Comments on: Maximize your 401k early in the year http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html Financial independence, frugality, self-sufficiency, ecology, capitalism, and voluntary simplicity Sat, 06 Sep 2008 02:59:16 +0000 http://wordpress.org/?v=2.6.1 By: Todd http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1059 Todd Wed, 23 Apr 2008 20:58:47 +0000 http://earlyretirementextreme.com/?p=207#comment-1059 Great post. This is exactly what my wife and I do with her 401k. She's going to quit work indefinitely once we have kids, and since we're trying but are not yet pregnant we use this strategy to maximize our her 401k contributions. I also did this when I went back to school (both in the year I quit work and the year I returned to the workforce). Great post. This is exactly what my wife and I do with her 401k. She’s going to quit work indefinitely once we have kids, and since we’re trying but are not yet pregnant we use this strategy to maximize our her 401k contributions. I also did this when I went back to school (both in the year I quit work and the year I returned to the workforce).

]]> By: Steve Austin http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1050 Steve Austin Tue, 22 Apr 2008 13:57:48 +0000 http://earlyretirementextreme.com/?p=207#comment-1050 ERE, my memory of my 100% contribution violation was that although it was all Federal tax-deductible (and by extension, state too), it was not FICA tax-deductible. So I legitimately had to reduce my contribution level enough below 100% so that I would still have pre-tax income to pay my 6.2% (or whatever it was) for FICA and Medicare. HR should have caught it before submitting it to payroll anyway, but it was my call so I took the heat for it. . [RIRA == Roth IRA; TIRA == Traditional IRA] Re: IRAs, wanted to say that even if you and Distinguished Woman get into partial phaseout of the Roth IRA, e.g. you can only make a $3k (of $5k IRA total allowed) each to a RIRA, that still leaves $2k each that you can contribute to a TIRA (albeit non-deductible contribs requiring you to file Form 8606). I say this because if you are partial phased out of the RIRA, I believe by definition the salary ranges will have you entirely phased out of the deductible TIRA. . Non-deductible contribs to a TIRA are sort of like a proto-RIRA: pre-tax contribs, and contribs are tax-free upon withdrawal, but any non-contrib growth in the TIRA is taxed as income (that's where the RIRA advantage is, as you know). Not as good as a RIRA, but better than keeping it in a taxable account where dividends and gains are taxable as you go. . Summary: always max out your IRA (whether RIRA, TIRA, or a combo) just like you max out your 401(k) -- you can play TIRA-to-RIRA (partial) conversions down the line, and you'll thank your past self for fully exploiting the IRA every year that you could (i.e. every year you had earned income). That's one disadvantage of full retirement: no earned income to enable IRA contributions and employ the standard deduction and personal exemption shelters. (Though taxable interest does use those shelters.) ERE, my memory of my 100% contribution violation was that although it was all Federal tax-deductible (and by extension, state too), it was not FICA tax-deductible. So I legitimately had to reduce my contribution level enough below 100% so that I would still have pre-tax income to pay my 6.2% (or whatever it was) for FICA and Medicare. HR should have caught it before submitting it to payroll anyway, but it was my call so I took the heat for it.
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[RIRA == Roth IRA; TIRA == Traditional IRA]
Re: IRAs, wanted to say that even if you and Distinguished Woman get into partial phaseout of the Roth IRA, e.g. you can only make a $3k (of $5k IRA total allowed) each to a RIRA, that still leaves $2k each that you can contribute to a TIRA (albeit non-deductible contribs requiring you to file Form 8606). I say this because if you are partial phased out of the RIRA, I believe by definition the salary ranges will have you entirely phased out of the deductible TIRA.
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Non-deductible contribs to a TIRA are sort of like a proto-RIRA: pre-tax contribs, and contribs are tax-free upon withdrawal, but any non-contrib growth in the TIRA is taxed as income (that’s where the RIRA advantage is, as you know). Not as good as a RIRA, but better than keeping it in a taxable account where dividends and gains are taxable as you go.
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Summary: always max out your IRA (whether RIRA, TIRA, or a combo) just like you max out your 401(k) — you can play TIRA-to-RIRA (partial) conversions down the line, and you’ll thank your past self for fully exploiting the IRA every year that you could (i.e. every year you had earned income). That’s one disadvantage of full retirement: no earned income to enable IRA contributions and employ the standard deduction and personal exemption shelters. (Though taxable interest does use those shelters.)

]]> By: DJ http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1049 DJ Tue, 22 Apr 2008 12:31:41 +0000 http://earlyretirementextreme.com/?p=207#comment-1049 Self employed people can get a SEP-IRA. You can contribute 25% of your profit up to a max of $46,000. I put my money in a savings account throughout the year just in case I have a major emergency during the year. At the end of the year, I take the money out of savings and put it in my SEP-IRA. Self employed people can get a SEP-IRA. You can contribute 25% of your profit up to a max of $46,000. I put my money in a savings account throughout the year just in case I have a major emergency during the year. At the end of the year, I take the money out of savings and put it in my SEP-IRA.

]]> By: Jacob http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1047 Jacob Tue, 22 Apr 2008 05:03:27 +0000 http://earlyretirementextreme.com/?p=207#comment-1047 @steve - fixed! I'm so paranoid with regards to bureaucratic authorities that everything is done by the book (hence my going to an accountant(ish) to get my state taxes done when they got too complicated). I don't see how 100% is abuse? Although it was kinda funny to see that the state taxes for the last pay period was exactly $3.00 ;-). I'll probably be phased out of the IRA for 2008. I don't think I'll be quite phased out of the ROTH. Remember, I'm a scientist, not an engineer ;P @tim - I don't know if they provide that option. I know it's possible to continue on a post-tax basis and get the match. That would probably involve IRS form 8086 (might misremember the form number), which I would like to avoid. @steve - fixed! I’m so paranoid with regards to bureaucratic authorities that everything is done by the book (hence my going to an accountant(ish) to get my state taxes done when they got too complicated). I don’t see how 100% is abuse? Although it was kinda funny to see that the state taxes for the last pay period was exactly $3.00 ;-). I’ll probably be phased out of the IRA for 2008. I don’t think I’ll be quite phased out of the ROTH. Remember, I’m a scientist, not an engineer ;P

@tim - I don’t know if they provide that option. I know it’s possible to continue on a post-tax basis and get the match. That would probably involve IRS form 8086 (might misremember the form number), which I would like to avoid.

]]> By: Tim http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1045 Tim Mon, 21 Apr 2008 17:37:46 +0000 http://earlyretirementextreme.com/?p=207#comment-1045 Hi Jacob, You mention "tailoring" your 401k contributions so you continue to get your match throughout the year. If you haven't already, you might want to check with your HR dept to see if your match would really stop if you max out early. I was in this situation last year and was pleasantly surprised to find that my company gave me my full match for Nov & Dec even though I had hit my contribution limit in Oct. I read a couple of other bloggers who receive the same "benefit" - so it appears to be reasonably commonplace... Hi Jacob,

You mention “tailoring” your 401k contributions so you continue to get your match throughout the year. If you haven’t already, you might want to check with your HR dept to see if your match would really stop if you max out early. I was in this situation last year and was pleasantly surprised to find that my company gave me my full match for Nov & Dec even though I had hit my contribution limit in Oct. I read a couple of other bloggers who receive the same “benefit” - so it appears to be reasonably commonplace…

]]> By: Steve Austin http://earlyretirementextreme.com/2008/04/maximize-your401k-early-in-the-year.html#comment-1044 Steve Austin Mon, 21 Apr 2008 16:46:29 +0000 http://earlyretirementextreme.com/?p=207#comment-1044 1. please protect yourself by referring to it as tax *avoidance* not tax *evasion*, that later of which is of course illegal -- must concur that tax avoidance is fun and inspiring -- I know you put a smiley there, but I cannot imagine that IRS has a good sense of humor about tax evasion ;-\ (!) 2. pre-retirement, I did exactly what you propose. The limit was 100% of salary until I abused that and the HR department lowered the limit to 75%. 3. you may be phased out of a Roth IRA due to your salary (and of course well out of the range for a deductible IRA contrib), but I recommend to continue to max out a non-deductible, non-Roth IRA every year -- particularly since you are of the early retirement mindset, once you unload the W-2 you'll most certainly have many opportunities down the line to conduct partial rollover conversions from your traditional IRA (the non-deductible contribs and any account growth) -- you can never make retroactive contributions to any IRA for a prior year, so it's best to get the contribution done and maxed each year, worry about conversions later, at your leisure 1. please protect yourself by referring to it as tax *avoidance* not tax *evasion*, that later of which is of course illegal — must concur that tax avoidance is fun and inspiring — I know you put a smiley there, but I cannot imagine that IRS has a good sense of humor about tax evasion ;-\ (!)
2. pre-retirement, I did exactly what you propose. The limit was 100% of salary until I abused that and the HR department lowered the limit to 75%.
3. you may be phased out of a Roth IRA due to your salary (and of course well out of the range for a deductible IRA contrib), but I recommend to continue to max out a non-deductible, non-Roth IRA every year — particularly since you are of the early retirement mindset, once you unload the W-2 you’ll most certainly have many opportunities down the line to conduct partial rollover conversions from your traditional IRA (the non-deductible contribs and any account growth) — you can never make retroactive contributions to any IRA for a prior year, so it’s best to get the contribution done and maxed each year, worry about conversions later, at your leisure

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