I need some help to allocate our savings appropriately between retirement and a general EF. We can save my husband's entire paycheck of $31500 per year (less taxes) and roughly $500 per month of my paycheck. I cannot contribute anything with my employer to retirement. My husband can contribute up to 80% of his salary to either 401k or roth 401k. Obviously, the 80% is over the IRS limit. We both want to contribute the full $5K to our roth IRAs for 2012 (already contributed for 2011).

So my question is this: How much should my husband contribute to a 401K? We were thinking 33%, which would be $10,400 per year. This would enable us to contribute $10K total into our roths and still have another $10K for general EF (with the remainder of my husband's income and what I can save from my paycheck.) Is this sufficient for our retirement savings for a year? Or should we max out his 401K?

We are both 30 years old and currently have about $30k in retirement savings. Our EF is at $13K right now. Our only debt is our mortgage. No kids. If there's any other information relevant to finding an answer, let me know.

Life will happen , and especially when you have kids and the retirement profile might get more shaky . I would bolster the 401K to the maximum degree possible . Remember you can borrow from it if you view your employment stable . So, I would do the following steps :

1. Max out 401K - definitely put enough in to get the match ;
2. Max out Roths;
3. Contribute $2,000-$3,000 to Reserve Account (different than Emergency )
4. Put a chunk in Emergency - $6,000-$8000
5. Put the balance in your regular checking account - this also acts as a reserve.


**Marcopolo

Thanks for the reply! I agree with you about putting as much as possible into the 401k now.

Now for another question. He has the option to do either or both pre-tax and roth 401k. We're thinking of splitting half of the 401k contribution to pre-tax and half to roth 401k. It would work out to about $11K between the two. We'd also still max out both of our roth ira accounts. Is this a good split or should all of the 401k be roth contributions? We're so young that it seems to me that we win with tax-free growth regardless of our tax rate in retirement. Am I missing something or need to consider something else?

You are on the right track, but I'd recommend one thing:

PAY ATTENTION TO WHAT YOU ARE INVESTING IN. How much do your investments cost you? What are their expense ratios? These will eat away at your returns over time.

One more thing:

Don't rule out the fact that the government might very well figure out how to tax a Roth IRA sometime in the future. It's a great saving tool for now, but if the tax code changes, you might get burned.

My suggestion: Max our your Roth IRA's and BOTH of the 401k's (you're allowed to contribute to both at the same time). Take advantage of your rather enviable position: save that dough for retirement!!

Yeah they will. It's only a matter of time.

I disagree. The money's already been taxed going in - how could they possibly get away with taxing it coming out, too? Then it becomes nothing more than a regular investment account, but with a $5,000/year input limit. Why would seniors (the single largest voting block) stand for such a thing? And for such a piddly amount (only $5,000/year, and how many people actually max out their Roth IRA's anyway?)?

Only the contribution has been taxed. The growth hasn't yet, so they could go after that.


Not exactly. It becomes a tax-sheltered in that your growth accrues without being taxed. True, they could tax you as the money from growth comes out, but you'd still have a tax advantage if you're in a lower bracket when you retire because your income is much lower.


They would if Congress decides to make this exempts seniors by making this change effective only for people under certain age. That's the kind of plan floating around on both sides of the aisle for Social Security.


I do. And if I've been putting in the maximum for decades, that sum, compounded, is a sizable one. If you think $5K/year is piddly, then you don't believe in the power of compounding over 30 years.

Means testing of Social Security. It's actually already being done but in a backwards way.

Any tax on IRAs and 401(k) withdrawals will not be transparent. It will be done in a way that allows the politicians to deny they are doing it while claiming some sort of victory like saving the SS system. It will also be done in a way that keeps the lawyers at bay so that lawsuits (against the government for doing it and against employers for setting up defective plans that failed to anticipate future taxation) are unsuccessful.

Over the last couple of years I've been doing my own modeling for our retirement. It looks like we can do it in 2016, down from 2017 or 2018 a couple of years ago. But that depends more on non-financial factors than anything. I've now got 5 full years of tracking everything we make, spend, invest, etc. (I actually have close to 20 years data but not in the same consistent format).

The big glaring problem that I see is that those great IRAs we have all been sold are subject to RMDs (required minimum distributions). When I factor in RMDs in our case, we will be paying higher taxes than we are now even if rates do not rise. It does not take much of a tweak in the rules to really twist things up. Simply changing the test for SS from earned income to AGI makes a big difference. And that's an accounting detail that most Americans would be clueless about even as they are taxed higher. And oh, by the way, that's a tax that would only apply to rich people, not middle-class families they'll say. Because of course only rich people have a lot of savings.

Roth IRAs are not subject to RMDs currently. That could change. And there are probably other things that can be done.

I've read recently that there are subtle changes happening to the inheritance details on IRAs that, you guessed it, greatly increase the tax obligations.

I still think IRAs and 401(k) accounts are something not to be passed up. But I very definitely think they will be taxed in the future but it will be in a convoluted way.

I agree that the government could change the rules at any time. Though I will add that the federal government has started offering a roth tsp option to federal employees. So maybe it is here to stay...for what that's worth.

As to fees of investments, I am very cognizant of fees. I agree that fees can hurt a portfolio greatly if not careful. We have the bulk of our money in vanguard funds which have low expense ratios. And we don't move our money around constantly incurring brokerage fees either.

Again, that's just like any other unregistered investment account then, isn't it? The growth isn't taxed you sell, right? I'll admit my knowledge of the US tax code isn't the greatest, but at least here in Canada, you don't pay tax on your capital gains until the shares are sold.

So like I said, wouldn't that reduce a Roth IRA to just a plain old investment account, with a $5,000/year handicap?

In a plain old investment account, dividends are taxed. Also, capital gains (long term and short term) are taxed. Even index funds do a small measure of trading, as the composition of the index changes. You are sheltered from that in an IRA account. This being tax season here in the US, I am deep into dealing with the tax ramification of ordinary investment accounts right now.

So let's see...

If I had $100000 in a Roth IRA (that's 20 years worth of contributions ignoring gains) and I had it all in index funds I would get about $2000 a year in dividends (because 2% is about the dividend yield of the S&P500).

If I had that money in taxable accounts instead I'd pay 15% tax on the dividends or $300 per year in taxes. That is 0.3% of the $100000 balance.

So having the money in a Roth IRA saves me about 0.3% per year. To me personally, that's not worth the small sacrifice I make in liquidity and flexibility. Now, if I traded more actively then it would make a lot more sense.

True. But the question was how they differed, not how much. Also, I live in a state where even qualified dividends are taxed at the same state income tax rate as earned income, so that's a factor too. Kind of a moot point anyway, since the reason I did to the conversion was predicated on what the laws are today, not on what they could be in the future. I believe kombat's original question was how they could tax money going out. His follow-up question was how it would differ from a taxable account if that happened.

Currently, long term capital gains and dividends are taxed at a lower rate than ordinary income. If that were true in this hypothetical world where Roth's status were changed, then you'd be paying more in taxes in a Roth than if you had invested in a plain old investment account.

Of course, this counts on a lot of assumptions about this hypothetical world: That dividends and long term capital gains will be taxed at a lower rate than ordinary income. That whatever method they use to tax Roths won't also hit POIA (on top of dividend and capital gains taxes). Etc etc.

On the other hand, with a POIA you have to pay taxes as you go - on dividends, capital gains distributions for a mutual fund, or capital gains if you sell and buy something different. I don't know how much of an effect this increased "compounding frequency" effect would have.

Interesting article on just this subject of taxing Roth IRAs. As long as there are ?Roth IRAs in the tens (or even hundreds) of millions of dollars sheltered from taxes, there is a chance that the government will want to go after it. And there's no telling at which point they'll invalidate the tax exemption. The article itself uses accounts that are in the multi-millions. But in real life, they start going after people who have or make much less than that. Just look at the AMT.

Why--And How--Congress Should Curb Roth IRAs (from Forbes).