DVM gone riding
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Post by DVM gone riding on May 19, 2011 22:33:56 GMT -5
So I know it gets debated a lot 401k vs Roth. What I actually have at work is called a "simple IRA" it limits me to only 12500/yr (not that that matters right now) but gives me a lot of freedom in what to invest in. Right now I contribute 5% to that and my employer matches 3%. I also contribute 2000 (last year) to 2500-goal for this year into a self-directed Roth. I will gross bet 75k and 78k most likely this year (year end bonuses can mess things up). In order to get ANY credit for all the SL I pay I have to have less then 75k AGI. Which according to my calculations wont be a problem unless I gross more then 78,800 this year. I had planned to increase the Roth slowly over the next two years to Max out but now I am wondering if I should increase the 401k first? Maybe it all comes down to personal preference but what do you think? Both accts are invested in mutual funds, I know the 401k type acct has more fees but I don't know how much more, some of the fees are paid for by my employer. One advantage of increasing the 401k is it is harder to change/decrease and of course I get the tax break (single with a house) but then I also like the idea of the Roth being a back up, back up EF. Thanks for letting me use all you strangers for a sounding board
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buster
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Post by buster on May 19, 2011 22:50:52 GMT -5
The standard deduction for someone who is single in 2010 was $5700. You'll have no issues this year.
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Mardi Gras Audrey
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Post by Mardi Gras Audrey on May 20, 2011 0:43:17 GMT -5
I would max the roth, if I were you. I know that you are relatively young and I think that tax rates will probably be going up in the near future. By having the funds in a Roth, you will have more control over the money, will already have paid taxes on it, and won't have it subjected to RMDs after retirement (Meaning you can keep it in there longer if you don't need it). I think that the general rule of thumb for investing priorities is 401k up to the match, Roth IRA, 401k to the max, taxable accounts....
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cronewitch
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Post by cronewitch on May 20, 2011 1:20:46 GMT -5
I would fund the tax deferred accounts until you are sure you are under the 75K AGI and delay funding the ROTH until the January after the year it is for. Then if you find you had a big bonus you can ask your employer to withhold more 401K from that bonus and if you have extra totally fund your ROTH for the year instead of only 2K.
You can use the money you didn't put in the ROTH yet as an emergency fund.
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Gardening Grandma
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Post by Gardening Grandma on May 20, 2011 9:39:02 GMT -5
I would fund the tax deferred accounts until you are sure you are under the 75K AGI and delay funding the ROTH until the January after the year it is for. Then if you find you had a big bonus you can ask your employer to withhold more 401K from that bonus and if you have extra totally fund your ROTH for the year instead of only 2K. You can use the money you didn't put in the ROTH yet as an emergency fund. This is great advice!
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jd2005
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Post by jd2005 on May 20, 2011 9:57:42 GMT -5
I would fund the tax deferred accounts until you are sure you are under the 75K AGI and delay funding the ROTH until the January after the year it is for. Then if you find you had a big bonus you can ask your employer to withhold more 401K from that bonus and if you have extra totally fund your ROTH for the year instead of only 2K. You can use the money you didn't put in the ROTH yet as an emergency fund. This is great advice! Yes, but you will be losing the growth opportunity of incrementally funding your ROTH during the year. Not sure it matters much for a one-off strategy, but I would not do this on a yearly basis.
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mithrin
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Post by mithrin on May 20, 2011 11:29:07 GMT -5
Standard deduction is not part of figuring out AGI. AGI is the number at the bottom of the first page of a 1040. It takes income, and subtracts off a limited number of items, of which retirement contributions are the biggest. The standard deduction, dependents, etc. are all on page 2 and lower your taxable income, but not AGI. Yes, but you will be losing the growth opportunity of incrementally funding your ROTH during the year. Not sure it matters much for a one-off strategy, but I would not do this on a yearly basis. I've funded my Roth in lump sums for the last several years. The incremental growth for part of the year isn't likely going to be a huge amount (it's roughly equivalent to putting all your money in 6 months earlier if you add it on a regular basis). In my situation, we've been hovering right around the Saver's Credit cutoff. By waiting to see if I need to put more in a TIRA instead of a Roth, I can control whether I qualify for a $400 CREDIT, plus I get the deduction for however much I put into the TIRA. Turned out we were below the line anyway this year, but the year before, by putting some of our 10K annual limit into a TIRA, we saved 25% on the contribution even though we're in the 15% bracket.
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jd2005
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Post by jd2005 on May 20, 2011 13:14:00 GMT -5
Mithrin - lump sum Roth funding I'm ok with...if you do it at the beginning of the year. I don't like the strategy, as a permanent one, of saving throughout the year and then funding lump sum Roth at the end.
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phil5185
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Post by phil5185 on May 20, 2011 13:45:28 GMT -5
IMO, the IRA/Roth selection isn't nearly as important as the amount. You are investing $6000/yr - that is about $425k in 20 yrs, $1.3M in 30 yrs @ 11%/yr.
And you are probably spending another $10,000/yr to prepay your $80k of low-cost debt. If you were to stay 'revenue-neutral', no change to your std of living, and re-direct the $16k/yr to highest and best uses - you can end up with a significantly higher NW in 20 or 30 yrs.
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mithrin
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Post by mithrin on May 20, 2011 13:46:38 GMT -5
Mithrin - lump sum Roth funding I'm ok with...if you do it at the beginning of the year. I don't like the strategy, as a permanent one, of saving throughout the year and then funding lump sum Roth at the end. I'm doing it in February for the previous year. The point being to wait and see how much, if any of the IRA money needs to go to a TIRA over the Roth to get our AGI to the right number. When our situation changes so that the Saver's Credit is not an option, then I'll stop waiting to see how the taxes come out first (as the Saver's Credit is a sharp cutoff, not a phase out--miss the cutoff by $1 and you get nothing, so exact numbers are needed).
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jd2005
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Post by jd2005 on May 20, 2011 15:59:39 GMT -5
Mirthrin - Ah...I see. Makes sense. Good planning.
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DVM gone riding
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Post by DVM gone riding on May 20, 2011 23:58:30 GMT -5
Phil No I stopped, I won't spend 10k total on SL this year (allowing me to increase the Roth con't) The car is "set and forget" mode since the interest rate is so low. But they do have these things called "min payments" so yes one SL and the car will be paid in 2.5 yrs roughly, at which time I will be able to significantly increase con't to retirement. But in the mean time I still intend to fund them as best as I can. mithrin I think that is a great idea, I had seen other people say they were going to make their yearly contribution to their Roth acct and I couldn't figure out why they made the whole thing at once, but the way you said it it makes sense, a little scarry but it makes sense. I have been sort of doing this in a delayed way. I have an auto deduct that goes into my brokerage acct every month (doesn't buy anything just goes in as cash) Then I transfer money from that acct to the Roth, but I am slow about doing that to allow cash to build up so if I want to reverse it I could but it doesn't count as regular cash in my general checking acct--out of sight out of mind So i could really easily save up all of the money in that acct and keep myself from thinking it is there to spend and then make a big transfer on occasion. I have been trying to also build the taxed acct up a little bit because I like Phil's general advice of having multiple accts.
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DVM gone riding
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Post by DVM gone riding on May 21, 2011 0:09:59 GMT -5
Phil Last year counting employer cont I put in not quite 9k total. this year should be over 10k, Total that is over 10% of gross so I figured I wasn't doing to bad. I want to get it up over 15% total which I should by the end of 2012 or so.
Getting my employer to adjust 401k with holding on the fly isn't easy, but last Dec they messed up my bonus (and I had it figured out close) which ended up putting half of end of year bonus into this year, so I told them ok I won't make a fuss now but you have to agree to work with me closely the following year, so for at least this year they are prepared to make last min changes! Its tough because in Dec I get a Christmas bonus, my reg paycheck (which they give us on the 30th talk about cutting the end of year stuff close) and my half year bonus which is supposed to be paid out before/on the first but can't be calculated until Dec 26th all of that makes adjustments tough and the year that the bonus was a lot higher then expected I got no credit for SL interest and since SL interest drives me crazy I found that really annoying!!
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Post by commentator on May 21, 2011 22:18:48 GMT -5
... I will gross bet 75k and 78k most likely this year (year end bonuses can mess things up). In order to get ANY credit for all the SL I pay I have to have less then 75k AGI. Which according to my calculations wont be a problem unless I gross more then 78,800 this year. ... I'm curious. What $3,800 adjustment to gross income do you think will lower your AGI from $78,800 to $75,000?
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Post by commentator on May 21, 2011 22:21:57 GMT -5
The standard deduction for someone who is single in 2010 was $5700. You'll have no issues this year. Neither standard deductions nor personal exemptions lower adjusted gross income.
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endofera
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Post by endofera on May 22, 2011 8:15:37 GMT -5
Maybe she is talking about the IRA contribution of 5%. 78,800 * .95 = 74,860, just under the $75,000 limit for SL deduction.
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Post by commentator on May 22, 2011 8:39:06 GMT -5
Maybe she is talking about the IRA contribution of 5%. 78,800 * .95 = 74,860, just under the $75,000 limit for SL deduction. The point at which phase out of contributions to ROTH IRA contribution begins is based on modified adjusted gross income. Traditional IRA contributions do NOT reduce modified AGI. For a single taxpayer, the Roth phase out begins at $105,000 of modified AGI and is complete at $120,000. I not only don't know where the OP got the $3,800, I don't know where she got the $75,000. Also, the limit on contributions to a Roth is reduced by the EMPLOYEE's contribution to a SEP.A limit on IRA contributions is earned income. The amount of earned income a taxpayer has is reduced by that taxpayer's contribution to a Simple IRA or a SEP. In other words, one limit on the amount eligible for contribution to a Roth is the taxable portion (about $75,000 in the OP's example, not the $78,000) of the taxpayer's salary. The OP probably knows that but I had to correct my own error.
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endofera
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Post by endofera on May 22, 2011 10:41:29 GMT -5
I was speaking of her 5% simple IRA contribution through her work and her concern that she be eligible for the student loan interest deduction. Nothing to do with Roth IRA.
The 5% simple IRA contribution does reduce AGI. And if she has 78,800 gross wages and makes a 5% contribution, her AGi will go to $74,860 which will allow her to take the SL deduction.
I was merely pointing out the possibility of this contribution being the answer to your question:
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DVM gone riding
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Post by DVM gone riding on May 22, 2011 12:29:55 GMT -5
Yes endofera is right my simple ira contribution (through work) lowers my AGI to a level that I can claim part of my SL tax deduction, since I also own a house I am well past the "single" std deduction. If I make over 78800 and DO NOT adjust the percent I will not be able to claim any tax deduction for the close to 4k I pay each year in SL. Now granted last year I paid just under 4k in SL interest and got to claim about 400 in "deduction" on my taxes but at least it was something. If my AGI is over 75k by even one dollar I won't get to claim anything. If I got married it wouldn't matter the deduction would go to 140k and we wouldn't make that together, but that doesn't look like it is going to happen ever at this point.
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DVM gone riding
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Post by DVM gone riding on May 22, 2011 12:34:29 GMT -5
Also work cont do not in anyway affect my ability to cont to a ROTH IRA on my own. I can cont a full 12500 to my work acct and an additional 5000 to my ROTH unless of course I start to approach the cut offs but I think my salary will keep pass with congress adjustments to cut off points, at least for now. Now I can't actually afford to do that much, I could maybe if I didn't have loans but Phil as confinced me it is more cost affective to cont what I can now and let time take care of the loans.
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DVM gone riding
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Post by DVM gone riding on Jun 30, 2011 15:49:47 GMT -5
UPDATESo I got the half-way year bonus and a raise (my boss does this to try and make my bonuses smaller so cash flow is more even) According to my extensive number crunching and guesstimate work : I will be $1169 over the 75k cut off at the end of the year. I think I could reasonable expect to push 500-1000 of that off onto 2012 taxes---my boss owes me because I wouldn't even be in this spot if he had gotten it right last year!! Still that is cutting it really close and this is already increasing my SIRA deduction to 5.5% for the second half of the year so do I a) not worry about the SL deduction--last year I got to count 400 and I do itemize b) fuss with the IRA % every couple of months to try and get it right--this will directly impact how much ends up in the Roth IRA that I control personally c) just convince them they need to pay me my last paycheck for 2011 in 2012---this is a little more of a problem then I was expecting because by giving me a pay raise I expect my bonus will be close to zero-which is what I was going to ask them to pay me in 2012 so now I would need to have part of the paycheck payed out a different year--is that legal for me to ask for that??
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wodehouse
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Post by wodehouse on Jun 30, 2011 16:04:16 GMT -5
I have a lot of grief now for over-contributing to our Roth IRAs. Went over the income ceiling so had to grab the whole year's worth of monthly contributions back for 2009. This is something you don't want to do if you can avoid it.
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DVM gone riding
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Post by DVM gone riding on Jun 30, 2011 19:19:48 GMT -5
well for this year there is no concern of going over the 90k limit to contribute to a roth, maybe in 2-4 years I will have to worry about that
No what I am worrying about--and maybe it is pointless maybe I should figure out what NOT having the SL interest deduction will cost me, but some of that is emotional,--is going over the 75k AGI allowed to deduct some SL interest.
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ontrack
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Post by ontrack on Jul 1, 2011 8:42:19 GMT -5
I don't know if my experience is helpful to you, but I also struggle with the SL interest deduction income phase out. Personally, I put as much as I can in my 401(k)--currently max, to stay below 75k AGI. Last year I got to take all of $950 of the deduction while paying over $4k in interest, but it still made me feel good. I can worry about Roths later when SLs are paid off.
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DVM gone riding
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Post by DVM gone riding on Jul 1, 2011 14:33:18 GMT -5
ontrack well I am glad I am not the only one messing with 401k deductions in order to get credit for SL interest!! I suppose I should figure out what NOT having that deduction would actually cost me but its the concept too of paying 4k in interest that is "deductible" and then getting no credit for it!! We should write our congressmen about increasing the AGI level for SL deductions!!
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DVM gone riding
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Post by DVM gone riding on Jul 6, 2011 11:49:21 GMT -5
So I ran the numbers this weekend. It would have cost me $137 in addtl taxes to let the SL deduction go last year. For this amount would you even stress over this deduction??
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ontrack
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Post by ontrack on Jul 6, 2011 12:07:22 GMT -5
I wouldn't let it stress you out, but if you can avoid the taxes by putting more in tax-deferred accounts, why wouldn't you? I also should add that I have an added incentive to reduce my AGI, as one of my SLs is on an income-based payment plan based on AGI.
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