Put more in 401K or invest elsewhere?

[frugalredhead]

We wound up owing federal taxes this year, not a ton, about $1800 (and got $800 back from state). I am hopefully getting a promotion in the next month that will have approximately a 20% pay increase. I currently contribute 6% in my 401K, which gets me the maximum company match. That is all I am saving right now, as we have been in big debt payoff mode.

I was thinking that when (if) I get this raise, I should increase my 401K to help lower my tax bill. We make too much for IRA contributions to be tax deductible.

Should I increase my 401K contributions or just focus on debt for now?

When my CC debt is all paid off, then what savings route should I take?

Thanks!

[Nutria]

I was thinking that when (if) I get this raise, I should increase my 401K to help lower my tax bill. ...

Should I increase my 401K contributions or just focus on debt for now?

How big are the balances, and how high the interest rates?

When my CC debt is all paid off, then what savings route should I take?

Completely unanswerable with the paucity of information you've given, since it all depends on your "life situation":

• Want to buy a home? Need that 20%!!
• Want to have children?
• Have children and want to send them to a better school?
• Need to save for college?
• Your cars are going to eventually need replacing.
• If you do have a home, what about repairs?
• Emergency Fund?
• etc
• etc
• etc

[dczech09]

You should be investing 15% of your income towards retirement. Yes, you are paying off debt, but from the sounds of it you make good money and I am guessing that your debt is manageable.

If I am wrong, please let me know. If you would detail the debts that you have (and any savings), that could help us better advise you. Without knowing more, my initial knee-jerk reaction is that you ought to be investing more.

Step 1: Calculate 15% of your gross annual income - this should be the dollar amount you invest for retirement each year.

Step 2: Invest enough in your 401k to get the full company match - it sounds like you are doing this, which is great!

Step 3: Invest the maximum $5,500 ($6,500 if you are 50 or older) in a Traditional IRA (non tax deductible). Then convert your contribution amount to a Roth IRA. This is known as a "back-door Roth IRA" and is completely legal.

Step 4: Increase your 401k contribution so that you are investing the full 15% of your income towards retirement in your 401k and IRA combined.

[feh]

Step 3: Invest the maximum $5,500 ($6,500 if you are 50 or older) in a Traditional IRA (non tax deductible). Then convert your contribution amount to a Roth IRA. This is known as a "back-door Roth IRA" and is completely legal.

This is only necessary if she's over the Roth contribution limit. If she isn't, she can just contribute directly to the Roth IRA.

[frugalredhead]

Big balances,not high interest rates though. Right now we still have about $50K on credit cards. We've paid off $40K in the last 2 years and will have the rest paid off in a year and a half if I don't get the promotion, and about a year if I do.

We own a home, although plan on moving in about 2 and 1/2 years. We have 2 kids, and want to save for their college, but our retirement comes first so that doesn't really factor into the answer to my question.

I guess my real question is am I better off maxing out the 401K, since that lowers my taxable income, to reduce my tax bill, or are there advantages to contributing to an IRA that I am not understanding that would offset that.

Hubby and I make about $185K a year combined, so we are now at a point where we have lost some tax credits that we used to get (some of the child care things), lower student loan interest than we used to, etc. Paying off the debt first had always been my plan, but if I get this promotion it will hurt even more come tax time so I was hoping to minimize that.

[Nutria]

I am hopefully getting a promotion in the next month that will have approximately a 20% pay increase.

20% increase over $20,000 or 20% increase over $120,000?

Big balances,not high interest rates though. Right now we still have about $50K on credit cards. We've paid off $40K in the last 2 years and will have the rest paid off in a year and a half if I don't get the promotion, and about a year if I do.

Congrats.

But... how low is "not high"?

I guess my real question is am I better off maxing out the 401K, since that lowers my taxable income, to reduce my tax bill ... [snip] Hubby and I make about $185K a year combined, so we are now at a point where we have lost some tax credits that we used to get (some of the child care things), lower student loan interest than we used to, etc. Paying off the debt first had always been my plan, but if I get this promotion it will hurt even more come tax time so I was hoping to minimize that.

Are you over 50? (If you are, then you can contribute a lot more than 15%.)
How much does hubby contribute? Would he max out, too?

http://www.bankrate.com/finance/taxes/tax-brackets.aspx

Since we don't know how much you make, we can't tell you how much that an extra 9% in your 401(k) would reduce your AGI. You'll have to see for yourself whether bumping your 401(k) to 16% would drop your AGI to the next lower bracket. And, of course, we don't know what your other deductions are.

The important question is: which is more important to you, paying less tax expenses, or paying less total expenses (taxes + CC interest).

I would consider paying $2,000 less tax but $3,000 more CC interest a losing strategy, but that's just me.

[JustBill]

Unless there is something unacceptable about the investment options offered through your 401k, then I think you are on the right path upping your contributions to the maximum. Once that tax-advantaged investment space is lost in a given year(s), it is gone for good. As you're doing, get rid of that CC debt, then consider further retirement investing in a rIRA, (or a backdoor roth), or a taxable investment account in low turnover index mutual funds.

[frugalredhead]

I have about $4K at 12.29% and the rest is at 7.9% or lower. The $4K will be paid off in the next 2 or 3 months. A lot of it is at 0% and I will have opportunity to take advantage of another balance transfer what that time is up (obviously I will do the math to see if it's worth it depending on how long it will take me to pay it off without doing a transfer).

I currently make $98K between my full time job ($80K) and my part time job. Hubby makes $87K and I think is putting 8% in his 401K plus gets a cash balance plan or retirement that his company puts several thousand in every year. If I get the new job, I'm expecting a salary of $100K ($20K increase).

I think I will just focus on the credit card debt for now, we have made such progress and it will be such a weight off our shoulders when that is paid off! We will still have car loans and student loans, so we'll tackle those next, but I plan on increasing my retirement before those are paid off. We'll have plenty of extra money to work on both goals simultaneously.

[Jluke]

wow, you had 90k in credit card debt - what did you buy???

Pay off the credit cards and forget about your "taxable income".

Have you changed your credit card behavior?

[Nutria]

I have about $4K at 12.29% and the rest is at 7.9% or lower. The $4K will be paid off in the next 2 or 3 months. A lot of it is at 0%

Even when at 0%, $46,000 CC debt isn't just a bear, it's the unholy spawn of angry mother grizzly and polar bears, since you've got to monitor the expiration dates, the interest rates and are really high after the introductory period, etc.

I think I will just focus on the credit card debt for now, we have made such progress and it will be such a weight off our shoulders when that is paid off!

Good choice, since getting downsized with $50K CC debt would be an even bigger weight on your shoulders.

[frugalredhead]

Actually my interest rates are not high after the introductory period. Believe it or not, despite the amount of debt, we both have excellent credit. But I get where you're going... paying off the CCs is the #1 priority, but they will all be paid off pretty soon.

Can anyone who has that much in credit card debt honestly say exactly what they've bought with it? That used to be the biggest part of the problem! Neither DH or I had good financial role models in our parents, and we figured if we had room on the credit card and could pay the minimums, then what's the big deal? Obviously we know better now... I have 1 card that I use for monthly recurring bills and pay off every month. The rest are unused and are being paid off. Luckily we make enough money that we'll be able to have it all paid off soon, and we are much more responsible and less impulsive with our purchases than we were before.

[tripods68]

You qualify for ROTH, the AGI limit is 183K. 185K combined income is gross correct? Max out 401K contribution to 15% AFTER you have paid your CC debt.

[JustBill]

For 2016, the married filing jointly maximum income before phase out inched up slightly to 184k.

[LivingAlmostLarge]

You need to max out the 401k both you and your husband after debt that way you can get under the income limit for Roth ira and get as many credits still.

[TexasHusker]

The answer to your question depends upon what you want out of life.

Do you want to work for "the man" from now on and collect the gold watch and hopefully fat retirement account at age 60 so you can enjoy the last 15 or so years of your life? If the answer is yes, by all means max out your 401K.

Are you content with casting your lot with the brochure of mutual funds offered by your company's 401K? Companies can and do change these offerings on a whim, based upon which brokerage firm the CEO is golf buddies with, etc. I know this from personal experience.

Do you realize that contributions to retirement accounts are not tax deductible, but only tax deferred, and that you will pay ordinary income tax (much more than capital gains tax) on every dollar you take out at some point?

Are you willing to lock up that money for the rest of your working years, as the money isn't really yours until you are an old man. It is only a number on a paper statement and is really of no use to you in the meantime.

Some thoughts to consider.

I did all of the aforementioned until about age 40 and decided it was a rigged game. I then opted out of the conventional wisdom, saved my arse off, and left the corporate world forever in 2013. I know have two businesses that net me about $285K a year of passive income, plus 4 vacation homes that I rent out, and I've never been happier.

And I don't have a 401K.

I usually get a lot of flack for my unconventional view, so I'm not going to disclose much of it on here. If you want more info, PM me. But remember this: The Herd is usually wrong.