Roth IRA

[skives]

Right now my wife and I put 15% into company 401k's. I am interested in opening a roth ira for each of us. I believe both of us have to put a minimum of 5% into the 401k to get the full company match. My question is if we lower out contribution to 5% will we get enough back in our paychecks to cover the maximum roth ira contribution of $5,500 or even close to that? We both make $36,000 a year.

[disneysteve]

My question is if we lower out contribution to 5% will we get enough back in our paychecks to cover the maximum roth ira contribution of $5,500 or even close to that?

No, you won't even be close.

You make $36,000.
You contribute 15%, or $5,400, to your 401K.
If you drop your contribution to 5%, that would be $1,800 to the 401K, leaving you the other 10%, or $3,600, for the Roth.

However, that $3,600 will be taxed as income first. I'm not sure what your tax rate is but let's say it's 12% federal. You'll lose $432 there plus state and other taxes so you might end up with $3,000 or so take home pay.

So you'll be able to partially fund a Roth but you won't be able to max it.

[skives]

No, you won't even be close.

You make $36,000.
You contribute 15%, or $5,400, to your 401K.
If you drop your contribution to 5%, that would be $1,800 to the 401K, leaving you the other 10%, or $3,600, for the Roth.

However, that $3,600 will be taxed as income first. I'm not sure what your tax rate is but let's say it's 12% federal. You'll lose $432 there plus state and other taxes so you might end up with $3,000 or so take home pay.

So you'll be able to partially fund a Roth but you won't be able to max it.

So the difference in take home won't be enough to max the Roth IRA out but is it still a good idea to lower the 401k and contribute the extra take to a Roth?

[disneysteve]

is it still a good idea to lower the 401k and contribute the extra take to a Roth?

That's an entirely different, and more complicated, question. There isn't really a "right" answer. There are pros and cons to both the 401k and the Roth.

Generally, people recommend doing both if you can because it gives you more control and flexibility.

With the 401k, you are limited to the investment choices offered by your employer. With a Roth, you have complete control over the investments.

The 401k lowers taxable income today but the withdrawals are taxed in retirement. The Roth is funded post-tax but then you never have to worry about taxes again.

By the way, congrats on actually saving 15% for retirement. That's exactly what everyone recommends but so few people are actually doing it.

[Jluke]

Do you know if you qualify for the savers credit?

You could get 10% of $4000 back if your AGI in 2017 was under 62,000 (I think AGI is reported on tax line 38).

https://www.nerdwallet.com/blog/taxes/can-you-take-the-savers-credit/

I would do the Roth too

[snafu]

If DW is onboard, I suggest assigning small 'snowflakes,' found monies like 2017's tax rebate, 1/2 of 2018 temporary tax reduction, selling items no longer used or needed/yard sale, extra earnings/side hustle sums to collect during the year sufficient to start a ROTH. Our parents gifting was always cash that we split between savings and fun As salary increases over time, add 15% of difference for example. Once we had the challenge, we found ways to fund a portion...somehow.

[Benderz]

Right now my wife and I put 15% into company 401k's.

Also, companies are allowed to set up a Roth type 401k where your contributions are after tax like a Roth. Check to see if either of your companies offer this. How old are you guys? Roths are awesome and I would work hard to put as much in them as possible.

[creditcardfree]

Go to paycheckcity.com to figure how changing your 401K contributions will impact your check. Remember 401K contributions are exempt from federal, state and local tax withholding.

This may help you figure how much to contribute to get your match and now how much you have left to contribute to a Roth.

[Gailete]

A note of information about that Saver's Credit depending on a person's situation. My ex-husband retired on disability about 17 years ago. A part of our divorce, I get a small portion of his pension – if he dies before me I will get a bigger amount. I recall doing my taxes last year with TurboTax and seeing a screen that said I wasn't eligible for the Saver's Credit even though I had contributed to my Roth IRA (not maxed it out by a long shot though). I didn’t bother trying to figure out why last year. So, I just took a few minutes to check Form 8880 to see why I wasn't eligible. They look at the pension I got over the last 3 years which was more than the amount I had contributed, which brought up a net of zero. That left me, not eligible to take the credit, so apparently the only way to be able to get that credit is to contribute more than the amount of my pension money over a three-year span, in my case over $3400. On our income, not feasible.

Anyhow, I wanted to give a heads up for someone that may be in this situation, to not assume that if you contribute, you will get the credit, especially if you are already getting a pension of some sort, even if you are still working. It doesn’t seem to include SS amounts you receive, just regular pension amounts.

I do like the idea of the tiny snowflakes. And am working on that this year. I even set up a special account so those $5 payouts, etc. won’t get dribbled away with our regular money. I want to see how much I can make with tiny snowflakes, and since I am depositing the money into an Acorns account, it will hopefully have some growth. I’m getting real near another $5 deposit. Hoping to have hit that before the end of next week.

[creditcardfree]

Anyhow, I wanted to give a heads up for someone that may be in this situation, to not assume that if you contribute, you will get the credit, especially if you are already getting a pension of some sort, even if you are still working. It doesn’t seem to include SS amounts you receive, just regular pension amounts.

I do like the idea of the tiny snowflakes. And am working on that this year. I even set up a special account so those $5 payouts, etc. won’t get dribbled away with our regular money. I want to see how much I can make with tiny snowflakes, and since I am depositing the money into an Acorns account, it will hopefully have some growth. I’m getting real near another $5 deposit. Hoping to have hit that before the end of next week.

Yes, saver's credits are income and contribution dependent. Not everyone is eligible.

Yay for snowflakes! I write about them from time to time on my Saving Advice Blog.