Dear Carrie: If you max out your 401(k) and make over $176,000, can you contribute the $6,000 limit (I'm over 50) into a Roth or traditional IRA with after-tax funds? -- A Reader
Dear Reader: Contributing as much as you can each year to your tax-advantaged retirement accounts is one of the smartest financial moves you can make at almost any age. But IRS rules can make contributing to your IRA a bit more difficult as your income grows.
That's because there are income limits on IRA contributions, which vary depending on the type of IRA and whether you're filing as a single taxpayer or married filing jointly. Let's take a look at those limits -- as well as some alternatives that can help you continue to maximize your retirement savings with after-tax dollars.
CONTRIBUTING TO A TRADITIONAL IRA
It's great that you're contributing the max to your 401(k). I always recommend that as the first move in saving for retirement. But your participation in an employer-sponsored plan limits your ability to contribute to a traditional IRA and get the benefit of an upfront tax deduction. For single filers, the most you can make in this situation and still contribute fully to a (SET ITAL) deductible (END ITAL) traditional IRA is $56,000. For married filing jointly, it's $89,000. Obviously, at your income level, that's not an option.
Another factor in a case like yours -- and I think this is something many people don't realize -- is that even if your spouse doesn't participate in an employer-sponsored plan but you do, he or she can't make a full contribution to a deductible IRA if your combined income is more than $177,000.
THE DRAWBACKS OF A NONDEDUCTIBLE TRADITIONAL IRA
There is no income limit associated with a (SET ITAL) nondeductible (END ITAL) traditional IRA, so you could contribute the current maximum of $6,000 with after-tax funds, since you're over 50. However, given current tax law -- particularly low long-term capital gain and qualified dividend rates -- a nondeductible contribution to a traditional IRA rarely makes sense. There's no upfront deduction, and earnings are taxed at ordinary income tax rates when withdrawn.(Who knows what the rates will be when you're ready to make withdrawals!)
Of course, your earnings will grow tax-deferred, but to really reap that benefit you'd have to have a longtime horizon. This close to retirement, the tax-deferred growth may not balance out the income taxes you could end up paying later on.
QUALIFYING FOR A ROTH
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