401K, Traditional IRA, Roth IRA
 

After rolling an old 401K into a Traditional IRA I now have the following:

Traditional IRA
Roth IRA

I also am at a new company and haven't yet signed up for their 401k. They don't match. :(

From what I have found online, my max contributions to either IRA is only $4000. That's not enough to sock away every year and retire early (like I want to).

BUT if I contribute to the 401k, ALL money that I put towards the Traditional IRA is no longer tax deductable? (EDIT: Or pre-tax, I should probably say.)

So if I'm reading correctly, this means that my annual maximum pre-tax contribution amount is limited to only the $15K annual contribution to my 401k? If I put any money in the Traditional IRA, I might as well be putting it in my regular stock trading account because it can't be pre-tax money anyway?

Lastly, I have a greater trust in my own stock picking abilities than in the grossly overpaid mutual fund managers (i.e.-- 50%+ gains last year based on my own research ;) ), which is why it pains me to think that if I put any money into a 401k, I won't be able to put pre-tax money towards my Traditional IRA.

So I take it this is most likely my best strategy:
Max out Roth IRA
Max out 401K (though I really don't like the fees these guys charge... esp since they aren't penalized for poor performance!)
Any extra $ I just put into my regular stock trading account and try to hold stocks for >1yr to benefit from long-term holdings 15% tax rate.

Any thoughts? Counter-opinions?

p.s.-- My AGI is >$100K

Here's a link I was looking at

Aren't you close to the phase-out AGI limit of Roths? That's what kills me & my wife. No chance to play with it. There is some talk about a Roth 401K starting up at work and I'll jump on that if I'm able.

Sorry, no comments on strategy. Mine sucks and I know it. :)

Your maximum contribution to a 401(k) for 2007 is $15,500 if you are under the age of 50. You can make a deductible IRA contribution if your Modified Adjusted Gross Income is between $83,000 and $103,000 if you are Married or $52,000 and $62,000 if you are single. Like you said, you can't.

There is an advantage to making a non-deductible IRA contribution. You do get tax-deferred growth on the investments that are housed in the IRA. You won't be taxed again on your after-tax contribution only the gain on those assets when you withdrawl. It does become a bit more complex to calculate the tax when you take those assets out after retirement, so you would want to open a seperate account for you non-deductible contributions.

As far as picking individual stocks versus the mutual funds in your 401(k), remember that most funds in a 401(k) are no-load or very low expense. The commissions you would pay to trade stocks in an IRA, in most cases, cost more than the mutual funds inside your 401(k). 2006 was a pretty easy year to pick a couple of stocks and do well. +50% is pretty fantastic, don't get me wrong. I don't know many that did that well. Take a look at how your stock picks did in 2001 through 2006 to get a better gauge of how your portfolio may do in the future. I'd be willing to bet that a very good mutual fund would have done close to or better than your individual stock picks. Your emotion tends to get the best of you when picking individual stocks unless you are very disciplined. Do what most seem to do on this board. If you have a need for gambling, open a smaller investment account, and play the market with that money.

If you're young, be aggressive with you fund choices, but rebalance to the better funds in your 401(k) quarterly. I use a 6 month number to reallocate my 401(k), and I do it on a quarterly basis. I did 19% last year in my 401(k), but I'd be willing to bet my strategy in my 401(k) over a 5 or 10 year time horizon will have done better than almost anyone's individual stock picks because I was not emotionally driven by the market to make incorrect choices.


Your strategy sounds pretty sound. A Roth contribution probably won't help you too much in the future, but you might as well take advantage of it while you still can. Load up that 401(k), and have fun with the rest that left over.

Roth phase outs:

$156,000-$166,000 MAGI Married Filing Jointly
$99,000-$114,000 MAGI Single

Thanks Money!

Make sure you're filling out 8606 (non-deductible IRA), basically it keeps track of the part of your IRA that you have already paid taxes on. If you don't do it then you're getting taxed when you put it in and then taxed again when you take it out. As Money suggested having seperate IRA accounts for your non-deductible contributions can simplify the calculation (it's not really that bad, unless you don't keep file 8606 in which case it's an absolute nightmare)

In 2008 the rules for rolling over from a 401k to a Roth will be changing to allow direct rollovers and the rollover will not be subject to MAGI limits. At least that's my understanding, keep an eye out for the 2007 publication 590 it should include some guidelines to the upcoming changes. Basically, unless it gets the axe before then it will allow you to contribute 15k a year to a Roth IRA regardless of your MAGI (so much for the last tax shelter exclusively for the middle class, eh?)