb and assume that you WILL get married this year, your fiancee WILL NOT earn any money this year and you WILL file Married Filing Jointly (for 2019)

With these assumptions, I project that your tax bill will be zero for this year, based on some reasonable projections

1. Standard deduction of $24k
2. Max contribution to HSA of $3.5k (make it!)
3. Health care premiums assumed taken pretax from your paycheck of $5k for the year; part of the year for you alone, part of the year for the two of you
4. Contribute to Simple IRA of at least $6.5k
5. Contribute to a Roth IRA of at least $2k

1 through 4 will leave your taxable income at $10k, tax bracket of $1k, canceled out by Savers Credit of $1k

I put there condition 5 because I am not sure if the same 6.5k used to reduce your income can also be considered as having contributed to a retirement plan. But I do know IRAs are definitely considered. So you need to contribute at least $2k to get the max savers credit of $1k. I suggest Roth IRA because there is no point in contributing to traditional IRA.

Beyond these, it is up to you to save wherever you want to.
Tax is not my forte, so I am a little confused one some of the suggestions.

First is line item #1. “Standard seduction of $24K” I am not quite sure what you mean by that.
Standard Deduction (not seduction - although I am curious what a standard seduction is :D ) The Standard Deduction in 2019 is $24.4 K for married filing jointly. You can deduct 24,400 from your income before calculating taxes. You would do this unless you can itemize and come up with more than 24,400 in actual deductions incurred during 2019 - mortgage interest, charitable contributions, state and local income tax (capped at $10,000), etc.
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

Topic Author
Mtangler25
Posts: 54
Joined: Mon Jul 10, 2017 7:44 pm

Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 10:04 am

craimund wrote:
Fri Jan 11, 2019 5:57 am
Mtangler25 wrote:
Fri Jan 11, 2019 1:48 am
lakpr wrote:
Thu Jan 10, 2019 8:26 pm
Mtangler,

I will go on a limb and assume that you WILL get married this year, your fiancee WILL NOT earn any money this year and you WILL file Married Filing Jointly (for 2019)

With these assumptions, I project that your tax bill will be zero for this year, based on some reasonable projections

1. Standard deduction of $24k
2. Max contribution to HSA of $3.5k (make it!)
3. Health care premiums assumed taken pretax from your paycheck of $5k for the year; part of the year for you alone, part of the year for the two of you
4. Contribute to Simple IRA of at least $6.5k
5. Contribute to a Roth IRA of at least $2k

1 through 4 will leave your taxable income at $10k, tax bracket of $1k, canceled out by Savers Credit of $1k

I put there condition 5 because I am not sure if the same 6.5k used to reduce your income can also be considered as having contributed to a retirement plan. But I do know IRAs are definitely considered. So you need to contribute at least $2k to get the max savers credit of $1k. I suggest Roth IRA because there is no point in contributing to traditional IRA.

Beyond these, it is up to you to save wherever you want to.
Tax is not my forte, so I am a little confused one some of the suggestions.

First is line item #1. “Standard seduction of $24K” I am not quite sure what you mean by that.
Standard Deduction (not seduction - although I am curious what a standard seduction is :D ) The Standard Deduction in 2019 is $24.4 K for married filing jointly. You can deduct 24,400 from your income before calculating taxes. You would do this unless you can itemize and come up with more than 24,400 in actual deductions incurred during 2019 - mortgage interest, charitable contributions, state and local income tax (capped at $10,000), etc.

Haha, my bad that's funny!

How come you recommended putting more in the Simple and not maxing out the Roth?

craimund
Posts: 84
Joined: Thu Feb 15, 2018 3:39 pm
Location: Virginia

Re: Maxing Roth and maxing the match - Investment help

Post by craimund » Fri Jan 11, 2019 11:36 am

Mtangler25 wrote:
Fri Jan 11, 2019 10:04 am
craimund wrote:
Fri Jan 11, 2019 5:57 am
Mtangler25 wrote:
Fri Jan 11, 2019 1:48 am
lakpr wrote:
Thu Jan 10, 2019 8:26 pm
Mtangler,

I will go on a limb and assume that you WILL get married this year, your fiancee WILL NOT earn any money this year and you WILL file Married Filing Jointly (for 2019)

With these assumptions, I project that your tax bill will be zero for this year, based on some reasonable projections

1. Standard deduction of $24k
2. Max contribution to HSA of $3.5k (make it!)
3. Health care premiums assumed taken pretax from your paycheck of $5k for the year; part of the year for you alone, part of the year for the two of you
4. Contribute to Simple IRA of at least $6.5k
5. Contribute to a Roth IRA of at least $2k

1 through 4 will leave your taxable income at $10k, tax bracket of $1k, canceled out by Savers Credit of $1k

I put there condition 5 because I am not sure if the same 6.5k used to reduce your income can also be considered as having contributed to a retirement plan. But I do know IRAs are definitely considered. So you need to contribute at least $2k to get the max savers credit of $1k. I suggest Roth IRA because there is no point in contributing to traditional IRA.

Beyond these, it is up to you to save wherever you want to.
Tax is not my forte, so I am a little confused one some of the suggestions.

First is line item #1. “Standard seduction of $24K” I am not quite sure what you mean by that.
Standard Deduction (not seduction - although I am curious what a standard seduction is :D ) The Standard Deduction in 2019 is $24.4 K for married filing jointly. You can deduct 24,400 from your income before calculating taxes. You would do this unless you can itemize and come up with more than 24,400 in actual deductions incurred during 2019 - mortgage interest, charitable contributions, state and local income tax (capped at $10,000), etc.

Haha, my bad that's funny!

How come you recommended putting more in the Simple and not maxing out the Roth?
That information was taken from lakpr's post not mine. However, the order in the list provided doesn't matter. You simply add up all of these deductions from your income to determine your taxes. It looks like you will not owe anything in federal income taxes for 2019 based on these numbers. Not sure about Simple vs Roth.
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Fri Jan 11, 2019 12:10 pm

Craimund,

Thanks.

Mtangler,

Yes I did recommend in contributing more to your SIMPLE IRA, because the amount you contribute to that account will reduce your taxable income. I was driving towards getting you to pay zero taxes based on your situation, and what looks like a golden opportunity for you for this year. Assuming next year your wife will pull in an approximately equal salary as you, you will find yourself in a 22% tax bracket in 2020 than the 10% tax bracket as now, also no longer able to avail the Savers Credit. It does take a bit of squeeze on your part I know, but would you rather not pay 0 taxes?

To get the $1000 Savers Credit from the government, your taxable income should be less than $38k odd for the year, AND you must contribute at least $2000 in this year to your Roth IRA. Based on what you told me in your previous posts, it looks like you will definitely meet the first condition (AGI below 38k), and it looks like you do intend to contribute at least $2000 to Roth IRA. You are good there.

Regarding the maximizing of SIMPLE IRA, simply be aware that if you don’t maximize it, you are essentially choosing to pay 10% tax on the amount you are not contributing below the maximum. Nothing wrong with that, just be aware that’s all. Actually, it might even make sense, t is better to pay 10% tax now on your contributions to Roth IRA (which is where your spare money will go to, I assume) this year, than pay 22% tax on the money not being contributed to SIMPLE IRA next year. You gain 12% in tax rate arbitrage.

lakpr
Posts: 581
Joined: Fri Mar 18, 2011 9:59 am

Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Fri Jan 11, 2019 12:16 pm

Also wanted to add: please maximize your HSA. Not only will the contribution escape the income tax, but will also escape the social security tax and Medicare tax. That is 10% + 6% + 1.5% = 17.5% tax rebate on that money. This is spelled out in the wiki but perhaps you may not have had a chance to read it.

Topic Author
Mtangler25
Posts: 54
Joined: Mon Jul 10, 2017 7:44 pm

Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 12:51 pm

lakpr wrote:
Fri Jan 11, 2019 12:10 pm
Craimund,

Thanks.

Mtangler,

Yes I did recommend in contributing more to your SIMPLE IRA, because the amount you contribute to that account will reduce your taxable income. I was driving towards getting you to pay zero taxes based on your situation, and what looks like a golden opportunity for you for this year. Assuming next year your wife will pull in an approximately equal salary as you, you will find yourself in a 22% tax bracket in 2020 than the 10% tax bracket as now, also no longer able to avail the Savers Credit. It does take a bit of squeeze on your part I know, but would you rather not pay 0 taxes?

To get the $1000 Savers Credit from the government, your taxable income should be less than $38k odd for the year, AND you must contribute at least $2000 in this year to your Roth IRA. Based on what you told me in your previous posts, it looks like you will definitely meet the first condition (AGI below 38k), and it looks like you do intend to contribute at least $2000 to Roth IRA. You are good there.

Regarding the maximizing of SIMPLE IRA, simply be aware that if you don’t maximize it, you are essentially choosing to pay 10% tax on the amount you are not contributing below the maximum. Nothing wrong with that, just be aware that’s all. Actually, it might even make sense, t is better to pay 10% tax now on your contributions to Roth IRA (which is where your spare money will go to, I assume) this year, than pay 22% tax on the money not being contributed to SIMPLE IRA next year. You gain 12% in tax rate arbitrage.
Thank you for clarifying, this does make a lot more sense now. As far as being able to Max out my Simple, which is 13k for 2019. I don't think I can afford that. I will be the sole income for at least half of 2019 and I will need as much extra cash as I can, of course we will live within our means but it is still quite expensive being the sole income, especially where I live! So, I think the best option is to contribute the following

$3,500 to HSA (Max)
$6,500 to Simple (Half of max)
$2,000 to Roth

This will be increasing my annual savings by $1,100 which will be a stretch for me but I can make it happen. If I go this route, I will be subject to the 10% tax, correct?

Topic Author
Mtangler25
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Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 12:52 pm

Lakpr,

I should also include that my employer usually makes a contribution to our HSAs' this year was a total of $1,300 which is quite generous!

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Fri Jan 11, 2019 1:09 pm

Looks like a great plan! Yes your employer is generous in the HSA match, but please be also aware they are doing it for the same reason as you: they get a tax break on the employer portion for the amount they contribute to HSAs.

Secondly, I would also say that you have until April 2020 to maximize your 2019 Roth contribution, so even if you may not be able to fully fund the Roth IRA this year, you have an extra 3.5 months to do so next year without losing that Roth space.

Best of luck and congratulations on your upcoming nuptials.

One other suggestion I want to throw in: submit a revised W-4 to your employer’s HR department to increase your exemptions to 10. With your plan, you are on track to owe only $600 for the entire year yo IRS. This will reduce the amount of tax being withheld from your pay check, and allow more of that money to be directed to your SIMPLE IRA, and if I am correct, you will see no change on your take home amount.

BD w/ Kung-Fu Grip
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Re: Maxing Roth and maxing the match - Investment help

Post by BD w/ Kung-Fu Grip » Fri Jan 11, 2019 2:00 pm

Mtangler25 wrote:
Fri Jan 11, 2019 12:52 pm
Lakpr,

I should also include that my employer usually makes a contribution to our HSAs' this year was a total of $1,300 which is quite generous!
Be aware that your employer's contribution to your HSA counts against the maximum contribution for the year.

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Fri Jan 11, 2019 2:28 pm

BD,

That is a good point, I missed it. If the employer is contributing $1300, the max that can be contributed by OP is only $2200 for a total of $3500.

Excess contributions to HSA attract a 6% excise tax until removed, it is a pain to deal with.

Mtangler, please shift the $1300 from your planned HSA contribution to Roth IRA instead

Topic Author
Mtangler25
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Joined: Mon Jul 10, 2017 7:44 pm

Re: Maxing Roth and maxing the match - Investment help

Post by Mtangler25 » Fri Jan 11, 2019 3:54 pm

Yes, that is a good point. I appreciate all the help! Tax can be quite confusing but I appreciate the fact that the tax advise will help me lower my taxable income.

Is this reccomended for the future as well? Say I was married and we both made 50K for example, would I still want to put more in my Simple? When should I max out my Roth? I think it is safe to assume that there are millions of Americans whom are married and have a Simple IRA/ 401k and a personal Roth.

lakpr
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Re: Maxing Roth and maxing the match - Investment help

Post by lakpr » Fri Jan 11, 2019 4:13 pm

Mtangler,

In general, for married filing jointly, the goal should be to drop a tax bracket. In your case, into the 12% bracket. Because of combined income of $100k+, you will be far above the threshold for the Savers Credit, so you might as well forget about it. The upper limit of 12% bracket is $78,950 for 2019, and indexed for inflation for years further. This is within reach. From your combined income, subtract $24,400 (or inflation adjusted amount), subtract your HSA contribution (always prioritize this over everything else), and if you are still above that threshold contribute enough to your traditional 401(k) /SIMPLE IRA to drop below the threshold. Then max out your Roth IRAs to the max you can. If you have money left, come back and contribute even more to traditional 401(k) and SIMPLE IRA.

Edited to add: I believe it is beneficial to be in Roth accounts if you are in 12% bracket or lower, it is a wash tax wise if you are in 22% or 24% bracket, and traditional 401(k) / traditional IRAs win if you are in higher tax brackets. In General. Your particular situation may vary depending on individual circumstances.

Hope that helps!

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teen persuasion
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Re: Maxing Roth and maxing the match - Investment help

Post by teen persuasion » Fri Jan 11, 2019 9:03 pm

The OP's SIMPLE contributions do count towards the Retirement Saver's credit.

If he contributes the $2k to a Roth IRA in his wife's name instead of his own (after they are married) his credit can be up to 50% of $2k for each of them, if their AGI gets below the $38.5k limit for 2019. Larger payback for same contributions, just more strategically deployed.

In actuality, they won't get the full $2k credit, because at $38.5k AGI MFJ they won't owe $2k in tax, and it's a nonrefundable credit, they will just get to zero tax. If their AGI goes just above $38.5k, their credit drops below 50% to only 20%, or $800 max while their tax rises. Thus it's important to contribute enough to HSA and the SIMPLE to get AGI below $38.5k, especially if his wife has earnings before year end.

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