Lowering Roth IRA or 401k contributions first?

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Ren
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Joined: Tue Sep 11, 2012 11:16 am

Lowering Roth IRA or 401k contributions first?

Post by Ren » Thu Nov 07, 2019 10:49 am

Due to some medical issues cropping up within the family, I'm probably going to need lower my retirement contributions for next year. I know there isn't a one size fits all solution when it comes to account funding, but I'd like people's take on it. Currently everything is being maxed, two pre-tax 401k's, and two Roth IRA's. My wife will likely need to quit her job, at least temporarily, so we won't have her 401k next year. Thanks for any input.

Federal tax - 22%
State - approx 7%

bloom2708
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Re: Lowering Roth IRA or 401k contributions first?

Post by bloom2708 » Thu Nov 07, 2019 10:58 am

If just 1 year, I'd probably lower Roth contributions.

If you reduce pre-tax 401k down to the match (example), then you pay 29% more tax on those dollars. You end up with less money in your check.

Or reduce both by some. Roth has the best long term prospects, but more tax for short term.
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Silk McCue
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Re: Lowering Roth IRA or 401k contributions first?

Post by Silk McCue » Thu Nov 07, 2019 11:08 am

Sorry to hear of the circumstances you are facing.

If the loss of your wife's income is going to drop you into the 12% bracket then I would first contribute to your 401k enough to get the match and then fund your Roth's followed by additional contributions to your 401k if you are able. If you are still going to be in the 22% bracket I would likely bypass the Roth and use the 401k exclusively. If by January 2021 your wife is working again I would use whatever means reasonably necessary (Cash or HELOC) to contribute to a 2020 Roth for both of you prior to April 15th.

Cheers

Topic Author
Ren
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Joined: Tue Sep 11, 2012 11:16 am

Re: Lowering Roth IRA or 401k contributions first?

Post by Ren » Thu Nov 07, 2019 11:21 am

I'd have to crunch the numbers, but I would most likely still end up at 22%. It's not a bad idea to either delay/lower my Roth contributions and then fund them early next year if everything works out.

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Darth Xanadu
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Re: Lowering Roth IRA or 401k contributions first?

Post by Darth Xanadu » Thu Nov 07, 2019 11:22 am

Silk McCue wrote:
Thu Nov 07, 2019 11:08 am
Sorry to hear of the circumstances you are facing.

If the loss of your wife's income is going to drop you into the 12% bracket then I would first contribute to your 401k enough to get the match and then fund your Roth's followed by additional contributions to your 401k if you are able. If you are still going to be in the 22% bracket I would likely bypass the Roth and use the 401k exclusively. If by January 2021 your wife is working again I would use whatever means reasonably necessary (Cash or HELOC) to contribute to a 2020 Roth for both of you prior to April 15th.

Cheers
This is quality advice. A related point of consideration is that depending on the timing of when your spouse quits the job, and the mechanics of how the employer matches 401k contributions (each pay period vs end of year / if employed) then she may not be eligible for matching funds.
"A courageous teacher, failure is."

MathWizard
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Re: Lowering Roth IRA or 401k contributions first?

Post by MathWizard » Thu Nov 07, 2019 11:31 am

If you expect to be in the 12% bracket in retirement, and/or have decreased state income taxes, then reduce the Roth. You can
convert from tax deferred to Roth in retirement especially before claiming SS benefits.

If you expect taxes to be the same, I would keep maxing the Roth and reduce the 401k.

The Roth has the benefit that you can withdraw contributions penalty free, so if you have a large Efund in the bank, or in a taxable account, you can place some of in the Roth so that you don't lose the opportunity. You can place those Efund Roth funds in a Roth IRA CD if you want, and transfer into your portfolio later if you don't need the funds.

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FiveK
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Re: Lowering Roth IRA or 401k contributions first?

Post by FiveK » Thu Nov 07, 2019 2:54 pm

See Prioritizing investments and Investment Order for general guidance. Does that fit well enough for your situation?

Silk McCue
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Re: Lowering Roth IRA or 401k contributions first?

Post by Silk McCue » Thu Nov 07, 2019 3:01 pm

Can Family Medical Leave be used by your wife? Not certain if that would fit in these circumstances but just wanted to mention it.

Cheers

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