A 401k question

[jbjr12]

As the title suggests i have a 401k question for the forum.

I work in sales and a large percentage of my income is commission based so my total annual income fluctuates year to year.

I currently contribute 10% of my income to my company 401k. The 10% I contribute comes in a few thousand dollars shy of the annual IRS 401k limit (somewhere between 3k and 5k depending on the year) but I am limited in my company 401k as I am considered an HCE (Highly compensated employee). I fall into this category both because of my salary and because it's a family owned business and i am a family member. Since the HCE cutoff is a moving target (depending on the other people employed by the company and how much they contribute to their individual 401k's) and since the company i work for maxes out their match at a 10% contribution level I've just kept my contribution locked where it is.

Would it make sense for me to open a separate 401k account and put in the difference between my annual company contribution and the IRS max? I could set the money aside and just contribute it at the end of the year. I would loose the any investment gains throughout the year but would gain the tax deduction.

Also, I usually fall right in the middle of the ROTH IRA contribution income limits. If I wanted to contribute to a ROTH as well how would I go about tracking the amount of money in the ROTH that falls within the IRS guidelines. Would it also make sense to just fund this account once a year as opposed to funding it on a monthly basis?

Thanks in advance.

[Petunia 100]

How would you open another 401k? Do you have another job, or own another business?

You can contribute to a traditional IRA (limit is 5.5k for 2014, additional 1k for those aged 50 and over). Then, you can convert to a Roth IRA (no income limitations to convert). If you have deductible contributions already sitting in traditional, Simple, or SEP IRAs, your conversion will be partly taxable.

[jbjr12]

Thanks. I wouldn't be able to open another 401k (brain fart on my end).

Regarding the traditional to Roth rollover.. I've read that there can be tax issues when rolling over from a traditional IRA since you cannot designate which dollars in the account are being transferred. Does the IRS look at the whole traditional account as being non-taxed income (even if contributions were made post-tax) due to the tax free growth?

Does it make sense to have a separate traditional IRA account that i fund and then immediately transfer to a Roth?

Thanks

[Petunia 100]

Thanks. I wouldn't be able to open another 401k (brain fart on my end).

Regarding the traditional to Roth rollover.. I've read that there can be tax issues when rolling over from a traditional IRA since you cannot designate which dollars in the account are being transferred. Does the IRS look at the whole traditional account as being non-taxed income (even if contributions were made post-tax) due to the tax free growth?

Does it make sense to have a separate traditional IRA account that i fund and then immediately transfer to a Roth?

Thanks

The IRS looks at all of your traditional IRAs as one pot of money. It doesn't matter if you have 1 account with 10k or 10,000 accounts with $1 each, it is all the same to the IRS.

You have heard correctly. If you have made both deductible and non-deductible contributions, you cannot choose which to convert. Any conversion will be deemed to be a proportionate share of both.

Example: You have 95k of deductible contributions sitting in a traditional IRA. For 2014, you contribute another 5k. You now have a total of 100k. You decide to convert some amount to a Roth. Your conversion will be 95% taxable.

It's not so much an issue, as it is something to consider and keep careful records. It may still be to your advantage, you just have to do the math.

One way to get around this, is to roll your existing traditional IRA(s) into your 401k, if your plan accepts rollovers. Once the rollover is complete, you have a "clean slate", so to speak.

Rolling your traditional IRA money into your 401k may not be a good idea if your 401k plan has high fees.

[jIM_Ohio]

As the title suggests i have a 401k question for the forum.

I work in sales and a large percentage of my income is commission based so my total annual income fluctuates year to year.

I currently contribute 10% of my income to my company 401k. The 10% I contribute comes in a few thousand dollars shy of the annual IRS 401k limit (somewhere between 3k and 5k depending on the year) but I am limited in my company 401k as I am considered an HCE (Highly compensated employee). I fall into this category both because of my salary and because it's a family owned business and i am a family member. Since the HCE cutoff is a moving target (depending on the other people employed by the company and how much they contribute to their individual 401k's) and since the company i work for maxes out their match at a 10% contribution level I've just kept my contribution locked where it is.

Would it make sense for me to open a separate 401k account and put in the difference between my annual company contribution and the IRS max? I could set the money aside and just contribute it at the end of the year. I would loose the any investment gains throughout the year but would gain the tax deduction.

Also, I usually fall right in the middle of the ROTH IRA contribution income limits. If I wanted to contribute to a ROTH as well how would I go about tracking the amount of money in the ROTH that falls within the IRS guidelines. Would it also make sense to just fund this account once a year as opposed to funding it on a monthly basis?

Thanks in advance.

Here are a few thoughts:

1) Focus on savings rate first, then contribution percentages second
Meaning its more important to save 20% of your income than to max a 401k
It is more important to save 20% of your income than deciding 401k vs Roth

2) I don't think you can create "your own" 401k, unless you are a 1099, then you might have another option. If you are a family member, is being on 1099 a good decision?

3) for the Roth vs 401k decision, I would focus on tax bracket planning. What tax bracket are you in, and can you come up with a way to lower it? If you can lower it, the Roth option becomes very appealing. If you cannot control your tax bracket now, I would advise taking as many deductions now (HSA over traditional IRA for example) and then convert to a Roth early in retirement. I would also boost taxable accounts if you cannot contribute to a Roth and consider taxable accounts even if you can use the Roth option.

[jbjr12]

Thanks very much for the helpful replies.

One more question. If my rollover contribution to a Roth is deemed taxable is that tax billed when i take the money out of the Roth or when i roll it over?

[Petunia 100]

It is taxable in the year you convert.