I am 46 years old, My wife is not working. File income tax as Married Jointly. . My company recently offers 401(k) matching at 3% - either thru pre-tax OR after-tax ROTH plan. ( 3% match = $184k X 3% = $5520 ). My Annual income is $184k.. but unfortunately I have not developed good savings habit.. I am committing to save up to 20% of my gross salary for retirement. My target retirement age is 65 ( hopefully earlier ).
Based on my scenario above.. what is the best strategy for me towards my retirement saving? Should I choose pre-tax OR after-tax ROTH for the 401(k) plan. How much ? What will be the best next step for me - while taking advantage of any tax break ( if any ) - opening up individual IRA ?
Appreciate any advise. I realize that I have to play "catch-up" here... but it's better late than never...
Congratulations on getting committed to saving for your retirement.
Assuming you have a number of high quality, low fee funds to choose from in the 401k, and the administration fees are low, then max out the 401k. Selecting the pre-tax version of the 401k will reduce your overall tax bill, which will give you some additional funds back in your pocket to invest elsewhere.
You are on the cusp of having too much income to be able to invest directly in a Roth IRA (Phase out starts at $178k and completes at $188K) However, you can do a 'back door' Roth. That is, you open a traditional IRA and make your investments. Then, very shortly thereafter (like the next day), you convert it to a Roth IRA. Because you only pay tax on the gains in a conversion, it is likely it will be very small, if any. (Note, if you already have a traditional IRA, the taxes are determined on the entire balance. There are ways around this too, but that is for another question).
Make sure you open the IRA for your wife too. Max them all out. And if you still have money left to invest, then look at a regular taxable investment account. Just make sure you have tax efficient funds in this account.
STOP!!! Break it down in three steps: 1. Do the pre-tax! You are starting late and probably not going to have a ton of income when you retire (whatever that means - let's say doing what you love full time versus your job). 2. Work on doing 20% first and see if you can do it. Why? Roth IRAs on top of your 401k is a great idea, but there are MAGI phaseouts that can hit you. Plus, let's just say I want to see you do 20% first, and work out the tax details later. Don't take the wrong way - take is as 'do what is in front of you first'. 3. Allocate properly! No, your 401k provider is probably useless - that is okay! Find a great advisor who will do a financial plan that includes telling you how to allocate you 401k money.
So - do the hard part first - 20% of your income. Worry about extra savings later, but before April 15th of next year. Then find someone who will do a financial plan that includes how to invest your 401k. Okay, okay - our firm does that and we have lots of clients in Texas. I said it. There are also a few other qualified CFPs and CFAs that can do it too. You found the right place to find decent people, no matter who you go with.
You can do this.
Good for you, Selah! You are not too old to get started. I agree with the comments above, so I won't rehash those. Here's what jumps out at me about your situation. You stated that you have not developed good savings habits. That may mean that, at your salary level, you may have a spending issue. I'll take my lumps from other advisors on this one, but I recommend you start with a budgeting class. Take a Dave Ramsey course with your wife to get your spending and savings habits in order. Then you will really be able to save the 20% you want without sacrificing your other needs. Good luck!
First of all, congrats on your commitment. Unfortunately, many will never commit and will have to live a poor retirement. Your income is strong, is it fixed or growing? Once you get started seeing your wealth grow it gets easier and easier commit to more and more. I've got quite a few millionaire plus clients who started right where you are.
Do you have a mortgage and/or children to deduct? Your income is at the point where taxes start being a real burden and all deductions will help. For this reason I would suggest pre-tax for your retirement plan. If you want to contribute to a tax-free retirement plan, a less known strategy would be life insurance. One plan came out recently that even includes an income rider. Life insurance costs can be somewhat expensive but so are taxes. The other benefit of adding this kind of strategy is the self completion feature if you fail to make it to retirement.
The only other way to defer more pre-tax dollars would be to start a side consulting business and open a defined benefit plan for both you and your wife. This would work even better if your income continues to rise.
These are some suggestions only. If you would like to discuss, contact me or another competent financial professional that has broad based knowledge.
Saleh - You're asking the right questions and these answers are all excellent. Just keep in mind that while the principles of investing will always hold true, the rules and limitations unfortunately have a way of changing. The one factor that could make or break your retirement years is how your savings or nest egg is taxed when you begin to withdraw it.
The best defense to saving in a constantly changing tax environment is to perpetually hedge your bets. Instead of focusing on which type of accounts are best under the current tax code, you will allow yourself more future flexibility by concurrently funding all 3 of the tax buckets. Tax-Deferred, Tax-Free, Taxable. So a good mix of your pre-tax (Tax-Deferred) 401k and a (Tax-Free) Roth IRA for you and your spouse as Andy mentioned is a great start. If you have additional funds to save you can continue building your Taxable bucket by saving in a joint or trust account, pay down your mortgage, or diversify into other real estate. And yes, Rod is exactly correct in that your employer match is your first and best options since "free money" beats anything an advisor could ever do for you.
To determine the exact allocations you'll want to find a good Financial Advisor who will not only work well with your personality, but is also willing to communicate with your other advisors like your CPA or Estate Planning Attorney. When you have this allocation discussion with your CPA, keep in mind his motivation and understanding of your objectives. Unless you specify otherwise most CPA's have one goal... lower your tax bill as much as possible in the current year. If you make it clear you would like pay the least amount of taxes over the next 20 years AND in retirement with the maximum flexibility, then a good CPA will now see that you want him to be your Tax Planner/Advisor and working with your Financial Advisor is a part of that. Feel free to contact me to discuss any other questions or ideas.
Invest With Purpose. www.appliedcapital.com
So far... all good answers...
Just to keep it simple... take the match... if nothing else, take the match... and, did I say, "take the match"?
Okay, it's only for one year at a time, but, a match is equivalent to a 100% guaranteed return for every dollar you contribute. Where else are you going to find that kind of deal? Best Regards... Rod
Here is a good 401(K) Savings Calculator you can use to see how your 401(k) can grow and the projected balance at retirement. Simple to use. Hope it helps. Sal. http://www.lanternwa.com/pages/calc.aspx?spid=119422&calcname=Retire401k
Everyone has said great things in their posts! 20% is awesome - work towards contributing the max! I'll just round it out with a couple of thoughts:
One way to think about it is if you think you'll make less in retirement than you do now and thus pay less in taxes, use the pre-tax side. If you think you'll somehow be making more in retirement and in a higher tax bracket than now, use the Roth.
Retirement has a different meaning for everyone -- it's the choice about whether you show up at an employer to get a paycheck or you make your own somehow. It's a super good idea to get a little obsessed with your money now so you have more options on how you create that paycheck later! There are plenty of books and calculators out there, so dig in!
Saleh, there are two important points here. But first I will relate to you with an anecdotal story. During my third mid-life crisis, I bought my first boat. I ended up with a small cabin cruiser with an inboard-outboard motor. Knowing nothing about boats, I moored it in the water at a slip at my girlfriend’s condo. Neighboring boat owners mentioned to me that it is not wise to leave a boat with an inboard-outboard motor in salt water. Sure enough, 2 years later the water jackets rusted through and I needed a new motor.
The point is, several people told me I could not leave that kind of boat in the water. I did hear them, but it just did not register. No one hit me over the head with a 2 x 4 and yelled at me that I couldn’t do that. Now something similar is happening to you. People are telling you that you have to have a budget and be more financially disciplined. I know you are hearing it, but is it registering? I know in the past, you have not focused on your financial plan. Hopefully, this is a great stage in your life, and you will develop not only a retirement plan, but a comprehensive financial plan that includes not only saving for retirement, but a plan for emergencies, your loved ones, and life before retirement.
The second point is that I believe that, in general, when the government offers you a tax advantaged plan, it is a gift. And it goes without saying that when there is an employer match, that is a gift. I think that you should take maximum advantage of the gifts that are offered to you. To save 20% in a retirement plan is a lofty goal. Remember that this money cannot easily or practically be spent before retirement age. So before you put it in……
I would recommend an emergency fund not a part of the retirement plan; something you can get to if you need it. Between you and your wife, in general, I would aim for 4-6 month’s of expenses.
As for Roth vs traditional 401(k), I lean towards the Roth; others do not. Consult a qualified financial planner in your area. Try to get referrals from trusted friends, family, and associates. Interview several and find one that relates to you, and you relate to. But most importantly, go back to my first point; that is the most valuable advice!!