In Part 1, we discussed the differences and benefits of Traditional and Roth IRAs. Today, I’d like to give you some advice on the amount you should be contributing.
The Max Factor:
When my clients ask me for advice about the Roth 401k or 403b plan, I immediately look at Box 12 of their W-2 forms to see how much they contributed in salary deferrals during the prior year. According to the instructions of the W-2 form, here are the relevant codes that show up in Box 12 of the W-2 form:
Code D – Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement.
Code E – Elective deferrals under a section 403(b) salary reduction agreement
Code AA – Designated Roth contributions under a section 401(k) plan
Code BB – Designated Roth contributions under a section 403(b) plan
What I’m looking to see is whether this client is maxing out their salary deferrals during the year. If a client is contributing to the Roth version of the 401k and 403b plan, and is falling short of the $17k max ($22.5k max if 50 or older), I strongly suggest that they consider contributing only to the Traditional version until they are able to max out their contributions.
In my opinion, socking away as much money as possible each year into these tax-advantaged, creditor protected accounts takes priority over worrying about saving taxes later. Remember, if money is tight, you have the choice of contributing $10,333 into a Roth 401k account, or taking advantage of the $6,667 tax break offered by traditional 401k plans and putting away the max of $17k into the Traditional 401k account.
I think a financial planning twist on Alfred Lord Tennyson’s poem about lost love sums this up best, “Tis better to save and be taxed than never to have saved at all.”