My employers 401K plan in addition to having only a few good options, limits the amount I can contribute each year because I'm considered an HCE.
I can only contribute about $7500/yr because of this. I am not positive yet but pretty sure that I won't be able to contribute to a Roth either, so the rest of my investments are after tax and subject to tax
It is like I have been asleep for many years and just woke up to find out how screwed I am...
Anyway, I'm putting away as much as I can and trying to learn from everyone.
Thanks for the discussions.
DPN
Comments
Sometimes, you can't win
but then again, you should move this to off-topic
Off-topic is fine, I didn't realize there was such a section and see it now.
If you want to increase your 401k contribution, you should try to get other less compansated employees in your company to sign-up but to do so company should make the 401k plan more appealing with better choices and possibly a higher good match.
You wrote:"I can only contribute about $7500/yr because of this. I am not positive yet but pretty sure that I won't be able to contribute to a Roth either, so the rest of my investments are after tax and subject to tax."
>>>>>Check this IRS link...very short page of info. Near the bottom, click one of the contribution limit links relative to whether you have a company pension plan.
You and/or a spouse may still qualifiy for some contribution amounts.
Whether you are married and/or tax filing status may have an affect regarding a ROTH contribution for combined income.
http://www.irs.gov/retirement/article/0,,id=202510,00.html
We most assuredly don't want or need to know your gross income (we don't do $ values here); but do you have any other 401k's or similar from other/previous employers, OR any other existing IRA accounts?
Regards,
Catch
And finally, you can edit your original post and place it under OT (as opposed to Fund Discussions).
Good luck.
You can contribute to a traditional IRA. You won't get a deduction, but you will defer taxes on the income generated. Once you max out there, you can get the same result from an annuity (post-tax contributions, tax deferral, and taxed as ordinary income upon distribution).
You can convert traditional IRAs to Roth - most useful if you don't expect your marginal tax rate to be significantly lower in retirement (e.g. because of large distributions or because you expect tax rates generally to rise). This has the effect of adding dollars to your IRA.
Think of it this way - you have a traditional IRA, and in a taxable account, money allocated to pay for the IRAs taxes years down the road. (Say, $100K in the IRA, $25K in a taxable account.) Over time, everything doubles - you now have $50K to pay for the taxes on $200K. But you'll also owe taxes on the $25K growth of that tax set-aside. In contrast, had you prepaid the taxes, you'd get the full $200K from the Roth.
More radical solutions:
1) If you are a sufficiently highly placed executive, try to get your company to offer you a nonqualified plan, that doesn't have to pass anti-discrimination tests. See cite for downside.
http://draketechnologies.com/LoadNv.php3?r=nvSturgill&f=Articles/Nonqualifiedpensions.htm
2) Persuade the company to restructure its plan as a Safe Harbor plan (essentially, the company commits to a certain minimum contribution or matching level). These aren't subject to testing either.
http://www.dol.gov/ebsa/publications/401kplans.html
3) Restructure your relationship from a W2 (employee) to a 1099 (contractor). There's more to that than simply calling yourself a contractor. The IRS will look into the details of the work relationship. Since you'll then be working for your own "company" and contracting yourself out, you'll have no HCE limitations on your "solo 401K". But your personal company, as your employer, will be responsible for the employer's half of FICA taxes. And you may have difficulty obtaining benefits like group health insurance (depending on your state).
IRS: Pub 15A, see Section 2: Employee or Independent Contractor?
http://www.irs.gov/pub/irs-pdf/p15a.pdf
A few more thoughts. Others have offered very thoughtful methods and actions you may choose to pursue.
A similar discussion(s) has taken place at FundAlarm. The circumstances were different, but the option choices of need for other places to park and grow monies tax deferred present similar end choices.
While I am not a supporter of traditional offered annuity plans offered by full retail insurance sales folks; other options exist within mutual fund companies.
I will mention Fidelity Investments, as this organization is the one of which I am familiar.
FIDO (Fidelity Investment Co.) offers a "plain jane" variable annuity. No surrender fee built into a 1-10 penalty period, no death benefits, no income builder function for a retire period.
A very straight forward method to have a tax deferred savings area without all of the bells and whistles and add-ons, and FEES of an annuity offered by the annuity salesperson at the bank or from the same company that also provides your auto or home insurance.
FIDO has 56 mutual funds to choose from, the "annuity/insurance" fee is only 1/4 / .25% per year which is in additional to the normal expense cost of which particular funds one places money.
This link should be for the general annuity info section at FIDO.
http://personal.fidelity.com/products/annuities/intro.shtml.cvsr
This is named the: "Fidelity Personal Retirement Annuity".
You will find the funds/investment choices at a link on this page; among a lot of other data.
ALSO, not knowing your location; you may find a FIDO investment center nearby where you may speak with a real person and be provided with all of the info you need.
Vanguard also has a similar program, if I recall properly; but I am not familiar with the aspects.
Study hard....you have more than enough to chew upon with the numerous ideas presented by all here.
I have no legal connection to FIDO; other than our house being a customer since 1978 and we have been pleased with their offerings, quality of service, excellent paperwork and with the advent of the internet; their investor web portal is well organized and offers many functions and a great overview of one's investments.
Good fortune to you and yours,
Catch
You said, "You can contribute to a traditional IRA. You won't get a deduction, but you will defer taxes on the income generated. Once you max out there, you can get the same result from an annuity (post-tax contributions, tax deferral, and taxed as ordinary income upon distribution)."
So the primary benefit of a traditional IRA, if I don't qualify for the deduction, is tax-deferred growth. No matter how much income my investments earn, and no matter how often I trade within the IRA.
Thanks for the help.
DPN
If you don't trade much, you may do better with tax-efficient investments (tax managed funds, index funds including broad-based ETFs, etc.) than with the nondeductible IRA. But if you expect to be realizing your gains every few years by trading, then a nondeductible IRA may be just the thing.