Comments on: Maximize your 401k early in the year

By: brian

brian — Mon, 09 Aug 2010 13:11:48 +0000

It has been mentioned above, but we should be absolutely clear about the timing of matching contributions by some employers. If your match occurs at the time of each contribution (as opposed to some time later) there is a chance you may forfeit your match if you hit the pre-tax limit ($16,500 in 2010) prior to your last paycheck. In these plans, employer match stops when employee contributions stop….for any reason. Some plans allow for contributions to “spill over” to after-tax once the pre-tax limit is reached, thereby eliminating the problem with stopping contributions and the associate company match. If you plan to hit the $16,500 limit any time prior to year end, it is imperative that you check with your employer to ensure you will receive full company match. There is also a $49,500 limit on company and employee contributions, if you are so lucky to reach that mark, which may also stop your match prematurely.

By: jc

jc — Mon, 09 Aug 2010 02:38:53 +0000

of course, once we’ve all loaded up on Roths the govt will slap on a national sales tax and/or VAT and tax the $$ all over again.

By: frugalscholar

frugalscholar — Sun, 08 Aug 2010 16:00:22 +0000

As mentioned above, there are all sorts of vehicles available to the self-employed–Keoghs, SEP-IRAs and so forth.

You and others are lucky to have incomes so high that you can’t contribute to your IRAs. I don’t have that problem.

By: Financial Samurai

Financial Samurai — Sun, 08 Aug 2010 03:56:08 +0000

At the age of 22, when all I wanted to do was save for my retirement, I maxed out my 401K. But, the damn government tells me I CAN’T contribute to an IRA due to my income.

Dear government, why do you treat 22 year olds who want to save for the future with discrimination?

It is utter bullcrap.

By: Jacob

Jacob — Sun, 08 Aug 2010 03:11:10 +0000

@Steve Austin – I’m waiting for that until earned income (for both of us) drop to zero. Currently, I’m using IRAs to maximize taxable income.

By: Steve Austin

Steve Austin — Sat, 07 Aug 2010 23:12:55 +0000

ERE, following your comments w/ NatX, did you convert your 401(k) to a Rollover IRA? I thought you were doing incremental partial conversions to you Roth IRA.

By: Why Can Employers Determine Retirement Contributions? | Sweating The Big Stuff

Mon, 14 Jun 2010 10:09:01 +0000

[...] there are perks. Some people get discounts, some get profit-sharing, and some get a nice healthy 401(k) match. That’s amazing and I’m jealous of them, but I understand that they are sponsored by [...]

By: Jacob

Jacob — Sun, 21 Feb 2010 21:25:55 +0000

@NatX – No I’m not. It would be hard to save enough to save enough in a retirement plan given my rate of savings when I was working. Thus, it is just sitting there for the next 25 years until I hit 59.5.

By: NatX

NatX — Sun, 21 Feb 2010 19:56:06 +0000

Thanks Jacob. I’m just curious, are you currently taping your 401K? If so, are you using the 72t loophole?
I’m really enjoying your site.

By: Jacob

Jacob — Sun, 21 Feb 2010 17:44:29 +0000

@NatX – If you believe your future marginal tax rate to be higher than your present, go with Roth. If you believe it to be lower, go traditional. Being retired very early, my working rate was higher than I expect my future rate to be, that is, I still expect to be able to deduct pretty much all of it as I spend as little on consumption as the the poverty level (what we consume is quite different though). Most traditional retirement planning presume that people want to replace their income level in retirement. Not their expense level.
Of course guessing future tax rates is a bit of a game. The government could decide that seeing that everybody have used Roth’s simply to increase sales tax or add a value added tax, which in Denmark is 25% on all consumables.

By: NatX

NatX — Sun, 21 Feb 2010 13:07:23 +0000

I’ve read that contributing to an 401K beyond the employer match is not a good idea since taxes are currently at an all time low and will only go up in the future. That it’s best to invest in a taxable account instead (paying taxes now at the lower rate) after investing as much as you can into a ROTH. Or am I totally wrong here?

By: Jacob

Jacob — Mon, 15 Sep 2008 23:54:42 +0000

@mjukr – I put most of my international stock (ADR, funds) there to avoid dealing with the more complicated tax filings.

By: mjukr

mjukr — Mon, 15 Sep 2008 18:54:39 +0000

Jacob, what do you buy in your tax-deferred plans?

By: Todd

Todd — Wed, 23 Apr 2008 20:58:47 +0000

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

Steve Austin — Tue, 22 Apr 2008 13:57:48 +0000

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

DJ — Tue, 22 Apr 2008 12:31:41 +0000

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

Jacob — Tue, 22 Apr 2008 05:03:27 +0000

@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

Tim — Mon, 21 Apr 2008 17:37:46 +0000

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

Steve Austin — Mon, 21 Apr 2008 16:46:29 +0000

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