What's my best retirement savings option?

[ezorn33]

I just turned 29. I have about $24K in a 401k from my last job, but haven't been contributing much toward retirement over the last couple of years, and I'm trying to figure out my best option.

Last year around this time I put $5K in an IRA and designated it for tax year 2009. (It's now worth a little over $6K, yay!) However, later in 2010 my company began offering a 401k plan -- with no employer match -- which means that my income is now too high to get a deduction for IRA contributions. My income is also too high to contribute to a Roth.

So I went to start contributing to the 401k plan at work, and apparently just about the only people contributing to their 401ks are "highly compensated," presumably due to the lack of an employer match. Given that, highly compensated employees are limited to contribute only 2.3% of their income.

What's my option here? I can contribute the 2.3% easily enough, but that's obviously not much retirement savings. What else should I do?

[Urban Chicago]

Well, if you're looking for tax advantages, you could go with rental real estate or a tax-free bond fund (municipal, state, etc...).

If you just want more savings, I'd go with a taxable brokerage account where you can do some broad-based index funds and such.

[Deleted]

Feb 28, 2011 14:58:39 GMT -5 ezorn33 said:

My income is also too high to contribute to a Roth.

At least that is a good problem to have.

Your best bet is using a taxable investment account and investing in low cost indexed mutual fund or ETFs.

[ezorn33]

Agreed.

I admit, I'm not experienced in the investment world. Is there a reason not to just contribute to my existing IRA, knowing that my contributions aren't tax-deductible? That $6K is in Vanguard's Target Retirement 2050 fund.

[Deleted]

Feb 28, 2011 15:15:24 GMT -5 ezorn33 said:

Agreed.

I admit, I'm not experienced in the investment world. Is there a reason not to just contribute to my existing IRA, knowing that my contributions aren't tax-deductible? That $6K is in Vanguard's Target Retirement 2050 fund.

The tax treatment of a non-deductible IRA is not good.

[Plain Old Petunia]

There is no longer an income limit for converting to a Roth! You can make non-deductible contributions and then convert to a Roth. However, you can't convert ONLY the non-deductible contributions. Instead, you must determine the ratio of deductible contributions, then pay tax on that portion of your conversion.

Your existing IRA is a traditional? Can you roll it into your old 401k? If so, you might consider doing just that. Then, make a 5k non-deductible contribution. Next, convert it to a Roth. There would be no tax, since 100% of your contributions were non-deductible.

Alternately, if you don't mind paying tax on the 6k in your traditional, then convert that too.