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Should We Max Out Roths?

January 5th, 2019 at 10:54 am

So the contribution limits for Roth IRAs have increased for 2019. The limits have increased for other accounts too, but I'm only discussing Roth IRAs since that is where we put about half of our retirement contributions.

The limit in 2018 was $5,500 per person. The new limit is $6,000. That's a monthly increase of $41.66/mo per person. Or in our case $83.33/mo.

This is the year my husband will turn 50 (late 2019) so he is eligible for the catch up contribution limit which is $7,000 for the year. This additional $1000 would increase our contributions another $83.33/mo.

If we choose to max out that will increase our monthly contributions to $166.66/mo.

As noted in my previous blog post my husband did get a raise. The monthly net increase to his paycheck is $115.49. I originally planned to save this money towards our Big Goal.

Now I could count it as Big Goal money but put it in our Roth IRAs knowing we could redeem some money from them for our downpayment if needed. But it also seems better to keep it all separate.

We've been maximizing our Roth IRAs for quite awhile, but this is just a bigger bump I wasn't really tracking! I have more work to do to figure out the best plan of action. I need to see what the budget can actually absorb.

We should have lower expenses her on base, far less fuel for our vehicles and no utility expenses. But we also have more airline tickets to pay for with two daughters away at college.

Back to the budget...

Are you maximizing your retirement contributions in 2019.

24 Responses to “Should We Max Out Roths?”

  1. crazyliblady Says:

    How about dividing it up between the IRA and the Big Goal?

  2. AnotherReader Says:

    What about the TSP? I would consider maxing that out first if you are not, because it reduces your taxable income. Most people expect to be in a lower tax bracket when retired, which favors saving pre-tax. Also, the TSP offers some of the lowest cost funds out there.

    Assuming you don't qualify for traditional IRA's, I would max the Roths out as well. A house down payment that is a few thousand less because of the Roths will probably not have a material impact on what house you buy or the monthly payment. Save early and save often is my motto!

  3. AnotherReader Says:

    Forgot to add that the TSP has a catch up provision as well. For 2019, it is $6,000. My understanding is the catch up rules are the same as for a 401 (k). Worth considering if that is correct.

  4. creditcardfree Says:

    My husband is in the TSP. It's about half of our current contributions. We are currently in the 12% tax bracket. Not sure we would be in a much lower bracket, but likely equal. Originally, we planned to increase the amount we contribute to the TSP once we exceed the threshold for the next bracket, likely when my husband gets promoted in one to two years.

    I appreciate the idea. And will definitely consider it!

  5. AnotherReader Says:

    With both girls in college, have you considered going back to work, at least part time? If you could make enough to cover the IRA contributions, that would be more for the TSP. No idea how long you worked before the kids came, but having those 40 quarters/credits in for Social Security and especially for Medicare is really important.

  6. Beawealthywarrior Says:

    I say max it out. Now that I'm back working since Oct 2018, I'm maxing out both years.

  7. creditcardfree Says:

    AR, yes, youngest only just left this fall, then we prepped for our move. It's been a tough transition, but work is definitely a possibility! Just need to figure out where and what that will be. I do have 40 credits with SSA. Now if I become disabled, I would not qualify for disability because I do not have 10 recent credits with SSA. I've always kind of expected social security will not be there when we are retired....thus the savings! Last year we saved 18% of gross towards retirement.

    Thanks Beawealthywarrior, I didn't know that you hadn't been working. I'm glad you found a job!

  8. crazyliblady Says:

    @Another Reader. What are quarters? How would I know if I have enough? I have worked most of the time for about 29 years. My husband has not worked as many years and he is several years from being able to collect anyway.

  9. AnotherReader Says:

    CLL - 40 quarters is usually equal to ten years. You definitely qualify! If you haven't, you should create a personal account at the Social Security website. You can review the work history they have for you and get estimates.

    CCF- I assume with two kids in college you are in your mid-40's. Your husband is only 12 years away from qualifying. In your shoes, I would start looking at the various calculators to see what he would get under the current program. There will likely be changes, but too many people in this country rely on Social Security for all or the majority of their retirement income for it to disappear.

  10. crazyliblady Says:

    @ Another Reader. I get those letters from SSA every once in awhile that say how much I would get if I retired or got disabled. The last one I got said I would get about $1865.00 based on that current income when I retire. I just was not sure if that meant I have enough, but I am not convince social security will even exist when I am 65 or so.

  11. creditcardfree Says:

    I signed up with Social Security today to see my credits and potential benefits. I have credits for a small social security check after working 12 years. If it's there when we reach that age, I will definitely take it, but my generation was taught not to rely on it and honestly I think more people should do the same. The age needs to increase dramatically to have any similarities to what was originally intended.

  12. Joe Says:

    Even if no changes are made to Social Security, the trust fund can pay full benefits until 2033 and after that enough payroll tax will be collected each year to pay about 75% of benefits. Medicare is the program we need to worry about.

    Be careful when looking at the benefit statement from Social Security - they project your benefit based on the assumption that you will continue working and earning the same amount until you reach retirement age,

  13. Dido Says:

    Good points, Joe! Those are the projections from the Social Security Trustees. There's another projection from the CBO (Congressional Budget Office) that is a tad more conservative--full payment until 2030 and then payout of 70%. We use the more conservative when we run projections for our clients.

  14. AnotherReader Says:

    CLL - It would help you if looked at the Social Security website and set up an account. The calculation is complicated. Your benefit is based on your highest wages for 35 years of employment. To determine how much you get, the wages are indexed up every year for inflation by the National Wage Index until you turn 60. So your benefit will go up at least until you have 35 years of covered employment. Social Security is also progressive. You get a higher percentage of the lower part of your income. There are two "bend" points where the percentage is decreased.

    CCF - One source that is commonly recommended is a book by Kotlikoff. https://www.amazon.com/Get-Whats-Yours-Secrets-Security-ebook/dp/B00LD1OPP6 The library should be able to get it for you. The current version includes recent changes. I haven't read it because my case was simple. If you are married, especially if there are significant income and age differences between the spouses, when to collect is very important, and this book is supposed to help with that.

    Social Security represents the largest percentage of retirement income for a big percentage of the population. It would be tough for politicians to reduce the payout and see old people out on the street as a result. I suspect there will be some kind of fix, possibly like the last "crisis" was fixed. Higher retirement age, higher percentage paid in, higher limits on income subject to the tax.

  15. ceejay74 Says:

    Yep, we're planning to max ours out by contributing $500 each every month. But we don't have catchup contributions to consider; that does make it a bigger bump! Still, I suppose it's worth it to stretch for that.

  16. creditcardfree Says:

    Oh, I know very well it SS won't go away at this point, but our mentality has never been to rely on it. And yes, honestly, I never even factor it in. I appreciate the book recommendation. It is something to be more informed on.

    Thanks DIdo and Joe, I appreciate the insight.

    So one more comment to add to this topic...we are saving 19% of my husband's gross income. Is it ever possible to be saving too much? I mean I would rather save too much than not enough, but is there a threshold that would be too much? My husband is likely to retire in about five years with a pension from the military. Some in the military don't save expecting that the pension will be there, yet not everyone makes it to the full 20 years. Then add on social security...I just wonder if we are putting away too much.

  17. creditcardfree Says:

    Ceejay, yes, we have decided we will max out our Roths. It did throw me as I didn't know the limits had increased! I kind of remembered that this would be the year for the catch up, but only in figuring our new budget did I realize I needed to include that change.

    Vanguard has already adjusted our contribution amounts for the new limit changes. I think I elected they be maxed out each year automatically.

  18. AnotherReader Says:

    CCF- I do not know the statistics, but not every officer that makes 15 years gets to 20. You have no guarantee that your husband will get a pension. RIF's are not uncommon and it sometimes depends on the specialty and the history of assignments. An unenthusiastic review from a supervisor can really hurt.

    In your shoes, I would analyze your situation if he were RIF'd out before the pension. He did not go in at 22, so he would have a harder time finding a second career federal job if he left before retirement. Sometimes the reserves are an option for building a pension, but again, age might be a factor.

    I'm conservative, but in my opinion 19 percent is not too much in your situation. I would max out the TSP and both IRA's if I were in your shoes.

    Doug Nordman, a graduate of the Naval Academy and a retired naval officer, has written extensively about military retirement - check out The Military Guide website. He is extremely knowledgeable about the subject and has helped thousands of people facing the same decisions you are with the articles on the web site and his book.

  19. creditcardfree Says:

    Thanks again, AR I do appreciate your comments.

    My husband has been in the Army 27 years. He joined as private and was commissioned as an officer in early 2000s. In 2006 he began full time work for the army. We are guaranteed a 20 year pension based on his time in the reserves. That does not start until age 60. That will go away when he gets 20 active federal service years. He is still part of the Army Reserves, just on full time active duty. He will promote to Lt Col in two years...yes the numbers of officers is reduced in the chain going up. He is not likely to get passed over for promotion. He is engaged, very hard working, teaching others along the way. He has never has a bad review or been passed over. I get that it is possible, but it is rare. My husband said last night he still expects to work in some form after military retirement.

    We cannot max out the TSP, we have other expenses we are managing. We'll stick to the 19%, which will include maxing out our Roth IRAs.

  20. livingalmostlarge Says:

    I think you are personally fine. I think I would decrease the TSP from 19% and max out the roth Before doing the TSP because of your super low tax bracket! That being said I think you are much more on track than 99% of people. I mean you aren't even budgeting for SS. I am going to guess with Pension you are going to be able to replace 100% of your income. The pension will be 50% right? You get half your base salary but not the living expenses? I'm not familiar enough with reserves to know enough.

    Have you calculated? I think you might be oversaving but I think you need to run the numbers and see how much the pension will replace. How much you have saved which is $500k = $20k conservatively and then SS conservatively. Thus why I think 100% of replaced income is probably in your case.

  21. creditcardfree Says:

    Pension should be 50% of base salary, so at least $55K after he makes Lt Col. TSP is not 19%, total retirement savings is 19%. My husband also doesn't expect to fully retire after he retires from military. We expect to continue investing after military retirement, possibly just not at the same pace.

    It's been awhile since I calculated...but when I did the amount we would have for retirement was more than plenty. I'm just trying to get the basic budget for 2019 figured out. I'll get to looking closer at the big picture soon and adjust if needed.

  22. livingalmostlarge Says:

    If pension is 50%. And you will likely have another $60k/year from Retirement. Assuming you have $500k and you are working another 15 years? That will double and double again. So conservatively $1.5m in retirement generation $60k/year. And that will likely put you at the 100% level. So I think bringing the TSP down to less and moving it to the Roth would make more sense because then you aren't forced into RMDs at age 70.5 Mostly because you will likely have a lot of income coming in from pension, SS possibly enough to never really tap your savings but I could be wrong.

    That's what I would consider. For us we have about 50/50% split right now in 401k and Roth IRA. I know the bulk will be in the 401k. However my thoughts are that we will convert the 401k after we "retire" early at say 55 and then move it to the Roth IRA. If we do it for 15 years from age 55 to 70.5 I think we could convert a substantial amount and be fine.

    But truthfully does it really matter if you have too much savingsSmile Congrats!

  23. rob62521 Says:

    If you can, I would max out your Roth. Better to have the money in there and not need it when you retire than wish you had it.

  24. frugaltexan75 Says:

    We'll be maxing out our ROTH's this year. $13k between the two of us. It definitely will be a stretch, but I feel it is important to put the max in. If we were ever to get into a situation where we needed that money, we could always get it out. But if we don't put it in each year, we can't make up for it later.

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