Here are the common questions I’ve received about saving into retirement accounts, complete with answers. I hope you find this helpful.
401(k), 403(b), and TSP Accounts
Note: These accounts work similarly, and I’ve used the names interchangeably below.
Q: How much can I contribute to my 401(k), 403(b), or TSP in 2017?
Q: Don’t I get to contribute a little more if I’m older?
A: Yes. If you are 50 or older (as of December 31, 2017), you can contribute an additional $6,000 in 2017, for a total employee contribution of $24,000.
Q: How much should I contribute?
A: At least enough to get your employer match, more if you can.
Q: Should I contribute pre-tax dollars or utilize the Roth 401(k) my employer offers?
A: This depends on your tax situation and thoughts on both what the tax brackets will be in the future and where you fall within those tax brackets.
Q: That sounds complicated. Does anyone know what the future tax brackets will look like?
A: No one can say for sure what future tax brackets will look like, and most people don’t have a clear picture yet of what their individual situation will look like in retirement.
Q: Alright, so how can I simplify this and make a good decision right now?
A: I prefer a combined strategy, contributing pre-tax dollars to a 401(k) and post-tax dollars to a Roth IRA. This ensures you are utilizing the benefits of both, but your situation may mean something else makes more sense. Either way, saving money is a good idea. Don’t become paralyzed by the details.
Q: What are the tax savings from contributing pre-tax dollars to a 401(k)?
A: Let’s say you’re in the 25% tax bracket and contribute $10,000, pre-tax, in 2017 to a 401(k). This means you will save approximately $10,000 x 25% = $2,500 in taxes in 2017.
Q: When I can start using money saved in my 401(k), 403(b), or TSP without incurring penalties?
A: Age 59 1/2.
Roth IRAs and Traditional IRAs
Q: Can I contribute to an IRA in addition to contributing to a 401(k), 403(b), or TSP?
A: Yes, you can.
Q: How much?
A: In 2017, you can contribute $5,500 TOTAL to IRAs. This is a combined total among all Traditional and Roth IRAs. This means, for example, if you contribute $3,000 to a Roth IRA you can contribute $2,500 to a Traditional IRA. Your combined contribution to all IRAs is limited to $5,500.
Q: Again, what if I’m older?
A: Similar to a 401(k), you can contribute an additional amount, called a “catch-up” contribution, to IRAs if you are 50 or older as of December 31, 2017. The catch-up limit is $1,000, meaning you can contribute $6,500 total to all IRAs.
Q: Aren’t there income limits for being eligible to contribute to a Roth IRA, too?
A: Yes, if you make enough money, you are no longer eligible to contribute to a Roth IRA. Those rules can be found here.
Q: Do these income limits apply to Traditional IRAs?
A: No, anyone can contribute to a Traditional IRA; however, there are income limits that determine how much you can deduct on your taxes. Those details are here.
Q: What’s the difference between Traditional and Roth IRAs?
A: Roth IRA contributions are always made with post-tax dollars. Your contributions and all the investment growth are tax free. You never pay taxes on this money again! Traditional IRAs can be made up of pre-tax dollars or post-tax dollars. Often, a Traditional IRA contains pre-tax 401(k) contributions from an old employer, which is then rolled over to a Traditional IRA after leaving that job. You can find more details on the differences between Traditional and Roth IRAs here.
Q: Alright, can you make it simple for me again?
A: If you are young – and eligible, contributing to a Roth IRA is a great idea. You use your net income (post-tax) to make contributions now, let them grow for a long time, and then take the money out tax-free in retirement. It’s pretty amazing.
Q: If I have a Roth IRA but didn’t contribute in 2016, is it too late?
A: No. You have until your tax deadline (April 18th, 2017, for most of us this year) to contribute. Just be sure to indicate that it is a 2016 contribution.
Q: When I can start using money saved in my IRAs without incurring penalties?
A: Age 59 1/2.
Other Resources and Notes
- It’s important to consider your individual situation to make the right decisions for you (which accounts, how much, if eligible, etc.). Be sure to do some research and seek help when needed.
- You can find more information on these topics by clicking here and reviewing the posts under “Retirement Accounts.”