View Full Version : 401 K Investment formula??
Averageman
04-17-16, 12:59
OKay in order to reduce the tax I am paying and invest in my 401K to the optimum rate I'm looking for a basic formula.
I want to reduce my end of year tax burden and optimize the amount I can invest. I messed with the amount this year increasing my percentage in the last quarter, but still ended up with a near 2K burden.
I'm single and 54 1/2 so I believe I can go over the 15K maximum amount this year.
Anyone have some knowledge or experience with this type of thing?
My intent is to ease my retirement and not pay in anymore than I have to.
Make sure you are taking advantage of catchup contributions. 24k was the annual max last year, with catchup contributions.
In order to give the best advice you would need to disclose a lot more than you should on a public forum.
My advice is to hire a good financial planner to make recommendations.
Averageman
04-17-16, 13:07
Make sure you are taking advantage of catchup contributions. 24k was the annual max last year, with catchup contributions.
Yeah I was kind of counting on the catch-up deal to put me over the top.
You're only 4.5 years late on that average! :)
OKay in order to reduce the tax I am paying and invest in my 401K to the optimum rate I'm looking for a basic formula.
I want to reduce my end of year tax burden and optimize the amount I can invest. I messed with the amount this year increasing my percentage in the last quarter, but still ended up with a near 2K burden.
I'm single and 54 1/2 so I believe I can go over the 15K maximum amount this year.
Anyone have some knowledge or experience with this type of thing?
My intent is to ease my retirement and not pay in anymore than I have to.
The IRS annual maximum for 2016 is $18,000 and a catch-up of $6,000 is allowed for those over 50. Thus, you are allowed up to a total of $24K to be deducted from your salary pre-tax because you are over 50.
https://www.irs.gov/uac/Newsroom/IRS-Announces-2016-Pension-Plan-Limitations%3B-401(k)-Contribution-Limit-Remains-Unchanged-at-$18,000-for-2016
Ideally, you should be funding your retirement at about 10% of your salary since you began working in order to maintain your lifestyle in retirement. That means someone earning more that $180,000 per year will need to max out their 401K AND fund additional retirement/investment vehicles such as an IRA.
As for your investment posture, you are going to want to be edge more towards conservative vehicles (maybe 40% stock and 60% bonds) since you may retire in 10-15 years. To make it easy, large 401K managers like Fidelity have target retirement dates that adjust your posture to more conservative mixtures as you approach that date.
Averageman
04-17-16, 13:20
The IRS annual maximum is $18,000 and a catch-up of $6,000 is allowed for those over 50. Thus, you are allowed up to a total of $24K to be deducted from your salary pre-tax because you are over 50.
Yeah, I'm tracking.
18K is the new max with a 6K bumper 'cause I'm over 50.
I've got a guy who does my taxes, he's pretty sharp, so sharp I can't get in to see him until mid May.
There are a couple of things I want to do, saving for retirement and later moving that money around to better investments when I'm 59 1/2.
I'm taking a beating on my taxes for a couple of reasons, I'm single and I have a military retirement that's being taxed like crazy until I get a little older. What I would like to do is find a formula that will lay it out for me so that I can come up with a household budget that I can live with.
I enjoy working and I will continue likely until I'm too old to work, but I would like to have the near same income in retirement as I have now. The issue seems to be increasing my 401K contribution to avoid taxes and optimize my investments.
Likely as not I will go in and talk to my 401K manager and increase it under his guidance. What I need is somewhere to do my own due diligence and have a plan before I talk to him.
Yeah, I'm tracking.
18K is the new max with a 6K bumper 'cause I'm over 50.
I've got a guy who does my taxes, he's pretty sharp, so sharp I can't get in to see him until mid May.
There are a couple of things I want to do, saving for retirement and later moving that money around to better investments when I'm 59 1/2.
I'm taking a beating on my taxes for a couple of reasons, I'm single and I have a military retirement that's being taxed like crazy until I get a little older. What I would like to do is find a formula that will lay it out for me so that I can come up with a household budget that I can live with.
I enjoy working and I will continue likely until I'm too old to work, but I would like to have the near same income in retirement as I have now. The issue seems to be increasing my 401K contribution to avoid taxes and optimize my investments.
Likely as not I will go in and talk to my 401K manager and increase it under his guidance. What I need is somewhere to do my own due diligence and have a plan before I talk to him.
Take a look at what I added to my first post. If your employer uses a larger management firm like Fidelity, then give them a call and find out about their targeted, self-adjusted vehicles. This would be a good place to start until you get in with your advisor.
One last word to the wise. You may now think that you will retire far later than 65-70. However, be careful with taking too aggressive of a posture. You never know what life can throw at you and you want to have a fairly protected principal moving into your 60's.
Averageman
04-17-16, 14:21
Take a look at what I added to my first post. If your employer uses a larger management firm like Fidelity, then give them a call and find out about their targeted, self-adjusted vehicles. This would be a good place to start until you get in with your advisor.
One last word to the wise. You may now think that you will retire far later than 65-70. However, be careful with taking too aggressive of a posture. You never know what life can throw at you and you want to have a fairly protected principal moving into your 60's.
I'm at moderate risk currently, the plan was to go low to moderate at 59 and low at 62. I will take my income tax information in tomorrow and sit down and have a talk with the guys at Fidelity.
I have a feeling I know how this is going to work out, I just have to make the call tomorrow. I will talk to my tax guy in May and figure out how to do this a bit better and later diversify some of my stuff as I begin to be old enough to pull it out without a penalty.
Thanks.
If you can financially swing it, and have no other retirement/tax deferred/advantage accounts i.e. roth, regular IRA, 529 college plan for kid, etc..., you should be maxing the 401k.
If you owed 2k bucks to the IRS last year there are some formula's to figure out how much you need to reduce your taxable income by to eliminate that, then its up to you to figure out HOW to do that, or even IF you can.
Averageman
04-17-16, 14:55
If you can financially swing it, and have no other retirement/tax deferred/advantage accounts i.e. roth, regular IRA, 529 college plan for kid, etc..., you should be maxing the 401k.
If you owed 2k bucks to the IRS last year there are some formula's to figure out how much you need to reduce your taxable income by to eliminate that, then its up to you to figure out HOW to do that, or even IF you can.
I've got a Roth at my Bank with a couple K in it, it's been sitting a while as the 401K is a pretty good deal because my employer is matching 6% and it is pre tax dollars going in to it that lower my taxable income. The 529 is sitting at the same bank waiting for my Son to get back here to Texas and start school again.
I could put some money away for a niece of nephew to go to college, but the plan is to reduce my tax amount and defer that in to my 401K. If I would give them money later for college, it will be cash and on a one time basis.
I'm looking for those formulas so that I can bounce some numbers around when I talk to the Fidelity guy tomorrow.
I'm pretty much able to budget myself and being single and having most of everything I need, I'm living a pretty easy life. I just want to have enough cash on hand to live at this same comfort level the rest of my life.
I also read the paper and watch the news a lot so sending anymore money to Washington than I have to going against my last F'ing nerve.
Your tax guy will have better access to the formula's.
Without knowing your gross income level, and im not asking, its hard to run a calculation.
Ill just use me as an example a few years ago I got a large raise, but the first check I got the pay wasnt really any higher because I bumped 2 tax brackets. So my raise was eaten up by bumping from the 15% to the 28% tax bracket(I hovered between the 25 and 28% bracket depending on how many hours I worked and the payroll software modeling) PLUS being more money being taxed at that higher rate led me to barely see the raise(I saw it, but my pay check didnt increase the corresponding % to my hourly pay rate bump). I bumped my 401k from 10% to 20%(ended up maxing the 401k for about 3 years, ive now dropped back a bit after buying a house to put some more money in my pocket monthly) and my pay check went up AND I was putting substantially more into the 401k, so a win win situation. At the end of the year I have enough deductions to bump myself down into a much much lower effective tax rate also.
So its A LOT more complicated than it sounds and IMO the fidelity guy is going to simply say "talk to your tax advisor". I can almost 100% guarantee that and IMO its a waste of your time to even go talk to your 401k people.
So you have to take your "tax bracket" and see if you can bump into the lower one by increasing your 401k(not that easy to do since the brackets are fairly large, but if you are on the bubble from one to another). All the rest is in your year end taxes, deductions, etc... that get you to your effective tax rate and only your tax guy can answer those questions, and he should since you are paying him for tax advice on how to reduce your tax burden, otherwise you would be doing turbotax for 49.95!
Averageman
04-17-16, 15:29
Your tax guy will have better access to the formula's.
Without knowing your gross income level, and im not asking, its hard to run a calculation.
Ill just use me as an example a few years ago I got a large raise, but the first check I got the pay wasnt really any higher because I bumped 2 tax brackets. So my raise was eaten up by bumping from the 15% to the 28% tax bracket(I hovered between the 25 and 28% bracket depending on how many hours I worked and the payroll software modeling) PLUS being more money being taxed at that higher rate led me to barely see the raise(I saw it, but my pay check didnt increase the corresponding % to my hourly pay rate bump). I bumped my 401k from 10% to 20%(ended up maxing the 401k for about 3 years, ive now dropped back a bit after buying a house to put some more money in my pocket monthly) and my pay check went up AND I was putting substantially more into the 401k, so a win win situation. At the end of the year I have enough deductions to bump myself down into a much much lower effective tax rate also.
So its A LOT more complicated than it sounds and IMO the fidelity guy is going to simply say "talk to your tax advisor". I can almost 100% guarantee that and IMO its a waste of your time to even go talk to your 401k people.
So you have to take your "tax bracket" and see if you can bump into the lower one by increasing your 401k(not that easy to do since the brackets are fairly large, but if you are on the bubble from one to another). All the rest is in your year end taxes, deductions, etc... that get you to your effective tax rate and only your tax guy can answer those questions, and he should since you are paying him for tax advice on how to reduce your tax burden, otherwise you would be doing turbotax for 49.95!
Yeah I need to look at the brackets, then I need to see if I can budget to fall in to the lower one and how will that effect my standard of living and budget if I do.
I also need to see when my percentage on my military retirement drops back to something more like a normal retirement rate, that will effect my ability to decrease my tax burden and increase my investment percentage.
When you start doing the numbers and looking at the average age your family members live one way or the other it can be a scary thing.
Stroking a $2K check to Uncle Sam is not all that bad. The LAST thing that you want to do is get a big refund. People who do this are give the govt. an interest-free loan. It also increases your exposure to certain regulatory risks as the govt. can withold your refund for non-compliance (i.e. not having health insurance can incur a tax penalty that can only be enforced on your refund).
Averageman
04-17-16, 16:11
Well, after some investigation I'm wondering how I can adjust a 50K difference in order to fall in to the lower bracket when I've already adjusted my current pretax income by 22% going in to my 401K in 2015? I can max out, but even that wont get me there and I still have to eat.
Gentlemen, I apologize, I've not a clue how to do this better. I doubt at where I am at my tax guy can help me either.
The idea that somewhere somehow this money is ending up in the hands of the mutha of a didndonuttin and will go towards his commissary chaps me.
Its not ALL about dropping into a lower bracket and usually thats IMPOSSIBLE unless you are only over the bracket limit by a little bit. I would have had to cut like 50k off of my taxable income to drop back into the 15% bracket, which is physically IMPOSSIBLE to do. So you saying 50k, to me says you make about what I make.
But lets just use say, 100k income and you owe 2k dollars. To erase that 2k dollars you MAY need to drop as much as 20k off of your taxable income.
Its not a straight forward number. Maybe you only need to knock off 8k to get 2k off your taxes. Maybe 12k to knock 2k off.
None of us can tell you that, only your tax advisor can using A LOT more information than we have. Its way more complicated at the end of the day. What is your exemptions? Mine are at 7, but I could go higher like 10. MAYBE your exemptions are way to high for the amount of deductions you have.
You have basically given us not enough information to help and really at the end of the day, only your tax guy can answer your questions and help get you squared up.
Ive been doing my taxes myself for enough years and every year after doing my taxes I adjust something either my 401k or my exemptions. My deductions stay fairly steady year after year.
Crow Hunter
04-18-16, 07:55
OKay in order to reduce the tax I am paying and invest in my 401K to the optimum rate I'm looking for a basic formula.
I want to reduce my end of year tax burden and optimize the amount I can invest. I messed with the amount this year increasing my percentage in the last quarter, but still ended up with a near 2K burden.
I'm single and 54 1/2 so I believe I can go over the 15K maximum amount this year.
Anyone have some knowledge or experience with this type of thing?
My intent is to ease my retirement and not pay in anymore than I have to.
This I can help you with. I love formulas. :)
First go to your 1040 line 43 and find out what your 2015 taxable income was.
Then based on your filing status (single, married filing jointly, etc), look at this table:
https://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions
Determine your marginal income tax rate.
Determine the amount of money that you need to not have as income and increase your 401k by that amount.
So for instance, if you are in the 25% tax bracket and single ($37,451 to $90,750) and you need to get $2,000 off your taxes (from your 1040 Line 63), you will need to put $8,000 additional $ into your 401k to eliminate that $2,000 worth of income taxes.
401k savings increase = (Tax Liability) / (Marginal Income tax rate)
401k savings increase = ($2,000)/25% = $8,000
This is assuming you are in a single bracket (I used 25% because it is easier math than 28% :)). If you are close to the bottom of another bracket and you can drop a bracket by deferring income it is even more beneficial. It makes the math a little bit more complicated as you will have to do the calculation 2x, one for each bracket, but it also means the deferral is that much more useful on higher brackets. As stated before by others, because you are over 50, you can defer extra via catch up contributions and, depending on your income, you could also use a Traditional IRA (tIRA) to defer an additional $6,000 above and beyond your $24,000 although there is an income limitation on the tax deductibility of a tIRA.
https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2016-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work
Now as to a formula for how much you should save, well that is kind of up in the air because no one can really predict what will happen in the future so more is always better. However, there are some "rules of thumb" that have worked in the past that you might want to use as guidelines.
If you are planning on retiring at 65'ish you should aim to have at least 25X your yearly expenses. That "should" support a 4% SWR (Sustained Withdrawal Rate) for 30+ years which will get you to 95 yrs old not counting on anything else. So that equation is:
Nest Egg for a comfortable retirement = 25 * Current yearly expenses
Now with you having a (I assume) COLA adjusted .mil retirement and you will be able to get social security you may not need to have that much, but I always prefer to not count on SS or pensions in my calculations that way I know I am covered and anything extra is gravy for extra guns and ammo. :)
This is a really good statistical resource (Monte Carlo) for doing back testing on what your current/expected nest egg would have done historically:
http://www.firecalc.com/
But again, no one knows what is going to happen in the future and that back test data may not cover what happens but it does include what would have happened with every 30 year period since 1871.
I like doing this stuff for fun (it is a hobby) and if you want some more help (I am not a professional, I am an engineer by trade), shoot me a PM and we can do more detailed analysis. I can tell/show you what I do personally.
Hope this helps!
PS. I saw you said that you have a ROTH at a bank. You should probably do a really hard look at that. Usually banks have terrible costs with very low return on investment accounts and you would probably be better off transferring that to Vanguard or Fidelity or some other low cost investment house. I prefer to put my high risk/high return potential stuff in my Roth and keep the low return/low risk stuff in other accounts.
So for instance, if you are in the 25% tax bracket and single ($37,451 to $90,750) and you need to get $2,000 off your taxes (from your 1040 Line 63), you will need to put $8,000 additional $ into your 401k to eliminate that $2,000 worth of income taxes.
401k savings increase = (Tax Liability) / (Marginal Income tax rate)
401k savings increase = ($2,000)/25% = $8,000.
It's pretty much that simple... it's not quite linear due to the way deductions work, etc. But for most it's roughly 3 or 4:1 (assuming 25-28% rate)
I ballpark based on my total tax for the year, divided by the total income reported. Tax brackets then really don't matter, unless you cross a boundary.
As to "keep my current income into retirement", you'll find that can be hard to do, but also is not needed for most. Several changes once you retire:
1) you are no longer saving for retirement. In your case, that's 15-22% of income that you don't have to replace
2) Any pensions or similar non-savings/401k retirement will replace some of that income
3) No longer commuting, keeping a professional wardrobe, etc
And the biggie: As the effect of items 1-3 start to hit, the income you need goes down, and you then owe less tax, etc.
Most people don't have to keep their current gross income level... it's all about the net income level.
And even that can get skewed. I don't buy into the X * current income retirement savings approaches that most advocate...
Crow Hunter's recommendation above to use expense based approach is much better. Focus on your anticipated expenses at retirement. Maybe current expense is better than nothing, but you'll shed some expenses typically. Ex: your mortgage normally phases out, some of us are no longer paying for our kid's college & launch expense, etc.
Myself, and also several friends, model our anticipated expenses by category with some assumptions around inflation and other wild card increases (medical, etc). Put in mortgage phase outs, etc.
For couples, at some point you can probably get by with one car, certainly don't need two expensive vehicles, etc.
So I'd spend at least as much time trying to understand your expense run rate as you do on the savings side. In some aspects, the savings is easy... Max it! If you are still asking the question you probably already know the answer.
And the biggie: As the effect of items 1-3 start to hit, the income you need goes down, and you then owe less tax, etc.
Only until later. Most people ignore the impact of required minimum distributions. I sure did. Pushed my income up and reduced or eliminate deductions that are income sensitive like medical expense, etc. Significantly increased my tax liability.
Crow Hunter
04-18-16, 10:54
Only until later. Most people ignore the impact of required minimum distributions. I sure did. Pushed my income up and reduced or eliminate deductions that are income sensitive like medical expense, etc. Significantly increased my tax liability.
If you are aware of it and plan for it, you can work around it.
I plan on living off of taxable investments during the first few years of retirement and then doing Roth conversions on the 401k up to the top of the 15% bracket.
Assuming tax laws stay the same, the capital gains and dividends I get from taxable investments will be tax free up to the top of the 15% bracket and I will try to get as much converted as possible during those years so when I turn 70.5 I don't get hit with as big of a tax bill.
I also plan on retiring ~55 so I should have plenty of time to convert quite a bit assuming no health issues.
Of course, that may be a huge assumption same as anything government related.
Only until later. Most people ignore the impact of required minimum distributions. I sure did. Pushed my income up and reduced or eliminate deductions that are income sensitive like medical expense, etc. Significantly increased my tax liability.
Very true, though that only takes effect after 70. But, you've also typically paid off your mortgage, so your deductions go down, etc. Most likely no kid deductions left (if you do, then rock on man!!!)
Let's say you are ahead of 98% of Americans and have $1M in your IRA/401k at 65. You live relatively modestly early on, spending 5k/mth. Rough $$, at 70 you have $700k left. IRS requires you to start taking distributions. Based on the table, you have to withdraw $700k/27.4= $25.5k / year. Less than you have been living on most likely.
But yes, that is taxed, and with SS and potentially, pension added to that the tax burden is higher. And certainly not fun.
I plan on living off of taxable investments during the first few years of retirement
I think that's the default assumption for most of us
and then doing Roth conversions on the 401k up to the top of the 15% bracket.
Assuming tax laws stay the same, the capital gains and dividends I get from taxable investments will be tax free up to the top of the 15% bracket and I will try to get as much converted as possible during those years so when I turn 70.5 I don't get hit with as big of a tax bill.
So try to stay out of the punative tax brackets... interesting strategy and makes sense.
I also plan on retiring ~55 so I should have plenty of time to convert quite a bit assuming no health issues.
Of course, that may be a huge assumption same as anything government related.
I'm trying to hang till 62, unless my hand gets forced earlier. And the gov risk is the part I have the least handle on. I'm assuming:
- Medical will go up significantly higher than average inflation rate
- Tax will increase
- SS will be taxed heavier or means tested.
But then you hear that it would be very difficult to screw with SS on folks over 55 at the time. I'm told that historically they've avoided that. But a means test has the argument "this won't really hurt you, you need to help your less fortunate brothers". (Read: Those who did not bother to save, drove newer cars, bad house decisions, etc)
But yes, that is taxed, and with SS and potentially, pension added to that the tax burden is higher. And certainly not fun.
Hindsight is 20/20, but I now wish I had been more aggressive with Roth conversions along the way.
Lesson learned, you are going to pay the man one way or another, early in life, or late.
Hindsight is 20/20, but I now wish I had been more aggressive with Roth conversions along the way.
Lesson learned, you are going to pay the man one way or another, early in life, or late.
I'm trying to decide at what point do I cut 401k down to the minimum to keep company match, and put the equivalent into Roth for my wife and I. Presumably at lower cost, etc.
I've not fully researched this, but sounds like I should.
The one advantage of the 401k approach is that once setup it's forced savings, largely hidden from view and out of reach.
Averageman
04-18-16, 12:24
I'm trying to decide at what point do I cut 401k down to the minimum to keep company match, and put the equivalent into Roth for my wife and I. Presumably at lower cost, etc.
I've not fully researched this, but sounds like I should.
The one advantage of the 401k approach is that once setup it's forced savings, largely hidden from view and out of reach.
Okay I'm tracking a bit better now. I can increase my 401K another 5% without effecting my budget too much, it wont bring me up to the 8K mark, but it should lighten the load a bit.
Now I need to come up with another strategy and you two seem to know a bit more about this than I do, so here it goes.
My Company will let me invest up to 50% of my income in to the 401K, I can start moving it out at 59 1/2 without penalty. I can put up to 24 K in my 401K at that point. Would it be wise to begin withdrawing the money from the 401K and putting it in to a Roth at that point and bumping up my input in to the 401K to decrease the tax liability?
Can I do this? Does it make sense?
Hindsight is 20/20, but I now wish I had been more aggressive with Roth conversions along the way.
Lesson learned, you are going to pay the man one way or another, early in life, or late.
Agreed.
As a 44 year old with a mortgage and two kids under 9 I have decent deductions now.
A few years ago I was able to change my $18K Max contributions to a 457 Roth instead of the pretax 457 and I jumped on it. Yes, I lost $18k in pretax contribution deductions but I'm confident my post retirement tax rate will be significantly higher than the effective rate I'm paying now.
I haven't converted the existing pretax contributions to Roth. I'm probably going to leave them pretax so I have two "pots" to pick from when I decide to start taking distributions.
I've was urged to save lot for retirement starting in my 20's (thanks Dad!) and I'm glad I did, but wow...I wish I got into Roth savings years ago.
Crow Hunter
04-18-16, 12:29
I'm trying to decide at what point do I cut 401k down to the minimum to keep company match, and put the equivalent into Roth for my wife and I. Presumably at lower cost, etc.
I've not fully researched this, but sounds like I should.
The one advantage of the 401k approach is that once setup it's forced savings, largely hidden from view and out of reach.
You should always weigh the tax portion.
If you are currently in the 25% bracket now and will likely be in the 15% bracket in retirement (counting everything) you will always be better off contributing to your 401k before the Roth.
If, however, you are likely to be in the 25% or higher bracket in the future, contributing to a Roth now and/or doing conversions of 401k/tIRA to Roths is likely to make more sense.
Also, keep in mind that there is another alternative. If it looks like you are going to get creamed by taxes from RMDs you can do what is called a 72t distribution:
https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments
That might allow you to retire earlier while still having the same net income as though you had worked through until 62 and avoid getting hit with really high RMD's when you turn 70.5 by giving you a longer more gentle distribution plan.
Of course, all this could change if Teresa Ghilarducci and her ilk get into power. Might as well throw everything we know now out the window.
Yes, I lost $18k in pretax contribution deductions but I'm confident my post retirement tax rate will be significantly higher than the effective rate I'm paying now.
The beauty of a Roth is that you only pay the tax on the contribution amount and not on all the accumulated dividends and gains, which is what is killing me now.
Even at 44 you have 28 years of compounding ahead of you that will get taxed as a RMD at 72 in a regular IRA. The younger you start or convert to a Roth the better.
I should add that while you have Roth contribution limits based on income, there are currently no conversion limits AFAIK. You are only limited by the amount and % of tax you have to pay for the year in which you do the conversion. As previously said, there are moves afoot to change this.
Crow Hunter
04-18-16, 13:20
Okay I'm tracking a bit better now. I can increase my 401K another 5% without effecting my budget too much, it wont bring me up to the 8K mark, but it should lighten the load a bit.
Now I need to come up with another strategy and you two seem to know a bit more about this than I do, so here it goes.
My Company will let me invest up to 50% of my income in to the 401K, I can start moving it out at 59 1/2 without penalty. I can put up to 24 K in my 401K at that point. Would it be wise to begin withdrawing the money from the 401K and putting it in to a Roth at that point and bumping up my input in to the 401K to decrease the tax liability?
Can I do this? Does it make sense?
It is going to depend on your situation.
You have to have earned income to make Roth contributions and they are limited to $6,500/year (in your case being over 50).
If I am understanding what you are saying, is that you would continue to work at a W-2 job (earned income) and then pull money out of your 401k (penalty free), pay the taxes on it, and then contribute to a Roth IRA, while increasing your 401k contribution rate?
That won't decrease your tax liability in the current tax year, because you will have to pay taxes at your marginal tax rate on any distribution from your 401k. What you are doing is essentially just keeping the status quo and contributing extra to a Roth from a tax perspective.
What you should do is look at what your .mil pension is going to be paying (annually) and what your expected Social Security (from the SS website) amount is going to be and then do a projection on what your 401k holdings are going to be when you turn 70.5 (use a high return) and see what your marginal tax bracket (assume a 2% year over year growth in tax brackets) is going to be when you turn 70 1/2.
If it is going to be the same or higher than what you are paying now, then trying to do Roth Conversions up to the top of your marginal tax bracket will likely be a good idea. If it is likely to be lower than what your marginal rate is now, you will be better off stuffing as much as you can into your 401k now because you will pay less taxes on it later.
But since we don't know what your current income vs future income and expenses are, it is hard to give you specific advice.
If you need some help/want to just PM me some generalizations (not exact amounts) and I can run you through it, if you want. It will only take a few minutes of time with an Excel spreadsheet to give you a good idea anyway.
TL;DR
If your goal is to reduce your current taxable income, go 401k combined with a Traditional IRA. You can shelter up to $30,500 worth of income each year that way.
If your goal is going to be to reduce your future income tax rate/RMDs contribute more to Roth today and try to work in conversions as you get closer to retirement. Particularly on years that you have a lower than normal income or big deductions.
Here is an example
For instance, if you are currently making $100,000/year but when you retire, you will only be making $75,000 and can live off of $50k, it probably won't behoove you to worry about Roths.
If, on the other hand, you will likely have $100,000+/year in retirement income because of your .mil + Social Security + RMDs then you might be better off adding more to a Roth instead of a 401k or doing conversions.
Sorry if I repeated myself, I am trying to multitask. :)
ETA:
No matter what, Uncle Sam will get his due. The only thing you can do is to tweak the % that he gets.
brickboy240
04-19-16, 10:01
After watching the Wall Street bandits and brokers lose 30-40% of my 401k twice (once in 2000...again in 2008), I too cut down my contributions and placed more of my earnings into straight cash and I also started buying real estate.
It is never bad to have cash somewhere. You know what you have and some moron broker is not going to "churn" it or lose part of it in a "market correction" as they call it. YOU control it and YOU can get to large chunks of it fast if needed without huge taxes or early withdrawal fees.
Real estate? Well...land around here keeps going up and up no matter where the oil biz and/or economy goes. One piece of land I bought 10 years ago, I could sell today for at least double what I paid for it. Cannot say my 401k or any mutual funds have doubled in the last 10 years.
sorry...but I have pretty much come to the conclusion that the 401k is not the investment/retirement vehicle it is often said it is.
YMMV...
It is never bad to have cash somewhere.
Minimum returns and subject to devaluation. Buying power reduced by inflation.
Cannot say my 401k or any mutual funds have doubled in the last 10 years.
Really? My diversified MF holdings YE 2000 to YE 2010 +85.7%. YE 2008 to current +121%. Just say'in.
Out of the last 23 years that I have held diversified MFs, I have only had 3 down years (YE to YE): 01, 02 and 08.
Interest, dividends and gains far outweigh any contributions I have made many times over.
All interest, dividends and gains reinvested and compounded is a beautiful thing.
sorry...but I have pretty much come to the conclusion that the 401k is not the investment/retirement vehicle it is often said it is.
I agree to a point.
Its one of the only ways a lot of people can shelter income from the government. So for that purpose its pretty good.
Most people are also getting free money from their company too.
As an investment vehicle, I think they are questionable, but a lot of that has to do with your plan administrator as well as what you do inside of the 401k options(of which you are generally fairly limited). I would say 98% of people with 401k's are in target date funds that overall SUCK and they pay HUGE fee's for these funds. If somebody would take the time to do a little research and understand the market they could make just as much(or more), protect their money in the event of a down turn, AND not pay somebody huge fee's for doing, essentially, nothing. I move between an S&P 500 tracker, a fidelity bond fund(used to be a pimco) or cash depending on what I see the market doing.
If you use a 401k as ONE tool in the tool box of retirement savings and investing vehicles, I think they are great, but as with anything else in investing if you put all your eggs in one basket and the basket breaks, you are ****ed. BUT with that said I would still rather see somebody who ONLY has a 401k that is well funded(15%+ yearly income up to maxing the 401k) and in a target date fund vs. having nothing in retirement savings and trying to rely on social security.
Powered by vBulletin® Version 4.2.5 Copyright © 2024 vBulletin Solutions, Inc. All rights reserved.