IRA question!

[glomerulus]

I dont know if this is the right place to post this question but anyways.

I am in the process of switching jobs. From my old job, I have a 401k with about $5000 in Fidelity and my annual salary was $50K.

My new job, which starts in August 2008, I am getting a base salary of 180K. The employer offers a Roth 401k without any matching. My question is:

1. When I rollover my 401k to an IRA in Vanguard, How much can I contribute to that IRA for the remainig of 2008??

I have researched this a lot and since my salary for this year would be 90K + 30K from the old job, I can still contribute to the IRA. However, when I rollover the $ 5K from the 401K, does that effect my contribution to the IRA.
I mean if the allowed contribution to the IRA is $10,000 in my case, can I contribute only $5K more or the full $10K??

The $5000 in the 401k took me 2 years to save (was not keen on retirement saving before).

2. For the next year, when my salary is $180 K, can I contribute to an IRA? Would it be tax deductible?? Since my employer does not offer a pre tax contribution program like 401k.

Any comments really appreciated.

[sweeps]

Rollovers do not count as contributions. So if you're under the Roth IRA income limit for this year, you can still contribute the full $5,000 despite the rollover.

For next year, you can take advantage of a loophole in which you contribute to a non-deductible IRA and then convert it to a Roth IRA in 2010.

[Snave]

Sweeps is correct that rollovers do not count. I rolledover my 401k a few times. For a while, my previous employer would only match in their company stock. So, every year I would roll that over to an IRA to get it out of the stock. Then, I rolled my entire 401k over when I left.

As for your roth 401k, that is great that they have that. A couple things that you may have checked on already and I just wasn't 100% sure from the post: do they not have a traditional 401k option? I am suprised that they only have a roth 401k. Most companies that I know of have either the traditional or they have both. I haven't heard of many just having the roth. The reason I ask is that my company has both and they match the roth, but that has to be taxable money. So basically, my my goes to a roth and their match is tax deferred dollars (like a regular 401K). You may want to check on that just to be certain - maybe you already are.

Anyway, congrats on teh new job! That is a huge increase in salary.

[glomerulus]

Great advice

Great piece of advice, sweeps. Despite all my reading, I never came across this loophole. One more questions I had regarding this loophole .....Is there a limit how much can you roll over into the Roth IRA in 2010 from your IRA?? I read a couple of other articles about the same loop hole and no one mentions a limit.

To answer your question, Snave...My company does offer a regular 401k too. Sorry for not making that clear.

I guess for this year, I can still contribute to a Roth IRA as I am starting my job in August and I wont quite hit the $150K limit for this year.

One more question is: If I contribute $5K to the Roth IRA this year, rollover my 401k to IRA and then Roth IRA, can I open a Roth IRA for my wife too and contribute $5K for her too keeping in mind that she is not working now.

[jIM_Ohio]

Great piece of advice, sweeps. Despite all my reading, I never came across this loophole. One more questions I had regarding this loophole .....Is there a limit how much can you roll over into the Roth IRA in 2010 from your IRA?? I read a couple of other articles about the same loop hole and no one mentions a limit.

To answer your question, Snave...My company does offer a regular 401k too. Sorry for not making that clear.

I guess for this year, I can still contribute to a Roth IRA as I am starting my job in August and I wont quite hit the $150K limit for this year.

One more question is: If I contribute $5K to the Roth IRA this year, rollover my 401k to IRA and then Roth IRA, can I open a Roth IRA for my wife too and contribute $5K for her too keeping in mind that she is not working now.

Sweeps gave information, I would question if it is effective in regards to your current situation.

In 2009, with a salary of 180k, that conversion would be taxed at 28%, 33% or 35% depending on other things. My advice would be to do some tax planning.

In 2008, your 120k salary is either in 25% or 28% tax bracket. If wife works, this rate could be higher.
In 2009 your 180k salary is either in 28% or 33% tax bracket. If wife works, this rate could be higher.
I don't know what state you live in, this does not factor in state taxes or local taxes, only federal.

You will want to pay more taxes in 2008 than you do in 2009. You marginal rate in 2009 will be quite high. Here are some thoughts:

1) can you afford to max a regular 401k in either year? In 2009 if you can find a way to shelter 50k from taxes, you move from 28% tax bracket to 25%. That is a 3% return you can "guarantee" regardless of market performance. 3% more money is invested now is the way to think about that return (IMO).

2) A roth (401k or IRA) works best if your current tax rate is LOWER than your future tax rate. I can tell you with certainty you will have lower taxes in 2008 (relative to 2009), so if you do a Roth conversion, do it now before Dec 31- the balance (5k) is low enough to not push you too high over income limits.

This would assume you did the tax planning (1st item in this list) in 2008 before the conversion.

3) A deductable IRA and 401k work best if your taxes now are higher or the same as they will be later. I would strongly recomend doing this as part of tax planning. Consider an HSA as well to further reduce taxable income and shelter more money from taxes.

[glomerulus]

Tax brackets

Thanks for the detailed reply, Jim Ohio.

However sheltering 50K from taxes is quite a difficult feat considering I have to buy a new house and furnish it plus start funding a 529 and ESA. I know that home mortgage interest can contribute to the tax sheltering but 50K would be just too much.

I do expect my AGI and my federal taxes to go up in the 33% bracket later. However, as stated in (3) in your reply, what options do I have If I cannot shelter 50K from taxes other than a deductible IRA which I could rollover to a Roth IRA in 2010.

[noppenbd]

If tax-sheltered accounts are out of the question (a "Cadillac" problem), look into tax-managed funds such as Vanguard's VMCAX inside an after-tax brokerage account.

[jIM_Ohio]

Thanks for the detailed reply, Jim Ohio.

However sheltering 50K from taxes is quite a difficult feat considering I have to buy a new house and furnish it plus start funding a 529 and ESA. I know that home mortgage interest can contribute to the tax sheltering but 50K would be just too much.

I do expect my AGI and my federal taxes to go up in the 33% bracket later. However, as stated in (3) in your reply, what options do I have If I cannot shelter 50K from taxes other than a deductible IRA which I could rollover to a Roth IRA in 2010.

I would not roll the deductable IRA into a Roth in 2010- too much taxes. Wait for the Roth conversion.

Even waiting until retirement is better than paying 33% federal taxes.

Just roll over the 401k and contribute to a deductable IRA while eligible. I would also use the traditional 401k and not the Roth 401k if in the 33% tax bracket.

There is only one federal bracket above 33%, so I would NOT use any Roth accounts until the tax deferred options are maxed out.

You should be able to conver the tax deferred accounts (rollover IRAs, deductable IRAs and 401ks) to Roth accounts in retirement 20-30-40 years from now.

Best to pay taxes at 15% or 25% and not 28%-33% or 35%.

[noppenbd]

However sheltering 50K from taxes is quite a difficult feat considering I have to buy a new house and furnish it plus start funding a 529 and ESA. I know that home mortgage interest can contribute to the tax sheltering but 50K would be just too much.

It's not that hard to have 50K in exemptions and deductions. For instance, if you are married with a child, you would have $10500 in exemptions. 2 kids would give you $14000 in exemptions. Our itemized deductions come out to around $20000 and that is with a pretty modest mortgage. If you are married and both max out 401ks/403bs you can lop $31K off your AGI. Doing all of the above would shelter $65000. If you are single it is much harder.

[jIM_Ohio]

It's not that hard to have 50K in exemptions and deductions. For instance, if you are married with a child, you would have $10500 in exemptions. 2 kids would give you $14000 in exemptions. Our itemized deductions come out to around $20000 and that is with a pretty modest mortgage. If you are married and both max out 401ks/403bs you can lop $31K off your AGI. Doing all of the above would shelter $65000. If you are single it is much harder.

Agreed. I make slightly more than half what the OP makes and had nearly 50k in deductions for 2007- without any kids.

For 2008 we get to add two kids to that amount. Plus wife earned less in 2008 because of disability/maternity leave.