More to retirement?

With Chad earning a little bit of extra income, I’m wondering if it makes sense to have him open a Traditional IRA.

This year, I’m maxing out my 401K, plus getting roughly $5K match. We also plan to max out our Roth IRAs, giving us a total of about $31,000 contributed to retirement. We have quite a bit of money sitting in cash, but since we’re agreed that we’d like a house someday in the future, it doesn’t seem like too much.

Complicating matters is that Chad received a very small bonus from his old job, part of which was put into his old 401K. I’m guessing this affects the amount he can put into a traditional IRA, but considering that he doesn’t even really know how much he got in that bonus, I have no idea.

I’ve never had to deal with anything more exotic than my own 401K, which is seriously 2 clicks of the mouse and you can contribute however much you’d like.

Part of me thinks that we can never contribute too much to retirement. Another part want to shore up our cash savings some more (because maybe we could buy a house in cash!). The part of me that loves big tax refunds is calculating how much extra we’d get back next April. The rational part of me is weighing the tax benefit now vs. the fact that this might be one of the lowest combined salaries we’ll ever have vs. the fact that our income in retirement could be much smaller since we’re only living on 50-60% of what we make. With 30 years to go before normal retirement age is even close, I have no idea what the right choice is. Oh, and I have a pension ($400 per month once I turn 65! Woo!), so does that affect retirement contributions?

Anyone who has fought this fight before want to give me some advice? What would you do – put it in cash, or take a risk in the stock market over 30 years and planning that this will all still be around then?

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6 Responses

  1. I didn’t check more than a cursory google, but i think the IRA limits are $5000 total, traditional + roth, and the 401k is just separate. There might be some other savings vehicle for him through his university, but likely, you don’t have to make the choice.

    It really depends on how soon you want to buy a house, but I almost always put retirement savings first. But I don’t want a house anytime soon.

    • Aha, I think my question is OBE if you can’t contribute more than $5000 total. That seems like one of those Personal Finance 101 things that I definitely should know. Guess it’s a good thing I don’t have a PF blog or anything!

  2. If I wanted a house, I’d definitely save more in cash and keep contributing to my retirement max.

    Not only can you do a great down payment but you need extra money for immediate repairs/changes/upgrades/renovations. They say about 10%. Plus property taxes for the first year, and saving 3% for future maintenance on the home.

  3. That bonus is earned income, and that’s the only thing that really rules over IRA contributions. (they didn’t send him a “paystub” with the gross bonus on it?) Maybe that puts the two of you over some earning threshold related the tax deduction for IRA contributions ($89k mAGI for married filing jointly), but the previous commenter is correct, that the max the average person can put in an IRA is $5000 total, Roth or otherwise. You each (most likely) can contribute $5000 spread out however you like.

    401k contributions don’t really affect IRA limits.
    (Well, there’s a long and complicated worksheet from the IRS, but the fact is, if you have a company sponsored retirement, your limit is $5,000. I dont know for sure, but I think Chad, since he must have been covered by a 401k at some point in the year, will also fall into the same $5000 limit)

    Pensions don’t affect any other contributions either.

    Whatever you do, try not to go over your contribution limit, because it becomes pretty cumbersome when filing your taxes. See Pub590 for all the details.

    http://www.irs.gov/publications/p590/ch01.html

    • Chad is hilariously not interesting in his own finances. He’s naturally frugal, and he doesn’t track anything. So I’m sure there’s a paystub somewhere, he just probably never bothered to check!

  4. Oh by the way, if you’re so inclined, you can withdraw up to $10,000 for a first time home purchase without penalty from your IRA (you would pay taxes if you’re pulling it out of a traditional IRA)

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