When it comes to boosting your retirement accounts, the IRS has sent us help in the form of tax advantaged accounts like a 401(k) and an IRA. If we don’t take full advantage of these money making tools, we are turning away help when we need it the most.
In this article, I will describe the different features of roth and traditional 401(k) and roth and deductible IRA accounts. There are different types of 401(k)s and IRAs, and we’ll look at the qualification and contribution limits, withdrawal restrictions, and other features. I’ll also link to some IRS publications that provide detailed descriptions of these accounts.
It’s important to note that 401(k) and IRA retirement accounts involve a lot of rules and regulations. Getting them wrong could have a major impact on your retirement savings. I am not a tax or retirement account specialist. What follows is my best understanding of the rules as they exist now, but you should consult your plan administrator or other retirement account specialist before making any decisions.
401(k)
Named after the 1978 IRS tax code provision implementing this retirement account, 401(k)s are offered by employers to certain covered employees. Both the traditional 401(k) and the Roth 401(k) allow an employee to set aside a portion of their income for retirement. The plans also permit an employer to make matching contributions if it so desires. It’s important to note that the tax advantages of a traditional 401(k) are different than for a Roth 401(k).
Traditional 401(k)
In a traditional 401(k), money contributed to the retirement account is not taxed at the time of the contribution. Instead, the pre-tax contributions and any earnings are not taxed until you withdraw the money from the account. There are three important contribution limits: (1) how much an individual may contribute; (2) how much an employer can match; (3) and the catch up contribution limit.
For both 2013 and 2014, the most an employee may contribute is $17,500. This is adjusted upward based on inflation in $500 increments, so the limit may go up in 2015. In addition, those 50 and older may make a “catch-up” contribution of up to $5,500 in 2013 and 2014. As with the regular contribution, the “catch-up” contribution is also adjusted upward in increments of $500 based on inflation.
In addition, employers may offer matching contributions. An employer’s match does not count toward an individual’s contribution limits. In other words, if your employer matches your contributions dollar for dollar up to 6% of your salary, these matching contributions do not count toward the $17,500 2014 limit. In 2014, the total contribution to a 401k (including the employer match) cannot exceed $52,000. Thus, if you contribute $17,500, your employer can contribute up to $34,500 in 2014.
Minimum Required Distribution (MRD): The official distribution age for 401(k) funds is 59 1/2. Subject to certain exceptions described below, withdrawing money earlier will result in a 10% penalty in addition to the income taxes you’ll have to pay. In addition, the IRS requires certain minimum distributions. Failure to abide by these rules can result in a 50% penalty tax on the portion that should have been withdrawn, so understanding the MRD is important for retirees. The MRD rules are described in an IRS 401k Resource Guide, but here are the basics. The required beginning date for distributions is April 1 of the first year after the later of the following years:
- Calendar year in which the participant reaches age 70 1/2.
- Calendar year in which the participant retires.
A plan may, however, require that the participant begin receiving distributions by April 1 of the year after reaching age 70 1/2, even if the participant has not retired.
If the participant is a 5% owner of the employer maintaining the plan, then the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reaches age 70 1/2. You can find additional information from the IRS in Publication 575.
401(k) Hardship Withdrawals: A 401(k) plan may, but is not required to, provide for hardship distributions. If the 401(k) plan offers hardship distributions, then participants who qualify can withdrawal money from a 401(k) before reaching 59 1/2. For a withdraw to be on account of a hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need. The need of the employee includes the need of the employee’s spouse or dependent. Whether a financial need is immediate and heavy will depend on the facts and circumstances of each situation, but the IRS has defined certain expenses as qualifying under this definition:
- certain medical expenses
- costs relating to the purchase of a principal residence
- tuition and related educational fees and expenses
- payments necessary to prevent eviction from, or foreclosure on, a principal residence
- burial or funeral expenses; and
- certain expenses for the repair of damage to the employee’s principal residence
It’s important to note that a distribution is not considered a hardship if an employee has other resources that can meet the financial need. Here’s how the IRS describes this point:
A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee’s spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee’s spouse generally is considered a resource of the employee, while property held for the employee’s child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. 1.401(k)-1(d)(3)(iv)(B))
A hardship withdrawal is subject to a 10% penalty plus tax. There are certain circumstances when a penalty-free withdrawal can be made, which include withdrawals:
- Made to a beneficiary (or to the estate of the participant) on or after the death of the participant.
- Made because the participant has a qualifying disability.
- Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59 1/2, whichever is the longer period.)
- Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
- Made to an alternate payee under a qualified domestic relations order (QDRO).
- Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions).
- Timely made to reduce excess contributions.
- Timely made to reduce excess employee or matching employer contributions.
- Timely made to reduce excess elective deferrals.
- Made because of an IRS levy on the plan., or
- Made on account of certain disasters for which IRS relief has been granted.
You can read more about early withdrawals in the IRS 401(k) Resource Guide.
401(k) Loans: Most 401(k) plans permit employees to borrow from their own retirement account. Typically, an individual can borrow up to 50% of the account balance or $50,000, whichever is less. Although interest rates vary from plan to plan, most charge prime plus 1 or 2 percent. The interest you pay goes back into your 401(k) account. Before borrowing from your 401(k), there are several factors to consider:
- Some plans limit borrowing to just once every 12 months.
- Interest is paid back into your 401(k) account
- Most loans are paid back over five years
- If you fail to repay the loan, you could be hit with a 10% early withdrawal penalty plus income tax
- If you leave your job, you’ll have to repay the loan in full (normally within 60 days) or you could be assessed penalties and taxes
Roth 401(k)
The Roth 401(k) was introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001. This Act provides that employers could start offering these plans on January 1, 2006. According to a recent survey, 12% of employers offer a Roth 401(k), although more are expected to implement Roth 401(k) plans in the near future. Like a Roth IRA (described below), a Roth 401(k) accepts after-tax contributions only. Investment earnings grow tax-free, and withdrawals during retirement are also not subject to taxation. Unlike a Roth IRA, however, a Roth 401(k) does not have any income limitations. If your employer offers a 401(k), you can participant regardless of how much you make.
Roth 401(k)s are subject to the same contribution limits and 50+ catch-up limits as a traditional 401(k). These contribution limitations apply across all of your 401(k) plans. If you contribute to multiple 401(k)s, whether traditional, Roth, or both, your total contributions cannot exceed $17,500 (2013 and 2014) and 50+ catch-up of $5,500 (2013 and 2014). In addition, restrictions apply to early withdrawals from Roth 401(k) plans. If a hardship distribution is made, the participant will be charged a 10% penalty and assessed taxes on the portion of the withdrawal attributed to earnings. Because participants in a Roth 401(k) have already paid tax on the contributions, no tax is paid on the contribution portion of the withdrawal.
Finally, if your employer matches your Roth 401(k) contributions, these matching funds are placed in a traditional, pre-tax 401(k). This means that you will have two 401(k) plans: a Roth 401(k) for your contributions, and a traditional 401(k) for your employer’s matching contributions.
Traditional versus Roth 401(k)
A lot has been written on which 401(k) is best, traditional or Roth. The consensus almost always favors the Roth 401(k), particularly if the tax savings from the traditional 401(k) are not invested in an IRA or a taxable account. One of the unknowns, of course, is what our tax rates will be at retirement. If your tax rate today is a lot higher than it will be in retirement, a traditional 401(k) may be best. Here is a Traditional versus Roth 401(k) calculator you can use to see what’s best for you.
It’s worth noting that participants can make contributions to both a traditional and Roth 401(k) so long as total contributions do not exceed the IRS limit. That means you can hedge your bet about future tax rates if you’d like by splitting your retirement contributions between traditional and Roth accounts (on a 50-50 or some other basis).
IRA
Individual Retirement Arrangements (IRAs) are retirement accounts that are not administered by employers. Subject to certain qualifications described below, an individual can open an IRA to enjoy tax-advantaged savings for retirement. Like 401(k) plans, IRAs come in both traditional and Roth flavors. While you may qualify to open an IRA, you may not qualify to deduct your contributions. Certain limits to deductibility come into play depending on your income and whether you have access to a retirement plan at work. Here are the details.
Traditional IRA
Qualifications: Anybody can participate in a traditional IRA who is under 70 1/2 years of age and has earned income (or whose spouse has earned income if they file joint returns).
Contribution Limits: For 2014 the limit is $5,500 (plus an additional $1,000 “catch-up” contribution for those age 50 and older).
Deducting Contributions: If you or your spouse is covered by a retirement plan at work, you may not be able to deduct some or even all of your IRA contributions. If you are covered by a plan at work, the following indicates whether and to what extent you can take a deduction:
- Singles and heads of household: $60,000 to $70,000
- Married couples filing jointly: $96,000 to $116,000 (if the person making the IRA contribution is covered by a workplace retirement plan)
- Married couples filing jointly: $178,00 to $188,000 (if the person making the IRA contribution is not covered by a workplace retirement plan)
- Married couples filing separately: $0 to $10,000
Note that this phase out limits can change from year to year. You can find more information directly from the IRS in Publication 590.
Roth IRA
A Roth IRA is similar to a Roth 401(k). Contributions are with after-tax dollars, and distributions during retirement are free from tax. One of the most significant differences between a Roth IRA and a Roth 401(k) is that your income can disqualify you from opening a Roth IRA. According to the IRS, here are the current limits:
Tax Year Single/Head of Household Filers Married Filing Jointly/Qualified Widow(er) Contributions Married Filing Separately* 2016 $117,000 - $132,000 $184,000 - $194,000 $0 - $10,000 2015 $116,000 - $131,000 $183,000 - $193,000 $0 - $10,000 2014 $114,000 - $129,000 $181,000 - $191,000 $0 - $10,000 2013 $112,000 - $127,000 $178,000 - $188,000 $0 - $10,000 2012 $110,000 - $125,000 $173,000 - $183,000 $0 - $10,000 2011 $107,000 - $122,000 $169,000 - $179,000 $0 - $10,000 2010 $105,000 - $120,000 $167,000 - $177,000 $0 - $10,000
As I noted at the start, the rules for 401(k) and IRA retirement accounts can be involved, and they change and are adjusted regularly. So before you make any decisions related to these accounts, you should consult with your plan administrator or other retirement account specialist. If you’re interested in further reading, check out IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out
Most definitely invest early and max out your contribution limits!
-Raymond
Does the limit for 401(k) contributions apply for the Roth IRA contributions as well? Meaning can I put a full $15,500 into my 401(k) and then have an additional 4,000 in a roth IRA in the same tax year?
Yes, the contribution limits are separate, so you can contribute $15,500 to your 401(k) and $4000 to your Roth IRA in the same year.
James, I echo what Sara has said, but remind you that there are income limits for you (and your spouse if married) that may prevent you from contributing to a Roth 401(k). I list the income limits near the end of the article.
This is a good summary of IRAs.
What are the rules on opening an IRA by rollover?
From a 403b, for instance.
Mark, you can roll a 403b into an IRA. I’m assuming you’re changing jobs. It’s actually very easy and your plan administrator and/or the financial institution where you plan to open the IRA can give you the paperwork and details that you’ll need.
Great summary! Kudos for mentioning the income limits on the Roth IRS – most people miss that and like AMT it is catching more people.
Best Wishes,
D4L
Great article! Would be nice though if the Roth IRA section included the maximum you can put in.. doesnt it change every year, this year its $5k?
Snoop911, I’ll add the info to the article. The limits for Roth IRAs are the same as traditional IRAs, $4,000 in 2007 ($5,000 if 50 or older) or your taxable compensation, whichever is less. There is one interesting wrinkle, however. If you contribute to both a traditional IRA and a Roth IRA, the total cannot exceed $5,000 and the traditional IRA gets counted first. In other words, your Roth IRA limit is reduced by the amount you contribute to a traditional IRA (contributions to SEPs or SIMPLE IRAs do not reduce your Roth IRA contribution limits). IRS pub. 590 has more details.
I changed jobs this year, and my salary adjusted considerably.
What happens if you reach the contribution limit? Is there a penalty, or does the employer / custodian somehow know how much the total amount thats been contributed for the calender year and sends you a check instead of adding it to your 401k?
Also, wouldnt it be safer to say that employer contributions can be a maximum of $13,500, since the percentage and salary can vary all over the place?
Ben, great questions. On the $13,500, I actually spent a long time looking at this issue and even talked to my 401k plan administrator. The problem with saying that $13,500 is the IRS limit is that it assume the employer is matching 6%. However, an employer could match more than that if it wanted, so long as contributions didn’t exceed the IRS limit of $45,000 in 2007. Here’s what the IRS says: “Annual compensation limit. You cannot consider the part of an employee’s compensation over $220,000 when figuring your contribution limit for that employee. However, $44,000 is the maximum contribution for an eligible employee. The annual compensation limit of $220,000 increases to $225,000 for 2007.”
To your first question, you are responsible for making sure your contributions to multiple plans do no exceed the limits. When I changed jobs a few years ago, I notified my new employer of the amount I had already contributed that year, and they then stopped my contributions when I reached the limit. If you go over, you have until tax day of the following year to remove the excess and any earnings generated from the excess. If you don’t remove the excess, you’re taxed on the amount AND you’re taxed on it again when you eventually withdraw it. On top of that, the excess contribution can disqualify the plan.
Wow! I inadvertently saved my own hide when I opened a Roth instead of traditional IRA. I did not realize that the limit for married filing jointly and having an employer retirement account it only 85K!
I really wish the IRS would open up the IRA category a bit and allow something on the order of 10 to 20K per spouse. I am the sole earner in my family at this point and we sock away 15.5K in the IRA plus a 4% match (going to 5% in Jan 08 woohoo!) plus two Roth IRAs at 4K a piece. That’s like 27.5K this year and about 30.5K next year with the IRA limits taking a bump. I’d like to drop about 10K per spouse into a Roth IRA and have a special rule for single income families to allow the unearning spouse to have a spousal IRA with a limit of 15K. That way I’d be able to sock away about 45K each year while my wife is in school. Dang IRA rules!
Tommy, I’ve wished for the same thing. It seems odd that a single income family can’t contribute as much as a dual income family, but that’s life.
Great article, I’ve been bouncing back and forth between different resources trying to compare all of the different tax advantaged plans. Maybe you could do something in the future about HSA’s (with high deductible health insurance plans). I’m debating about whether or not I should get into one to help out with bringing down health insurance costs and to do some more tax advantaged savings/investing…
Jonathan, that’s a good idea. I don’t have access to an HSA where I work, and I’ve even talked to HR about that. They don’t like HSAs for a variety of reasons, but I like your idea of writing about it. By the way, I love to get great articles from readers to post on the site, so if you have any interest in writing the article and sending it to me, that would be great 🙂
All, these are some great comments and questions. I’m working on answers and will post a response later this week. Thanks and keep the questions, comments and tips coming!
Just to add to Ben’s question..
What if you contribute to a Roth IRA on Jan. 1, but then later in the year, it turns out you make over than the $114k limit.. what happens?
Snoop911, did you ever wonder why you have until tax day of the next year to make an IRA contribution? However, if you do contribute earlier and then make too much to qualify for a Roth IRA, you have to get your money out before the due date (including extensions) for filing your tax return for the year. You must also withdraw any earnings attributed to the excess contribution. And if you don’t get the money out in time? 6% excise tax! IRS pub 590 has more details.
Wow, this is a great web site. I am so glad I found it, thank you. It is funny, I was just talking to my friend about their web site, and they said they like your site too!
When you mention socking away $15.5k to an IRA + 4% match you meant to a 401(k) not an IRA. Just to clarify for other readers.
On that last entry I thought I was replying to Tommy’s Dec 18th reply.
Also the article fails to mention that Roth IRA contributions can be withdrawn anytime penalty free and tax free (since it was taxed going in). This apparently differs from the Roth 401(k)where you can get hit with the 10% penalty for early withdrawals.
bpack, thanks for the comments. On Roth IRA withdrawals, be careful. You can be taxed on an unqualified distribution. You won’t be taxed on the amount you contributed, but you could be taxed on unqualified distributions to the extent they represent earnings or contributions converted from other plans. You can check out IRS pub 590 for more details (a link to the pub is in the article).
So rather than percentages, and/or specific salary info, its always safe to say that the maximum contribution by an employer into an employees 401k is $47k (2007)?
Also, most 401k custodians Ive seen don’t make it easy for you to see the difference between what pre-tax you’ve contributed for that year, and what the overall current value is (contributions +/- growth).
So if you dont correct any 401k over-contributions in time, is the penalty the same as that for the roth ira (i.e. a 6% excise tax)? Or does the penalty come at age 65, or an irs audit?
Also, not quite related, I heard that there is an advantage to NOT moving a 401k fund from a previous employer over to a Schwabb, fidelity, etc. You may get more fund choices and control, but if for whatever reason you are ever sued/divorced/etc, going after the 401k fund still managed by a previous employer is *MUCH* more difficult than getting (splitting) your current employer’s 401k fund. Is this true?
Ben, you ask some good questions. First, the limit is $45,000 for 2007 and that is the annual defined contribution limit. On a percentage basis, the maximum contribution is 25%, I believe. Also, there is an exception to the $45,000 limit for individuals older than 50 and who contribute to a 401k. As for knowing how much you’ve contributed during the year, that should be reflected on your pay stub and your w-2 at the end of the year. In addition, you should be able to go online to whomever is managing your employer’s 401k to find out. Now unless you change jobs during the year, I’ve never seen over-contribution as a problem. My current employer stops my contributions automatically when I reach the limit. If you have excess contributions, you have until tax day of the next year to take them out to avoid the tax. But if you don’t, they get taxed twice–immediately and when you withdraw them. Here’s what the IRS says: “Excess not withdrawn by April 15. If you do not take out the excess deferral by April 15, 2006, the excess, though taxable in 2005, is not included in your cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.”As for shielding retirement accounts if you’re sued or divorced, that’s a major topic in and of itself. I’ll put something together as a post soon. Good luck!
Anyone who runs a one person business should definitely consider setting up a Solo Roth 401(k). She can invest $15,500 (2008) in a Solo Roth account AND she can make a profit sharing contribution of 20% of the net income (up to certain limits) from her business into a Solo 401(k). In addition, she can make a regular Roth IRA contribution of $5,000 (2008). If she is over 49, catch-up rules allow $20,500 for the Solo Roth and $6,000 for the regular Roth. If her spouse is over 49 and has his own business or works for a firm that allows Roth 401(k) contributions, the couple can do a combined Roth contribution of up to $53,000 per year. Several firms will help you to set up a Solo plan.
Just one other thing perhaps worth mentioning is that instead of investing in stocks/mutual funds for your retirement account, you could purchase real estate using the same money from your IRA.
Its not very common, and usually requires a hot-shot cpa/tax guy to setup, but in the end you have property instead of stocks, and still enjoy the same ira tax breaks.
Any thoughts on this, DR?
Ben, it’s funny you raise this topic. I invest in residential real estate and, along with a good friend who invests with me, write about real estate investing on a blog called Two Wise Acres (www.twowiseacres.com/). Although I don’t personally use IRA funds to purchase real estate investments, I recently wrote about it on our real estate blog. You can check our the article here: http://www.twowiseacres.com/2007/12/17/using-a-self-directed-ira-to-invest-in-real-estate/
Thanks for the great article. Beginning today, the company I work for offers a Roth 401k option. I am trying to find out if the IRS Roth 401k rules allow transfer of after tax contributions I had made to my traditional 401k account. I have seen a few things written about transferring pre-tax contribution money, but nothing that addresses after tax contributions already in the account.
Bob, I’m 99% sure that you can NOT transfer traditional 401(k) money to a Roth 401(k). Your 401(k) plan administrator could confirm this.
I was wondering if you know if it’s possible to do a partial conversion from a 401(k). My husband has money in his 401(k), some of it funded pre-tax, some after-tax. Ideally, we’d like to transfer the after-tax money to an IRA, and convert that to a Roth (paying taxes on the gains). Then, we could transfer the before-tax to an IRA, and over time, convert that to a Roth, spreading the taxes over several years.
I know that IRAs are considered to be mixed, so you can’t transfer only the after-tax to a Roth if it’s all IRA. I know 401(k)s are not included in this mix. What I can’t seem to figure out is if we can selectively transfer from the 401(k).
I know that the best source of information would be the plan administrator. Since my husband has not yet quit, we don’t want to start asking about our options where it might get back to his boss.
(and thanks for the offer to host a guest post about picking mutual funds — it’s intriguing, but I don’t really have the time to devote to it now)
Jane, you can’t selectively transfer from a 401(k). The IRS treats a rollover from a 401(k) as first coming from pre-tax contributions and then after-tax contributions. You may, however, be able to accomplish some of your goals. I’m preparing a post to publish this weekend that will cover your question in more detail.
Can I invest or max out my 401k and later put funds in Traditional IRA ($4k) + Roth IRA ($4k) to get max tax benefit?
Ashok, depending on your income (and your spouse’s income if you’re married), you may be able to contribute to both a 401(k) and a deductible IRA or Roth IRA. The income limitations are in the article. However, you cannot contribute $4,000 to a traditional IRA and $4,000 to a Roth IRA in the same year. The IRA contribution limits apply across all contributions to all IRAs you own. Furthermore, the contribution limitation for Roth IRAs is reduced each year by the amount you contribute to traditional IRAs, which means the contributions to traditional IRAs count first toward your limit.
Thanks for the response DR.
Further to my last query, I am married, spouse does not work & filing jointly. Since my modified AGI is less than the specified amount in the tables listed in this article. This is my understanding
401k – $15500 – Tax deferred
Traditional IRA – $4k – Tak deferred
Traditional IRA (Spouse) – $4k – Tax deferred
I hope this is allowable.
The tables in the article are taken from IRS Publication 590, which covers Individual Retirement Arrangements. There is a link to the publication in the article. Also, you should consult with the broker where you have your IRAs. Although they won’t give you tax advice, they generally know the 401(k)/IRA rules well (at least Vanguard does where I have my Rollover IRA). Good luck.
“If a hardship distribution is made, the participant will be charged a 10% penalty and assessed taxes on the portion of the withdrawal attributed to earnings. Because participants in a Roth 401(k) have already paid tax on the contributions, no tax is paid on the contribution portion of the withdrawal.”
No 10% penalty or tax on the employee deferral here, just on earnings (i.e., anything in addition to what is deferred). I wanted to clarify.
Ok, here’s a real dilemna…What happens if I forgot to transfer the funds to my IRA before the 4/15/07 deadline, but I filed my taxes indicating that I did fund my traditional IRA in 2007? Uh oh, what do I do now? (My contribution was not deductible this year.)
what other advantages does a Roth IRA have besides being able to withdraw your contributions without being taxed.
von, one potentially big advantage is that you aren’t required to begin withdrawing from a Roth IRA during retirement. This may not matter for some, but if you want to leave money to your children or grandchildren, the Roth IRA may be a good way to do it.
If i leave my current job with $15,000 in my 401k, can i rollover the money into a Roth IRA, or i would need to have a Traditional IRA. By the way, can i have both a traditonal and a roth IRA and contribute $2000 to each every year.
Great article: currently, my wife and I have a defined contribution plan through our employer (administered by Fidelity), would this preclude us from deducting IRA contributions? Our income is greater than 100k.
Thanks
TS, check out the tables at the end of the article. These come directly from the IRS and should answer your question.
For fifteen years I’ve contributed to a company-sponsored 401k, but it had somewhat limited investment options. In the last couple of years they’ve offered a Self-Directed Brokerage Account. What kind of records do I need to keep in order to be able to figure the cost basis when I start to sell-off funds as part of required retirement distributions?
wow 🙂
its very interesting point of view.
Good post.
realy gj
thx 🙂
For the last few years my company has offered both a Roth 401k and a traditional 401k. I participated in the Roth to the tune of $60k. I also had $146k in the original, traditional 401k. We were acquired in September by a company that does not offer a Roth. Yesterday, they transferred all of these funds ($206k) into their traditional 401k. Since I’ve already paid tax on the money in my Roth it doesn’t seem kosher that they could move it into a taxable investment. Is this legal?
My work 401k website (Fidelity) only allows me to contribute 10% of my income as pre-tax; which is less then the $ 15,500 IRS limit. Why can’t I contribute up to the IRS limit via my 401k? What other options do I have? I have a retirement plan at work and appear to be over the AIG limit to shelter income via a seperate Traditional IRA.
Thanks
My husband and I both contribute 15% to our companies 401k plans. If our AGI is less than 85K can we each contribute 6K to a traditional IRA?
I retired 12/31/2010. I received my last pay check in 01/2011. Can I put money into my Roth IRA in 01/2011(up to the amount of my gross or net income)?
Is pension income considered taxable compensation for eligibility to make a roth contributions? What about income from a disability pension? Thank you very much for your answers
What will happen when my company offered 401 roth with our fidelity accounts so I choose the roth now 4 years later I find out they only paid to a regular 401 and not the roth I choose now they are trying to fix that what will they have to do to convert the account.
401K or ROTH401K? I know this is tax 101 for most, but I am not sure what the best choice for me is! I am early 30s, not married, have no kids, and do not own property. I make near the six figure mark. So my question is, which plan is better for me to make contributions to?
Considering my current situation, I am wondering if my taxes would be the highest they will be in my life because I make a decent living and have no write offs for my taxes in the form of marriage, property, or dependent. At this point in the game, would the Traditional 401K be the best bet because later in life if I am married and/or have children my tax rate would drop even considering that my wage may increase? As well, when I am at retirement age, I will be in control of what my “taxable” income is based on the amounts I withdraw, right?
OR am I completely off the mark and should assume that no matter what our tax rate will increase and even if i was married and had children…all of my combined assets/investments would render me in a higher tax bracket at an older age making the ROTH401K the better choice?
How does owning property play into all of this? I am not looking for a lesson on property taxes, that is for another day, but mainly, how would that sway the choice between my two retirement contribution options?
In 2012, I rolled my 401(k) from J.P. Morgan-Chase into a standard IRA account with TD Ameritrade. The amount was $12,202.95. The IRS claims that because I invested an amount over $5,500 in one year, that I have to pay taxes on the remaining amount of $6702.95 plus any fines and/or penalties.
Question: Is that correct?
Tim, that doesn’t sound right to me. You do have to pay penalties if you contribute more to an IRA than is allowed each year. But a rollover from a 401k to an IRA is different. I’d suggest that you consult with a tax expert.
Rob,
Can you comment a little more about you do a rollover when you have mixed funds in the 401k? For instance I have contributed $10,000 pretax and $2,000 after tax to my 401k. I also have contributed $8,000 to the Roth 401k. My earnings have been about $5,000 so the total balance is now $25,000.
How do I role this over? The $10,000 pretax goes into a traditional IRA. The $2,000 after tax and $8,000 Roth 401k contribution can go into a Roth IRA. What do I do with the earnings though?
James, the earnings go into their respective IRAs as well. If you work with a firm such as Vanguard, they will walk you through everything. I’m sure most mutual fund companies and brokers will as well.
I need some clarification on the Rule of 55 regarding early distribution from a 401k without penalty. Everything I can find states that you must separate from service “during or after the year in which you turn 55”. What if you retire at 54, turn 55 later that year and then begin pulling money out? Example: I retired at age 54 on 3/1/16. I turned 55 on 8/1/16. I want to pull money out of that 401k on 2/1/17. Will there be a 10% penalty because I retired at 54 even though it was within the year I turned 55?
for 2016…can I max out my IRA @ $5500 & my Roth IRA for $5500 for a total of $11,000, or must they both together max out at only $5500?
Hal,
You can contribute to both, but your combined contribution between the two cannot exceed the $5,500 (or $6,500 if you’re over 50) limit.
-Stephanie
Can you withdraw from an IRA while, at the same time, contribute to a 401(k)?