Contribution questions

[Kevin]

Hi,

I've got an issue with my yearly contributions - I'm looking for somewhere to park some additional funds and of course shrinking the amount of taxable income would be preferable - any ideas?

I have a company matched (up to 8%) 401k - currently contributing 16%, a Roth 401k (contributing 2%). I hit the yearly limit in around the middle of September for the last few years. My company won't let me accidentally go over, but when they dump the funds into that after tax bucket, it has a detrimental effect on my paychecks until January

Wife is a w2 contractor who's work varies on 6 month or 1 year stints so may have a intermittent work schedule and may be off for say 3 months of the year - her company doesn't match 401k contributions but she dumps about 25% into their 401k, and tops it off in December with a check into her IRA account to meet the limit.

If I understand it correctly, the limit this year is 18k (we can't yet take the extra 5k catch up contribution). That 18k is the total amount (each) that we can contribute to the 401k, Roth 401k, and IRA accounts.

Our home mortgage deduction is only getting smaller, and while there are no tax advantages, we have no car payments or CC debt and have a 9 month emergency fund...

Any opinions on where we could park extra funds, preferably tax advantaged situations?

 

[Hutch]

Not the cheapest but still an option. Open a 529. Even without kids or intention of education you can withdraw the tax-free interest with a small penalty ~10% which is still less than long-term/short-term gains.
If your company provides an HSA medical plan, max that out. Lowers AGI directly

 

[madage]

If I understand it correctly, the limit this year is 18k (we can't yet take the extra 5k catch up contribution). That 18k is the total amount (each) that we can contribute to the 401k, Roth 401k, and IRA accounts.

You do not understand this part correctly. The 18k limit is the amount you can contribute to 401k/Roth 401k. IRA is a different "bucket". You can each also contribute $5,500 to a traditional or Roth (or split between the two) IRA.

Also note 529 contributions are only deductible on (most) state income tax returns. There is no federal deduction for 529 contributions.

 

[Kevin]

You do not understand this part correctly. The 18k limit is the amount you can contribute to 401k/Roth 401k. IRA is a different "bucket". You can each also contribute $5,500 to a traditional or Roth (or split between the two) IRA.

Also note 529 contributions are only deductible on (most) state income tax returns. There is no federal deduction for 529 contributions.

Hi Madge,

Interesting - My office benefits people were adamant that IRA deposits were included into that 18k total limit... That could potentially open up another 11k+ deferral. Nice!

Thanks for the info - keep it coming!

 

[madage]

Perhaps they're confused because traditional IRA contributions may not be fully deductible?

Can I contribute to an IRA if I participate in a retirement plan at work?
You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able todeduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

 

[Kevin]

Perhaps they're confused because traditional IRA contributions may not be fully deductible?

source: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

I think this is an issue - as we both contribute to 401k plans and our AGI was over 116k in 2014 - and I was looking for tax advantages.

So back to the drawing board then.

 

[madage]

I think this is an issue - as we both contribute to 401k plans and our AGI was over 116k in 2014 - and I was looking for tax advantages.

So back to the drawing board then.

Then you need to make sure your wife contributes the max to her 401(k), because her IRA contribution is non-deductible anyway. Definitely do contribute 11k/year to Roth IRAs, though.

 

[Kevin]

Then you need to make sure your wife contributes the max to her 401(k), because her IRA contribution is non-deductible anyway. Definitely do contribute 11k/year to Roth IRAs, though.

Will definitely make that happen.

 

[Sunny]

I think this is an issue - as we both contribute to 401k plans and our AGI was over 116k in 2014 - and I was looking for tax advantages.

So back to the drawing board then.

While Roth IRA contributions are not tax deductible, they do offer the tax advantage of tax free growth.
529 also offers the tax advantage of tax free growth. Withdrawals are tax free if they are used for Qualified Higher Educational Expenses.

Another option is tax sheltered annuities for tax deferred growth. http://www.investopedia.com/terms/t/taxshelteredannuity.asp

 

[Matt]

Another option is tax sheltered annuities for tax deferred growth. http://www.investopedia.com/terms/t/taxshelteredannuity.asp

This isn't an option. This is something that is offered to certain govt/city/edu workers. And its most likely to be atrociously fee'd up. While there are a couple of good ones out there, its best to consider all anuities as a terrible investment opportunity, due to management and surrender fees, and once you hate them with a passion, ask someone to tell you why they aren't bad (including those fee topics).

 

[Matt]

Not the cheapest but still an option. Open a 529. Even without kids or intention of education you can withdraw the tax-free interest with a small penalty ~10% which is still less than long-term/short-term gains.
If your company provides an HSA medical plan, max that out. Lowers AGI directly

HSA is a great option (providing there aren't any major health costs expected).

529s that are not used for QHEE are taxed at ordinary income + a 10% penalty = shockingly bad. Additionally, the SOTU discussed changing the QHEE aspect to tax that too.

 

[Sunny]

My mistake. I meant tax deferred annuity.

I looked into this one and there are no surrender fees and the yearly fee is 0.25% which isn't great, but not robbery.

https://www.fidelity.com/annuities/FPRA-variable-annuity/overview

 

[Matt]

My mistake. I meant tax deferred annuity.

I looked into this one and there are no surrender fees and the yearly fee is 0.25% which isn't great, but not robbery.

https://www.fidelity.com/annuities/FPRA-variable-annuity/overview

That's a good option. Unusually low fees. Good point.

 

[Kevin]

Thanks for great discussion so far. The Fidelity FPRA does look interesting, off to do some research.