Ask Me Help Desk - Retirement plans

I recently rolled over a couple of tax sheltered annuities into a traditional IRA. Is it possible to contribute money to these from my own pocket? Or should I open an account for money that is already taxed (which is what I would be contributing)? I appreciate any help. This stuff makes my head spin.

You may be able to contribute to the IRA accounts that you set up with the rollovers. However, my advice is to establish a separate, traditional IRA account for your non-deductible IRA contributions. It will simply make it easier to keep track of how much after-tax money you have in which account.

I prefer a Roth IRA for retirement over traditional IRA. You do not get the tax advantage but the money is not taxed at withdraw either.

Setting up a Roth IRA may indeed be a good choice for future contributions. However - the assets rolled from a 401(k) go to a Rollover IRA account, NOT a Roth IRA.

So, a traditional is untaxed now but taxed later and a roth is taxed now and untaxed later? Also is the max annual contribution amount of $16500 for all accounts associated with one person or each account? (I found that amount while researching online, please correct me if it's wrong.) Thank you both for your answers!

The max contribution to all your IRAs in any given year is $5000, or $6000 if you are over 50 years old. The max contribution to your 401(k) plan is $16,500, or $22,000 is you are over 50. It's important to not get confuse the two types of plans - they have significantly different rules.

A Roth IRA is funded with after-tax money (you get no deduction for your contribution), but as long as you maintain the account at least 5 years future withdrawals are tax free. The effect is that the growth in investments is tax free to you. A regular IRA is funded with pre-tax dollars (if your income doesn't exceed the limit), so you get a deduction for your contribution. The account grows tax-deferred (not tax free), so when you withdraw money down you pay income tax on the full amount. It gets a bit complicated if some of your contributions are made with after-tax dollars, but we won't go into those details here.

A rollover IRA, such as an account you established to roll your 401(k) plan from a former employer to your own IRA, is more like a traditional IRA. It is funded with pre-tax dollars and withdrawals are fully taxable.

Now, to complicate matters - it is possible to convert a regular IRA to a Roth IRA. It requires paying taxes now on the amount of the conversion, and you must fund the tax payments from sources other than the IRA. This may be something to consider if you have a suitable amount of cash on hand with which to pay taxes, but honestly I see little value to it unless you are pretty sure that your marginal tax rates when you retire wll be significantly higher than your current tax bracket. For example - if you believe the Bush era tax cuts will expire and hence your tax bracket will go up this is something to consider.

Seems like the more information I get, the more questions I have. I am in awe that you can keep it all straight! Is the 403b max contribution the same as the 401k? And can you only get a 401k or 403b through an employer? I'm 28 and have no significant savings toward retirement (other than the rollovers I mentioned earlier) and I have no idea how to start. I am a travel RN, probably will be for the next few years, and more than likely will be working for a different company every 3-4 months. So I can't really depend on a company plan just yet. Do you have any recommendations that would be a good place for me to begin?

Quote:

Originally Posted by maegenrn

Is the 403b max contribution the same as the 401k?

Yes.

Quote:

Originally Posted by maegenrn

And can you only get a 401k or 403b through an employer?

Yes. A 401(k) is technically a deferred pay plan, where the employer withholds an amount of the employee's pay until a later date, and in the interim invests the pay at the employee's discretion.

Quote:

Originally Posted by maegenrn

I'm 28 and have no significant savings toward retirement (other than the rollovers I mentioned earlier) and I have no idea how to start. I am a travel RN, probably will be for the next few years, and more than likely will be working for a different company every 3-4 months. So I can't really depend on a company plan just yet. Do you have any recommendations that would be a good place for me to begin?

Please verify something - you will be a W2 employee of these companies, and not a contractor, correct? Assuming that's the case...

If you're going to be changing employers frequently you are really going to have to pay attention to details and not let things lapse. First - if your employer offers a 401(k) or 403(b) you should take advantage of it, but carefully read the plan rules. Many plans require new employees to be on roll a certain amount of time before the employee match vests (i.e, becomes yours). So if you think you're only going to be with a particular employer for, say, 4 months and their rules require a year for the employer match amount to vest you should be aware. Nevertheless, even if the match doesn't vest I still recommend that you enroll and take advantage of the automatic contributions from your pay and the tax deferral advantages. And when you leave each job you will probably be rolling the 401(k) or 403(b) to your rollover IRA (the same one you already established).

Second - I would also recommend that you establish either a Roth or traditional IRA and start contributing the max allowed each year if you can afford it. And even if you can't, at least get in the habit of contributing some amount each quarter - putting $100 in each quarter is better than $0.

Finally - get in the habit of keeping meticulous records of all accounts and contributions. It sound like you'll be moving a lot, and it is very common for ex-employees to forget about their 401(k) or 403(b). Maintaining a bunch of different accounts can be cumbersome - which is one reason why I think it's a good idea to consolidate into the one rollover IRA as you cycle through these jobs.

It's good that you're thinking about these things now. I started my first IRA back in the early 80's and even though the amount I put in was relatively small (less than $2K/year) those first amounts have grown substantially over the years. The magic of compounding over time is really in your favor when you're in your 20's; not so much when you're 50.

Yes, I am considered a W2 employee. And other than the Roth or traditional IRA, I have been doing what you suggested. Makes me feel much better, knowing that I have been doing a few things I should. Thanks for your help.