2010 Contributions 401k and Roth IRA

2010 Contributions
Here are the contribution limits for each:

2010 Roth 401k Contributions
Maximum $ 16,500
Catch-up > 50 years old $ 5,500

2010 Roth IRA Contributions
Maximum $ 5,000
Catch-up 50 and over $ 1,000

You can make your 2010 contributions as early as January 2 for the whole year. If you contribute 2010 Roth IRA money between January 2 and April 15, be sure to designate calendar year 2010 if you have already contributed the maximum for 2009.

Thanks.

Yep, same as last year. That's a good thing as some expected a decrease this year since the limits are tied to inflation.masteraleph said: This is the same set of limits as for 2009, right? I'm pretty sure that the numbers all match up.

Have the limits for 2011 been announced yet?

Thanks in advance.

If I read the announcement correctly, the limits for solo 401k and SEP IRA plans stay the same at $49k.

cameron2003 said: Dont fall for the tax deferral myth.

The Myth: Defer current taxes since your marginal rate will be lower when you retire.

The Truth: Its not your marginal rate that matters. Nobody pays that. Its your EFFECTIVE marginal rate. And that is very likely going to be HIGHER when you retire, since you will have fewer deductions (e.g. zero mortgage).

Lots of assumption there about future expenses, deductions, and income. It depends on what people want to do at retirement. Their primary residence prior to retirement may be paid for, but then they move to a more desirable/expensive area and suddenly they have a mortgage again. How much did people plan in terms of income replacement? Traditional thinking usually recommends 70-80% of pre-retirement income but I'd bet a lot of people undershoot this, often by mistake (in factoring healthcare costs or having their investments perform less well than planned). So usually retirement income (and thus taxes) would be less than pre-retirement but it's still a case by case situation.

Other reason for future taxes to be higher is where current tax rates are historically (very low). With budget deficits and growing debt to pay for, there are only basically two ways to pay for them: inflation and/or higher tax revenues. Can't do much about inflation but this does not point towards future tax rates going down.

Of course, there's always the risk of a total change in taxation scheme, like Fair Tax and others based on consumption taxes. In those, Roth IRA/401k participants would likely be hosed without some compensation scheme. Considering this risk, some may want to spread their retirement contributions between pre- and post-tax account in a tax diversification scheme.

Xnarg said: To clarify, the catch-up amounts apply for age 50 and over, not just for over age 50 (as implied by ">50").

Happy 50th Birthday Xnarg!

How about a more interesting topic: potential use and benefits of the 2010 IRA conversion rules/loopholes. I'd love to hear discussion about how these could be used for maximum benefit of individuals (and, if its not too political, whether these rules are a good thing for the public at large)?

cameron2003 said: Dont fall for the tax deferral myth.

The Myth: Defer current taxes since your marginal rate will be lower when you retire.

The Truth: Its not your marginal rate that matters. Nobody pays that. Its your EFFECTIVE marginal rate. And that is very likely going to be HIGHER when you retire, since you will have fewer deductions (e.g. zero mortgage).

death and taxes are inevitable .future can be uncertain . avoid them when you can ( as in right now )

masher4077 said: One thing I was just thinking about that I haven't seen on any post on the discussion of Roth Vs IRA thread was state income tax. A lot of people want to retire in Florida or Texas or some other state without income tax, but currently work/live in a state with income tax. Wouldnt that have a big affect on the calculations(~6% in missiouri, kansas)?

Yes it would, but you would have to move to the other state in the future, which might not be possible because an unwilling spouse, family considerations, etc. It is the same as tax brackets changing in the future. (The other option is to just domicile yourself in the other state, say by buying a house in Las Vegas and having all your mail go there, while staying there just enough to be in that state more of the time than any other state.)

You may not live past 65 to claim the cash in your ROTH (with full tax benefits). Deferring taxes gives you more cash now (compared to same contribution with ROTH), and a fall back in case you do live that long. I do a mix of both.

cameron2003 said: Dont fall for the tax deferral myth.

The Myth: Defer current taxes since your marginal rate will be lower when you retire.

The Truth: Its not your marginal rate that matters. Nobody pays that. Its your EFFECTIVE marginal rate. And that is very likely going to be HIGHER when you retire, since you will have fewer deductions (e.g. zero mortgage).

tripleB said: Xnarg said: To clarify, the catch-up amounts apply for age 50 and over, not just for over age 50 (as implied by ">50").Happy 50th Birthday Xnarg!I'm on the downhill side of 50

nycll said: cameron2003 said: I work 30 years. I am in the 35% marginal tax bracket. But I am in the 11% effective marginal tax bracket. (this is my situation, its quite common if you have a mortgage). When I retire I will be in more like a 25% tax bracket with no mortgage whatsoever. My effective marginal rate and my marginal rate are both 25%. I pay MUCH LESS tax, if I pay now than if I pay when I retire. I know it is counter-intuitive to think you pay less when you make more, but thats how it works in reality. Tax deferral is sad joke.I don't get how you are in 35% bracket but marginal tax rate (Delta Tax / Delta income) is only 11%. The phaseouts and other hidden gems in the code are designed to increase your marginal rates.Yeah. There is no imaginable way that cameron2003 could be correct.

Mortgage interest is a simple itemized deduction. It only affects your effective marginal rate by changing your tax bracket (in the same way that having less salary would), or in the simple ways that itemized deductions do (the phaseout, repealed next year, at 3% of your AGI over a cutoff, and the corner effect of the decision of whether or not to itemize). It does not have the weird, complicated effects of special rules like the AMT and all of the special phaseouts.

Most people don't know what their effective marginal rate is (since it requires recomputing tax with a small change in income). I would bet that cameron2003 is just quoting his average rate -- total tax divided by total income. That is completely irrelevant to this decision.

As you said, in general, the effect of the complex rules is to make one's effective marginal rate higher than the official, tax-table bracket rate. There are situations where it is lower. For example, the highest ordinary bracket rate at the moment is 35%. The marginal rate of the AMT, on high income, is only 28%. You could be in the 35% bracket but have a 28% marginal rate because you are paying AMT. It doesn't reduce your tax bill, it's just that it prevents you from saving much money by lower your income. (Of course, the AMT marginal rate might still be higher than 35% because of the disallowance of many deductions.) But you're not going to get down to 11%, at least not by something as ordinary as a mortgage deduction.

Just to steer the topic back to the OP for a moment. I currently contribute the maximum to my company's 401k and a roth ira on my own. Now the company is offering a roth 401k in addition to their regular 401k. Does that mean I can put (for 2010) $16500 in the 401k, $16500 in the roth 401k, AND $5000 in the roth ira? Is there any opportunity (or reason) to convert the existing 401k funds to a roth 401k?

Thank you for the information. Is it advisable to put the $16,500 in the 401k pre-tax (at a cost of $11,500 - assuming a savings of ~30% income tax) or put it all in the roth 401k post tax, but the interest is tax-free?

I'm not sure I understand. Since I am only allowed $16,500 total, is it more financially advantageous to put it pre-tax in the 401k or post-tax in the roth 401k?

kinglerch said: Since I am only allowed $16,500 total, is it more financially advantageous to put it pre-tax in the 401k or post-tax in the roth 401k?This is not an easy choice. There is one big factor, and a lot of small factors.

The big factor is: will the marginal tax rate you pay on this money be higher now or later, when you either withdraw or eventually convert to a Roth IRA? If you're working now and expect to have much lower taxable income when you're retired, you will want a traditional 401(k); if this is a temporarily low income year, and you expect to go up to a higher bracket and stay there, or if you just think that Congress will be raising rates on people like you (or like you will be in the future), then you want a Roth 401(k). If your rate will stay constant -- like if you're in the 28% bracket today, and expect to keep paying 28% on marginal income for your whole life -- then it makes no difference whether you pay tax up front (leaving you less money to invest) or later (on a higher dollar amount). Choosing a Roth account is like locking in today's rates, so you might want to do it as a kind of insurance if you're not sure which way rates are headed. On the other hand, if you expect to have a year in the future when your income will be temporarily low, you can take advantage of it by using a traditional account and converting to a Roth IRA at that point (assuming you will have left your job).

The minor factors generally would push you to use a Roth: if you are contributing the maximum, then you can effectively save more money (since $16,500 after tax is worth more than $16,500 before tax); you can escape mandatory withdrawals from a Roth 401(k) just by rolling over to a Roth IRA after you retire, but you'll have to start taking withdrawals from a traditional account after you turn 70 1/2 (unless you convert to a Roth IRA then); if you will be paying estate tax, paying tax now takes more money out of your estate.

I for one am glad they didn't raise them. Whenever they raise them I go to the max, and my take home pay gets smaller and smaller! I know I could just leave it, but theres this little creature in the back of my head who says MAX IT OUT MAX IT OUT!

Luckily, I can keep the creature happy for 2010, and hopefully get a nice 5% or so raise that doesn't all need to go to retirement. I may actually be able to lower my contribution limit by 1% since hte raise will put me over 16.5k.