Retiring Early

Saturday, October 28, 2006

The new 2007 401(k) limits...

Here's a quick one: Does anyone else feel like contributing an extra $500 next year to your 401(k) seems like a drop in the bucket? Sure, I'm all for any increase in tax-deferred savings, but $500??? Since 2002 we've been able to add $1000 more per year, why the sudden slowdown? What am I missing here? (BTW, I saw this over on Our Money)
del.icio.us del.icio.us

12 Comments:

  • At 10/28/2006 2:56 PM, Blogger The Sarcasticynic said…

    Yeah, 500 bucks doesn't sound like much. I've been adding a grand a year each year they upped the amount, and have been pleased with the results. But don't let the paltry increase discourage anyone from signing up for it. If you want to retire early, ya gotta contribute the max every year.

    http://1sttimeinvestor.blogspot.com

     
  • At 10/28/2006 5:02 PM, Anonymous Anonymous said…

    Yes, paltry is a good word. Just keep maxing, but don't let the evil tax code cloud your vision of what you need to do: save, save, save. Use the tax deferred vehicles to the max, and then save some more. Most 401k plans have a "spillover" election that will continue to save the same percent as an after-tax amount in your account.

     
  • At 10/29/2006 7:18 AM, Blogger jellu said…

    Maxing 401ks are fine if you don't have the discipline to save otherwise. But how do you know taxes won't be much higher when you eventually take the money out years from now? Not to mention the money becomes almost completely illiquid and you have very limited investment options in 401ks. I'd rather pay my taxes now on anything above what the company matches. I feel like illiquid money in my 401k isn't even part of my net worth.

     
  • At 10/29/2006 1:18 PM, Anonymous Anonymous said…

    Jellu:

    When you move jobs you can roll over the money into an IRA and from there into a Roth IRA. After 5 years all the rollover money can be taken out penalty free. You need to pay taxes at the rollover stage but after that earnings are tax free (if withdrawn after 59 1/2 or the $10,000 for first time homebuying). I plan to rollover my 403(b) to a Roth IRA when I quit this job. Am thinking to take my contributions to the max next year now that I have 8 years plus of spending in taxable accounts...

    Then there are 72(t)s for early retirement.

    I was like you much more anti-retirement account until I learnt all these rules.... coming from Australia where it is much harder to get the money out (though now the one type of retirement account has contributions and earnings taxed at 15% which is pretty good).

     
  • At 10/29/2006 3:30 PM, Blogger fin_indie said…

    @the sarcasticynic / anon: yep, I'll certainly keep funding to the max... was hoping to fund at least $1000 more next year. Ah well...anyone know why we're decelerating on the limits? mOOm?

     
  • At 10/29/2006 3:32 PM, Blogger fin_indie said…

    @mOOm: Yeah, I wholeheartedly agree with your statements. One of the benefits to moving away from my current company was the idea that I could roll my 401k into a Roth (paying tax on the gains now) with the hopes of enjoying tax free gains indefinitely. Stealthbucks and I briefly discussed it a few weeks back...

     
  • At 10/29/2006 6:19 PM, Blogger StealthBucks said…

    For many years the cap never moved. Soooooo.... Somethings always better than nothing. I'll take the $500 and want for more....

     
  • At 10/29/2006 6:22 PM, Blogger StealthBucks said…

    Also, I disagree with Jellu. If you can't fund a Roth (like me), you can't do future tax dream therapy to tell you not to save in a 401K. Just save and don't play the could a would a should a game. It'll drive you nuts.

     
  • At 10/29/2006 8:57 PM, Blogger pfstock said…

    In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act that set forth a schedule for the increases in 401(k) contribution limits. Through 2006, this was $1000 per year. From 2007 onward, the contributions are indexed to inflation (known as a cost-of-living adjustment) rounded to $500 increments. If you are disappointed by the meager increase, then I guess that is because the inflation rate is too low...

    I am guessing that you may have already left your "large tech company," but you don't need to quit your job in order roll money into an IRA. Companies don't advertise this fact, but in most cases you can request an "in-service distribution" and roll that into an IRA while you are still working there. You need to read through the company 401(k) plan documents to find this information.

     
  • At 10/30/2006 8:39 AM, Blogger fin_indie said…

    I'll take the low inflation any day.

     
  • At 11/19/2006 3:06 PM, Anonymous Anonymous said…

    the Increase to $15,500 is great, however how does a highly compensated employee get there. I make $110,000 a year, but my employer considers that highly compensated, so I'm limited to 10% savings. That means I can only save $11,000.

    Anyone heard of this? How do i get the additional 4,500 that I want to save.

     
  • At 4/06/2007 3:05 PM, Anonymous Anonymous said…

    It's not your employer that considers you a highly compensated employee. The rules for 401k testing (ADP/ACP, et.) determine that. Ask your employer to consider a Safe Harbor 401k Plan. Your contributions will not be restricted and your employer will not be required to do all that testing. One possible drawback for the employer is that all employer match is 100% vested as soon as it is contributed under this plan. Seems like a small price to pay for the freedom to be able to contribute to the maximum. Your employer's contributions are most likely restricted, too.

     

Post a Comment

<< Home