Money Management

Money at 30: Retirement and Taxes

Surely you’ve heard it said that, in this world, nothing is certain except death and taxes. Of course, before you get to the death part, you have to go through retirement first (well… hopefully). Thus, while this idiom finds a humorous and true connection between the two, I can’t help but associate retirement with taxes as well — especially during this time of year.

A few weeks ago I wrote on how I was preparing for tax time early. Since then my wife and I have not only been thinking about our impending tax bill overall but also considering where our retirement contributions factor in. With that, here’s a look at our tax and retirement dilemma.

Making up for my lack of 401(k)

One of only a handful of negatives that come with being self-employed is that I can no longer take advantage of employer 401(k) matching programs like I did at my old gig. In fact I no longer have a 401(k) of my own (or at least not one I regularly contribute too — there’s is still an old one floating around). Because of this, my wife and I have looked for ways to make up these funds elsewhere.

Our first step was to ensure that we were taking full advantage of the employer 401(k) matching offered by her work. Sadly her company’s matching scheme isn’t the greatest, but it is certainly something… and free. Additionally we scaled her contribution percentage way up so that it could essentially act as contributions from both of us. So far this method has worked well, but that’s not all we’ve been doing.

Our other retirement accounts

The 401(k) my wife now has is actually relatively new — only about seven months at this point. Luckily we also have a Roth IRA my wife has been keeping for several years as well as a rollover IRA I have from my movie theatre days. While my IRA admittedly sits lonely most of the time, our Roth IRA has been getting some love in recent months.

During the last tax season, my wife and I took note of how underwhelming her IRA returns were for the year. As it turns out, back when she first opened the account, she chose the ultra-conservative money market account, meaning her money wasn’t actually invested. We rectified that last summer by moving the savings to a mutual fund instead. While this did mean some extra fees upfront and some financial risk overall, it has led to much greater gains from that account.

Comparing the accounts for our tax time move

Now comes the real question: where do we put out extra money ahead of the April tax deadline? In case you weren’t aware, you can contribute to your IRA up until tax day (April 18th this year) and have it count toward 2016’s taxes. This leaves us with a few options:

Option 1 – Add money to my IRA

Even though my IRA is the one we contribute to the least, it might actually make the most sense to contribute to now. That’s because our contribution would help bring down our tax bill, which could come in handy.

Option 2 – Add it to the Roth IRA

Since we haven’t hit our contribution limit for the Roth IRA yet, getting us closer to the number might be a good goal. Then again, since it is a Roth, it won’t benefit our taxes immediately and could really be done anytime during the year (as long as we’re below the $5,500 limit of course).

Option 3 – Up the 401(k) contribution instead

The last option would be to forgo a last-minute tax time contribution and simply adjust the percentage we contribute to my wife’s 401(k) once that opportunity comes around in July. Since we are already maxing out everything we can get from employer matching, this might not make the most sense but it is still an option.

The big decision

When you get down to it, perhaps the best way for us to make our final choice is to run the numbers. This could prove difficult since our accounts have different amounts in them and have been opened for various lengths of time, but it would ultimately behoove us to contribute more to the account getting us the best return. I’m inclined to think that’s probably the Roth IRA since there are also tax benefits down the road, but couldn’t honestly tell you for sure just yet.

That said, there is more to the decision that just the dollars and cents. For example 401(k) contributions come straight out of your paycheck, making saving a forced habit. Then again, there are plenty of ways we could arrange to make regular contributions to our other accounts as well. In the end, it seems my wife and I have a lot to think about as we approach the April tax deadline — but that’s why you get started early!  

Tax time can be a stressful event but it also serves as a great time to really dive into your finances. As part of that, perhaps it’s time you considered your retirement savings and determining where there’s room for improvement. Instead of just turning over your account earning statements to your tax guy, be sure to take the time to give them a good look over. Even if you don’t end up making money moves directly intended to affect your taxes, it’s at least worth carving out a plan for the rest of the fiscal year.

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