How to maximize retirement savings

Question

My husband and I are hoping to maximize our retirement savings this year and need some strategy help.

I currently have a 403b through work. There is no match from the company. I currently fund it myself at a total of just about 10% of my earnings annually (80% pretax and 20% post tax).

My husband has a pension plan at work which he makes mandatory 8% contributions to.

He just started a consulting business and we created a single member LLC. I am serving as Business Manager (so to speak). His current contract is large enough so that the funds will push our total earnings into a higher tax bracket than we’ve been in the past. We are hoping to save as much as possible of our total earnings pre-tax. I’ve looked at opening either a Solo 401k and SEP IRA.

I’ve been in a bit of a rabbit-hole reading about all of this. My questions for you all -

1. What is the overall pre-tax savings limit per person for 2020 and does that apply for all accounts (for example, my 403b AND any Solo 401k contributions for me)?

2. Does my husband’s mandatory pension contribution count towards that?

3. Are there any ways to increase that savings? (For example, if we have a Solo 401k, the company can match our contributions up to 25%...)

Our goal is to reduce our overall taxable earnings, ideally far enough to still be eligible to contribute in full to our Roth IRA’s as well.

Thanks for your help!

George Blower · Answer

1) Typically, only employee contributions made to a retirement plan through your employer (e.g. "day job") are aggregated with any employee contributions made to a Solo 401k.  For example, if you max out employee contributions to your day job (e.g. $19,500 or $26,000 if you are 50 or older) you can't make any additional employee contributions to the Solo 401k.

2) While employer contributions made to your day job plan are typically not aggregated for purposes of determining the amount of employer contributions that you can make to your Solo 401k, 403b plans are an exception to the general multiple employer rule: for purpose of plan contribution limits, you would be treated as if you are participating in one employer’s retirement plan, which limits your aggregate contributions to both plans to $57,000 plus a catch-up contribution of $6,500 (if you are 50 or older).  Therefore, if contributions made to the 403b are less than the overall limit, you could make additional contributions to a Solo 401k if you are eligible to open a Solo 401k (i.e. you are separately self-employed with no full-time w2 employees) and you have the self-employment income to justify such additional contributions to the Solo 401k.

3) Your ability to contribute to a Solo 401k is based on your self-employment earnings, your age, contributions that you make to your "day job" plan, etc. - it is not impacted by contributions made to your husband's pension.

Jamie H. · Answer

@George Blower

Thanks! My employer doesn’t match my contributions so that isn’t an issue. Neither my husband or I are 50 y.o. yet so we aren’t eligible for catch-up contributions.

I contribute to a Roth account through my employer-sponsored program AND we both have a separate Roth as well. We are at risk of not being able to fund our Roth accounts based on our income if we don’t lower our taxable income, which is part of the logic for this all!

Jamie H. · Answer

@Dave Spooner

Yes! I absolutely get that. My husband pays into a pension plan through his employer and we save (small amounts, generally) into his Roth. I save about 50/50 pre-tax IRA vs Roth. This consulting contract is pushing us into a pretty high bracket (not the highest but...) and therefore the entire amount will be taxed at that rate which is when I thought - “this doesn’t seem to make sense...I wonder how much of it we can save pre-tax to keep our income taxed at that level down (or eliminate it). When I started doing research, it wasn’t totally clear to me what those limits were (especially if we are contributing to various accounts through both W-2 and LLC earnings).

Dave Spooner · Answer

@Jamie H. Just wanted to add - if you've found yourself in the highest tax bracket (or even close to it), you might want to consider a pre-tax traditional IRA. This means the AGI is lowered which may drop you to a lower tax bracket.

A Roth IRA is filled with post-tax dollars and as a result, you don't pay tax on withdrawals. A Traditional IRA is filled with pre-tax dollars and so you're taxed when you withdraw the funds. If you expect to be in a lower tax bracket when you go to withdraw (which is common for those in retirement), it can result in more savings. Something to keep in mind!

Jamie H. · Answer

@Greg O'Brien

Sorry - to be clear, you are saying “now we should invest more fully in getting some help around tax planning”? We have had an accountant doing our taxes for several years, but I’m not sure he is the right person as our circumstances continue to get more complex. Do you have advice about what to look for/how to find the right person?

Greg O'Brien · Answer

@Jamie H. integrating your tax planning with retirement will be key. Having a consulting entity should open up the world of tax planning to your family

Jamie H. · Answer

@Todd Goedeke

Thank you! This is what I thought...but I wanted to check. I really appreciate it.

Todd Goedeke · Answer

@Jamie H., the contribution limits for a Solo 401k for 2020 are $57000,under age 50 and 63500 for over age 50. If both husband and wife participate in a business they each can have their own Solo 401k plan and contribute accordingly. Contributions to other plans count against the limits.

You can choose to have a pre tax and post tax,Roth portion to your Solo 401k.If you have other IRAs, not Roth, you can roll them over/transfer them to your Solo 401k.

Bjorn Ahlblad · Answer

@Jamie H. my accountant is in Silicon Valley where I used to live............there are some excellent accountants who post on here. Contrary to popular belief your accountant does not have to live near you, or even be in the same state.

How to maximize retirement savings

Most Popular Reply