Compared to the IRA with its $5,000 limit, the 401k with its $15,500 limit possesses an unfair advantage. Everybody with a W-2 income can get an IRA, whereas not everybody is lucky enough to have access to a 401k with the higher limit. These tools are useful because they minimize taxable income.
In this household I am blessed with a 401k while DW is not. In 2007, I had a 401k and a partially limited IRA (due to the AGI phase out) while DW could maximize her IRA (her ceiling is higher due to her not having a 401k). Due to my secondary job and DW’s new job, we might very well hit the ceiling ($103,000) for my IRA this year. On the other hand, due to restructuring at my workplace I no longer consider this a very secure position. Thus I may be in a situation, where my IRA is limited due to the fact that I had a 401k but where I can not contribute to my 401k because I no longer have a job.
It is such pieces of stupid legislation that makes tax avoidance fun
One strategy is to contribute the maximum possible amount (for me it’s 75% of my salary) as early as possible to max out the 401k in the first few months of the year(*). Then if I lose my job I will have contributed the max to the 401k. At the same time our AGI will drop and I can also contribute to the IRA. If I just did a smaller but regular 401k contribution I could get into a situation where I could not maximize neither the 401k nor the IRA should I drop out of the job market later in the year.
(*) Personally I get a match, so I tailor the contributions so I can keep contributing for the rest of the year. I get a 6% match which is grand for a match but pathetic as a savings goal.
To do this it goes without saying that there should be enough liquidity elsewhere in the system (secondary and tertiary incomes) to fund living costs but if you’re following the philosophy in this blog this should really be no problem.
Originally posted 2008-04-21 07:25:39.