What are my options for maximizing my retirement contributions?
September 19, 2022 2:00 PM   Subscribe

I’m 60-year-old unmarried woman and I’m worry about my underfunded retirement. I started the year as a W2 contractor and contributed to my traditional IRA instead of participating in my agency’s 401(k). They didn’t match and it was a temporary job. I’ve contributed $4,000 so far this year. My plan was to contribute the maximum of $7,000.

However, I accepted a full time position and the new company offers a 401(k) but won’t match until the one-year anniversary. So, how do I proceed for this year and next?

The rule seems to be you can’t do a traditional IRA and a 401(k) if your AGI is over $76K, as mine is. Do I simply stay the course and contribute the max IRA amount ($7K) in 2022 and wait until next year to start participating in the 401(k)? I think contributing to a 401(k) for the last part of this year will cause problems for the 2022 IRA contributions even though I was not a covered employee when I made those contributions.

It also sounds like I can’t contribute to a Roth IRA because my AGI will exceed $76K. I’m earning a decent salary and I’d like to put the most money possible toward retirement. So, what are my best options for the remainder of this year and for 2023?
posted by shoesietart to Work & Money (9 answers total) 2 users marked this as a favorite
 
You CAN contribute to both a traditional IRA and a 401(k) - the limit you are referencing is only whether or not you get to take a tax deduction for your contributions to the traditional IRA. You will lose out on tax deductions for contributing to a traditional IRA, but it doesn't mean you can't contribute to it.

You aren't eligible for making Roth IRA contributions - you are correct.

It is fine to contribute to both a traditional IRA and a 401(k) at the same time.
posted by dngrangl at 2:12 PM on September 19 [1 favorite]


It depends on how much you are going to contribute to your 401k - but generally 401k contribution limits are much higher, and it's basically a dollar for dollar reduction in your income, so if you contribute enough, it may lower your AGI enough to get the maximum benefit to both, or course depending on how far away you are.

But if you can contribute more than $7k to your 401k, then you should do that, because time is not on your side, so you need to maximize your dollars contributed.
posted by The_Vegetables at 2:16 PM on September 19


The rule seems to be you can’t do a traditional IRA and a 401(k) if your AGI is over $76K, as mine is.

This is incorrect. 401(k)s have no inherent income limit. Some employers have "discrimination testing" that limits what certain employees can contribute to the 401k. However, those employees have to make at least $135K.

There's no point to contributing to a Traditional IRA without a tax deduction - if you don't get a tax deduction, you might as well contribute to a Roth IRA. If you are single/head of household, that tax deduction starts to eliminate at a MAGI of $68K and disappears at $78K. So, at your MAGI, if you are single/head of household, there is likely no reason to do a Traditional IRA.

It also sounds like I can’t contribute to a Roth IRA because my AGI will exceed $76K.

This is also incorrect. Roth IRA income limits are significantly higher than Traditional IRA limits - likely at least $129K for you. Further, due to the existence of the backdoor Roth IRA, there are effectively no income limits to Roth IRA contributions.

Based on these two issues, I'm not pursuing answering the rest of your questions. It may be useful to restate the questions with updated MAGI limits and see if they still make sense.
posted by saeculorum at 2:40 PM on September 19 [1 favorite]


Best answer: Do you earn less than the max for Roth contributions? It phases out between $129K-144K in MAGI. If so, recharacterize your traditional IRA contributions to Roth (you will have to pay taxes on them) and contribute away to the 401(k). There's no restriction on contributing to 401(k)s and Roths together.
posted by praemunire at 2:45 PM on September 19 [1 favorite]


There's no point to contributing to a Traditional IRA without a tax deduction

Well, small point. Bankruptcy-remote, largely judgment-proof. But these are low-probability contingencies, and only worth thinking about if you have a 401(k) and a salary too high for a traditional pretax and a Roth.
posted by praemunire at 2:47 PM on September 19


Response by poster: "The rule seems to be you can’t do a traditional IRA and a 401(k) if your AGI is over $76K, as mine is.

This is incorrect. 401(k)s have no inherent income limit. "

The problem is that I've already contributed nearly 5K to a traditional IRA. If I start contributing to a 401(k), I will no longer be able do deduct the IRA contribution. It would also seem to make my taxes more complicated when I withdraw the IRA funds.

Converting the traditional IRA to a Roth might be the answer for this year.
posted by shoesietart at 2:56 PM on September 19


If I start contributing to a 401(k), I will no longer be able do deduct the IRA contribution.

This doesn't make sense to me - contributing to a Traditional 401(k), the one used by the vast majority of employers in the USA, decreases your MAGI, not increases. If you have a Roth 401(k) at work, you almost definitely also have a Traditional 401(k) option.

Say your income would result in a $79K MAGI without any IRA contributions or 401(k) contributions. You would not be able to deduct your Traditional 401(k) contribution. However, if you contributed $12K to your Traditional 401(k), you would have a MAGI of $67K after the Traditional 401(k) contributions, making you eligible for a Traditional 401(k) deduction.
posted by saeculorum at 3:04 PM on September 19


Best answer: You need to talk to a retirement planner ASAP. Memail me if you'd like a recommendation, ours is fantastic and he works 100% remote so geography is irrelevant.
posted by pdb at 5:25 PM on September 19


in your shoes, the place I’d trust to have the right answer is the bogleheads forum.
posted by daisyace at 1:40 PM on September 20


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