We may not contribute to the IRA this year!

We maxed out our 403(b)s this year and then maxed out DH’s 457.  That is putting away a LOT of money for retirement.  This would be the first year we let an IRA deadline come and go without funding anything.  I’m not sure how to feel about that.

I keep thinking, it’s only 5K… most years we have more left than that after getting through the unpaid summer.   But you know, two of them are 10K, and 10K is kind of a lot of money, especially when your take-home pay has been dramatically cut because you’re putting away a huge amount of money into retirement accounts already.  And we’re doing the ROTH option on about half the work retirement accounts as it is.

If only we made more money!  Then we could do everything.  Stupid lack of COL raises and increasing benefits costs.

The other places for the money would be emergency fund (and we’ve been spending a LOT on trying to keep me fed… also, potential new baby expenses) and pre-paying the mortgage.

Deep down I know that we’re going to need the money sooner rather than later.  Even if DH gets tenure he’s not entirely happy with his job, and having a big cash pot would allow him more flexibility to try new things.  We’d get more happiness about having slush now than we will from whatever tax advantages we’ll have in the future.  Probably…. assuming we continue on at least a similar income/savings trajectory.

But I’m also a creature of habit and it just *bugs* me that we’re not taking advantage of the Roth this year even though we can.  That’s totally irrational.  Though the Roth would probably maximize our returns given certain guesstimates about future tax increases and so on, it won’t maximize our overall utility.

It is so much easier to optimize money than it is to optimize happiness.

(NOTE:  #2 is all Roth’d up in here.  Maxing it out hurts my savings a lot but it makes me feel better.)

Did you contribute to a 2011 IRA this year (note: there’s still time)?  How about your other retirement accounts?  Or did you meet other spending/savings goals instead?

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34 Responses to “We may not contribute to the IRA this year!”

  1. feMOMhist Says:

    srlsy every time you do a $ post I’m thinking, DAMN I must get my financial house in order. I know we are putting extra $ in savings but not fully funding and DAMN I can’t figure out how with a combined income of what we have we don’t save more.

  2. Leah Says:

    I contributed very little to my Roth IRA this year. I am still a student, technically, and I won’t have any income this term as I student teach. I decided that flexibility in my bank account is more important than the Roth for now. I know compound interest helps, yadda yadda, but so does being able to eat. I also wanted extra money on hand in case I needed it for wedding expenses. And I took last summer off, because I could, and because I never have since I started working.

    I hoping to get a job this next fall and be able to max out my Roth (and put a big chunk into student loans) with my first few paychecks, since my husband makes enough to support both of us on his own. Once I have a full time job, he’ll also be able to max out his Roth.

    Your posts do make me want to get my financial house in better order. But then I remind myself that I have just a little loan (from most recent grad school, grrr) and no other debt. And a year’s worth of living expenses in savings. So I feel better.

    • nicoleandmaggie Says:

      We maxed out the IRA Roth when we were in grad school… BUT the limits were a lot lower then! I don’t think there’s any way we could have done that with the current limits (ignoring inflation etc.)

      And honestly? It might have been better to eat meat on a somewhat more regular basis at that time so I didn’t lose my ability to digest it (I got that ability back, but it was somewhat painful).

      • Leah Says:

        oh, we certainly eat meat and all that jazz. I’m in that weird spot of financial management — I’ve never been in debt, never poorly managed my money, but also rarely been budget-oriented. I am frugal enough that I never seem to have a problem making ends meet no matter how little I make. But I must admit that I’m not good at funding retirement at the expense of things like eating decent food or traveling.

  3. Linda Says:

    No Roth IRA for me. I don’t qualify based on my income. But I am contributing the max to my Roth 401(k). In fact, I recently switched *all* of my 401(k) withholding to the Roth version. That means I have no pre-tax retirement plan withholding anymore, but I have been maxing out my standard 401(k) for years and a financial planner advised me to make this switch based on an analysis of my financials. I’ve also opened an annuity and will be contributing monthly to that instead of an IRA. As for other savings goals…I guess I should set some better ones. I have a six month emergency fund fully funded and savings accounts for vacation and long term “goals” (I will someday have to replace the 10 year old car, put a new roof on the house, etc.), but I have no specific target amounts for either of these.

    • nicoleandmaggie Says:

      I went to a talk yesterday about Roth 401(k) vs. regular 401(k) and employer matches. I need to think hard about it and find and read the paper to make sure I understood it, but I’m going to have to post on it.

      We’re able to contribute to the Roth IRA because the traditional 401(k) (actually 403b) lowers our AGI.

  4. bogart Says:

    In the abstract, I am mystified as to why anyone with an EF (one beyond the “mini EF” of the sort Dave Ramsey advocates for the early stages of getting out of debt) wouldn’t, if nothing else, move the appropriate portion of the EF into a cash-equivalent Roth at every opportunity, up until the entire EF is there. Not that this is the best way to fund a Roth, but as compared to letting the opportunity slip by …

    And sure, withdrawing the principal if one subsequently needs to is a bit of a hassle and defeats the purpose, but if one doesn’t need to, one’s in good shape — and, nothing like needing to pull money out of retirement savings to help you evaluate whether something is or isn’t *really* an emergency.

    Also mystified as to why anyone who can’t afford, say, $5K doesn’t at least put in, say, $1K, if they can afford that amount.

    As for translating theory to practice, my Roth is fully funded. My 403B got almost fully funded; after the horse died, I maxed out as much as my institution would let me (80% of gross) for my last 2 paychecks which, together with what I’d already put in, got me very close though not quite there. DH retired (with a pension) almost 10 years before the “real” retirement age and now insists that since he is retired it makes no sense for him to be saving in retirement accounts, which is, of course, a joke (note that I manage our money…); with his modest pension and the big hit his SS will take given his early exit from the workforce, this is truly laughable, but given my maxing my 403b, I’ll be hard pressed to come up with the funds ($6k in his case as he’s 50+) to max his Roth. Per the above, I might put in a smaller amount (honestly it was easier just to max my 403b, and probably not too different in the long run), but we do have a bunch of expenses coming up, including what will probably be a big tax bill as I converted about $60K in an old 403b in 2010 to a traditional and then a Roth IRA and we’ll owe on half of that this year and half next.

    • Debbie M Says:

      Good answer to put some emergency funds into your IRA. Better than my original idea for an answer of making sure that the money you’re saving is going in the best places. For IRAs, you’re not limited to whatever your employer allows, so i’d think that’s usually the best place to put money if you can (and once you get any employer match for other places).

    • nicoleandmaggie Says:

      Well, if one already has a large sum of cash in the Roth, then it becomes less attractive as a secondary emergency fund (since the secondary emergency fund is pretty well funded). We’re really talking about Roth vs. Spending here, not Roth vs. other saving, since to change the other saving we’d have to stop DH’s 457 contributions which would be a hassle.

      Our Roth conversion didn’t actually cost that much in tax… that’s what happens when the stock market sucks…

      • bogart Says:

        OK, so assuming you have (a) a large sum of cash in the Roth and (b) an appropriately adequate EF, why wouldn’t you then (c) move $10K from the EF to the Roth and (d) invest $10K (or some smaller amount, per your preferences) in riskier (non-cash) investments in the Roth. So the total size of the Roth and the EF stays the same, but the amount in each shifts (more in Roth, less in EF). And the total in cash available in an emergency stays the same, but the size (and risk, and thus expected return) of your Roth increases. And your spending, which of course draws on neither your Roth nor your EF (barring a real E), stays the same. The downside is … ?

        Even given a down stock market and reasonably decent timing on my part, my Roth conversion will cost me about $7K each year over two years, and that’s at the 25% marginal rate, but I’m happy to have done it (though strictly speaking I should be still happier not to have done it and to fully fund DH’s Roth as well as my 403B and Roth — but this ignores the psychic cost to me of arguing with DH, which is non-zero, in favor of some future payoff, which is unknown though surely exceeds zero).

      • nicoleandmaggie Says:

        Possibly because definitions of “appropriately adequate” vary… We only keep one month’s expenses on hand (4 months in the beginning of the summer since we don’t get paychecks 3 months in the summer— and we actually do need 3 of those 4 months to live on, which is why we have more than one month in savings right now… we need to accumulate the rest), and when we need that money for emergencies in August or September we need those in cash, immediately. Not in the amount of time it would take to de-Roth them. What would happen would be we would have to stop eating out and buying fancy cheese in order to keep that one month EF in order to feel comfortable, depending on the state of emergencies, which would lower our quality of life most likely starting in June or July. Also we’d have to stop any and all mortgage prepayment– and mortgage pre-payment is much easier to control on a month to month basis. (Also note that one month’s expenses < 10K. We live dangerously.)

        When we bought a house I had a temporary liquidity problem when I needed cash on hand but the check from the broker took longer to come than we had anticipated. We had to do a 0% credit card check. Liquidity problems are stressful.

        And we do have to dip into the EF from time to time as some months have more emergencies than others and what a hassle to have to de-roth something because you need $500 that will be replenished in 15 days. Again, that would end up cutting our consumption because we wouldn't want to make that trade-off.

        We could totally do the IRA if we weren't already putting 6% of our salaries plus 6% matches plus maxing out two 403(b) and one 457. That's a lot of money going towards later consumption, and, as noted before the 457 is a better emergency fund if one is worried about losing a job.

      • bogart Says:

        Yes, OK, fair enough. I had forgotten that you had said you keep a fairly small EF, and, obviously, no one wants uncertainty when it comes to cheese.

  5. femmefrugality Says:

    My goal is to get a job that offers this option once I graduate. Finally. After years.

  6. Debbie M Says:

    I never max out all my retirement accounts. I think I have finally gotten rich enough to do that AND eat, but not to also live indoors like I like.

    Last year I maxed out my Roth IRA, added some to my Roth 403(b), then changed my mind and started adding the extra to my 457 instead (which you can yank penalty-free as soon as you leave your job, even if you’re not old yet). I also made the mandatory contributions to my pension.

    This year, who knows? I gave notice at my job without having another one lined up. Let’s just say that burnout + overwork + personality conflicts = emotional and physical mess. I want a break. And my savings give me that luxury, though not the luxury of a permanent break:
    * 2 months of vacation (= about 3 – 4 months of expenses)
    * 1.3 months of expenses in the 457(b)
    * maxed out Roth IRA since it was created (= about 2 years of expenses)
    * eligible for pension in 6 years.

    I’ll spend the first month or two cooking, exercising, and writing, with a little job hunting on the side. Then I’ll increase the job hunting at the expense of the writing. It’s looks better to do something productive while unemployed, and of all the productive things I could think of, writing a book sounds the most fun (and the most doable in a short period). I’m going to try writing a math book for adults who are afraid of math (and thus would never read such a book–unless I sucked them in with an alluring or odd title like maybe “Math is Pretty”). I’ve written an extremely bad “novel” as part of National Novel Writing Month, so I’ll follow a similar plan for this nonfiction book.

    I may just do a bunch of temp jobs or find a part-time minimum wage job I like, or I may get another real job at the university or in the real world. Or since it’s a recession, I may never find another job. Even if I had to sell my house and car to buy a van I could live in, I won’t regret this decision. And that’s a good thing to know going in.

    To finish answering your actual questions: other spending/savings goals I achieved last year were buying a replacement car for cash (no debt) and paying off my house. Property taxes are really high in my state, though, so that’s not quite as exciting as it sounds ($440/month for a small 2/1 for taxes and insurance, plus I save another $153/month for maintenance and repairs = $593). Oh, I also started buying dividend-growth stocks outside of my retirement portfolios, but I’m only up to an average monthly dividend income of $15.69!

    • nicoleandmaggie Says:

      YES, that’s what makes the 457 so attractive this year (as compared to the Roth)… if we need it because DH loses his job, it is there right when we need it. It makes a great emergency fund in that respect. And you can put 16.5K in it! So, small benefit to being a state worker even if we don’t get things like raises…

      I think I once calculated that if we maxed out all our retirement accounts that would be putting away 72K total/year. This coming year it must be even more since I think they’ve increased some limits. With the lack of raises, etc. etc. etc. we’re not really rich enough to both do that and enjoy life. Plus if we did that we might have way too much at retirement given how little we’d be consuming today!

      Have a fun sabbatical, and good luck with your endeavors! I also love dividend bearing stocks…. they’re another form of emergency fund that I don’t want to convert into the Roth. We don’t get enough to live on, but it is enough to smooth things a bit should disaster strike and we undripped.

      We also have high property taxes, so mortgage prepayment is not the ticket to freedom here that many people talk about (1/3 of the mortgage bill each month).

      • Debbie M Says:

        Yeah, it’s always a little annoying when personal finance articles say to max out your retirement plans. If you’re not rich enough to do that, it doesn’t mean you can’t make wise choices.

        Bummer about your property taxes. At least I get out of income taxes (and income tax forms!) in return. (Which, admittedly, is more exciting when I have an income.) I wish they would charge a one-time sales tax for houses instead of a never-ending property tax. At least I don’t also have a never-ending HOA fee.

        I’m sure my sabbatical will be fabulous, though it may get less fabulous later if it goes on too long!

      • nicoleandmaggie Says:

        I imagine most people don’t have the 457 option in addition to 403b and IRA.

        Property taxes do pay for things… like schools, parks etc. It would have to be a really really big one-time tax, and that wouldn’t really work if some people are only going to live there a few years and others for decades. So I don’t begrudge them their financing… just, it’s a fixed expense for a long period of time. I guess I’d rather the property tax than an even bigger sales tax!

        (We have a never-ending HOA fee… but it’s small compared to taxes! That reminds me, I should pay it.)

      • Debbie M Says:

        Good points.

  7. Bryan at Pinch that Penny! Says:

    I wasn’t really able to participate in a 401(k) this year (2011), so I’m doing my best to max out a combo of my Roth and my traditional IRA. I’m leaning toward leaning on my traditional IRA for the remainder of the $2,000 or so I’m still eligible to contribute as that’s considered pre-tax come tax time.

    Also, I was kind of a-scared to say it on the pertinent post, but thanks for letting me be a feminist over here.

  8. chacha1 Says:

    I make a token contribution to my company 401(k), but DH and I are still in debt-repayment mode and we figure that is the best “savings” we can do at this time. I haven’t even looked at my 401(k) balances (actually have two, little current-employer account and big past-employer account) for a long time, but it’s probably around $130K (combined).

    One month this spring will be Finance Month and the big account will almost certainly get rolled over to an IRA because I prefer having control over it.

    DH has a tiny 403(b) left over from his university employment days and we ought to roll that over, too, but I don’t meddle in “his” stuff all that much. :-)

    We also have a Health Savings Account with around $9K in it, which we can’t use at the moment because we are stuck in my employer’s health plan with no high-deductible option. Grrr.

  9. First Gen American Says:

    I don’t qualify for the roth, so it’s a no brainer for me. My question is how much to do contribute to a 529 vs our next house goal. I have this thing where I don’t like saving small amounts in multiple piles. I’d rather tackle one pile at a time. I really should do more with the 529s, they really have been a crappy investment.

    • nicoleandmaggie Says:

      We qualify for the Roth because we’re putting so much away in traditional employee plans that it lowers our AGI.

      The 529 makes the most sense if you start it early– doesn’t make a lot of sense if your kids are about to go to college since you don’t get many tax benefits if there haven’t been earnings (and earnings are more likely to happen over the long-term). So I would go for that over a house early on. In terms of financial aid, I don’t think they usually count the value of your house, so if you got a new house before your kids started to college you’d get more aid.

      We’re still doing the auto-deduct 529 $500 every month. So not really thinking of it as a big goal, especially since we don’t know how much ze will actually need.

  10. Molly (Mike and Molly's House) Says:

    Because we both got laid off this year we did not contribute the full amount. We are at a standstill with all savings. I feel lucky that we haven’t had to dip into our emergency fund but I don’t think that is going to last all that much longer. Mike is really missing the days of watching our retirement and savings rise every month.

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  12. SP Says:

    I only skimmed the comments, but I do think this was covered.

    If the choice is Roth vs. “necessary” spending, obviously you can’t fund the Roth this year maybe that is OK. If you know for sure you are going to spend it.

    BUT, you seemed to discuss this as a Roth vs. “cash savings” for emergencies (i.e. you may not need to spend it at all). If that was the which case I would definitely put it (in cash, not invested) in a ROTH IRA and if it turns out I did need it, it is actually very easy and quick to get a distribution of this funds. I stupidly and naively did this once when I was a personal finances newbie (and ended up putting it back in, which you can do I think within a 12 month period). But the point is, it was easy – almost too easy!

    • nicoleandmaggie Says:

      It still takes a few days to transfer funds from an online account to savings or checking. Our small emergency slush fund is only one month’s expenses. That’s cash on hand we often need on hand when we need it. I would feel uncomfortable without it, so we’d cut back spending and be unhappy.

      And no, much of our spending isn’t necessary. But I also don’t think we need to be saving a full 72K/year in retirement accounts while eating rice and beans! (Sure, rice and beans in moderation, but we’re kind of into the whole organic fresh produce high quality variety thing and really don’t want to go back.)

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