Hey guys, looking for help with retirements and Federal Tax liability (no state income taxes here, TX) but unfortunately it is more like damage control lol. My girlfriend just submitted her 2016 taxes then casually mentioned the 1040ez software would not let her input anything over $5000 into Roth IRA contributions box without popping up an error message, so she just put down $5k. I asked for more details from her but it didn't make much sense to me cause I have never had a Roth IRA. After doing some digging, I found out she is only able to put $5k/yr into a Roth IRA per her income and age. Well... I asked her today how much she had put into the account for 2016, she said "15%"... well how much is that... "$10k, but that includes my companies match of 4% - dollar for dollar ". She was told she has to pull out everything over the $5k/yr limit before April 14th, she was given an option to put the overage into her employers 401k plan.

First question is about damage control, What would you do? Obviously get the taxes resubmitted correctly, but how should I show the overage? Will she get penalized(fees) on the amount of the overage when she pulls out of the Roth and puts it into her works 401k? Will she have to show the overage as income for 2016? Is there any better option given the scenario, seems like every path is like stepping into a different size bear trap.

Second question is about the future. What should she do to prevent this scenario from happening? Any better retirement options or should she inquire on a managed retirement account or possibly hire a financial advisor? Is she putting too much into retirement? $10k/yr or 15% gross income seems like a lot to me given her age, she wants to retire ~60yo. She is only 26, she makes ok money $60-70k/yr(guessing here), her college is paid off and her car will be paid off early here in a few months, she rents a small apartment, very humble expenses.

Thanks for any info or advise!!

 

I use merrill lynch, i can take money out of one account and put it into an ira or roth, the company does all the paperwork required for taxes...it's simple and free to transfer money. i do not use a financial advisor.

 

She may have to take money out of the account and put it somewhere else because a traditional Roth has contribution limits.

Does she work for the government? If she has a government 457b plan she could contribute up to $18,000 per year into a Roth.

Roth's are great while you are younger and making less. Once you pass the 28% bracket you are better off shutting down contributions to the Roth and going pre-tax.

And your question "Is she putting away too much?" A HUGE "No". You can never put away too much and the more you do when you are young the FAR better off you are. I keep telling my 16 year old nephews to start a Roth and put $1k of their part time jobs in it annually until the get out of college and get real jobs, but they are stupid and would rather buy ringtones and video games. I told them if they get $10k into a Roth by the time they are 25 years old it would be worth $150-$200k when they are 65 for very little effort, they went "Awesome", then went back to staring at their phones.

If you girlfriend is not in a government 457b, then talk to the plan administrator about how to transfer the excess out to comply with the tax year limit. Then change her contributions to limit the Roth to $5,000 next year and the rest into pre-tax accounts. She could hire a financial advisor but I would not. As long as she has decent mutual fund options and spreads her money around a bit into the right asset allocation for her age, she will be fine. The advisor is going to give her basic advice she could get by doing a google search, take a chunk out of her earnings, and in many cases, steer her into bad investments for which they will make a high commission and she will lose money or make poor returns. Advisor at many branches get paid extra to push bad products that make money for the company, not the client. No, unfortunately, it is not against the law.

 

why do you say it is bad once you pass the 28% tax bracket? What if you do both pre-tax and Roth (what we are doing)? Also is there any advantage to the 457b aside from the $18k cap? I work for the govt, but we use a traditional Roth, but stick under the cap.

 

Are you sure shes not confusing a Roth IRA with a 401k or 403B... 401k or 403B is pre tax, and most companies match those. Roth IRA is post tax, i may be wrong here but i think it's pretty rare for a company to match those, as opposed to 401k anyways.

 

Most people will make less in retirement than they will during their working years. It takes pretty decent income to get into the 33% bracket. Again, most people will not have that kind of money in retirement income so their tax bracket will be lower when they retire.

So if you are working and you were going to have to pay 33% in tax and then take that after tax money and put it into a ROTH, but when you retire and take it out tax free but your bracket in retirement is 28% (or 25% or lower), you would have paid more tax than if you would have put it away pre tax. The ROTH is very beneficial to people in their early years when they are not making much money. If she becomes a high income earner in the future, she is better off putting it away pre-tax to get a lower tax rate in retirement but also to bring down taxable income to avoid AMT.

We just got hit with $5k in AMT over the weekend when we went to our tax guy. The next time I see a democrat saying people are not paying their fair share I am going to punch them in the face.

 

keep in mind that any money in the roth can make money fed tax free, that's essentially tax free income for a long time, like a lifetime....state tax is a small price to pay for that if you have state tax. it's after tax money but it earns , earns, earns,.