Kyle’s new postdoc position comes with a benefit neither of us have ever had before – access to a 401(k). (Okay, it’s a 403(b) because it’s through our university, but I’m going to call it 401(k) in this post.) However, we have (mostly) decided not to set up contributions to it. I’ll tell you our reasoning and then you can let me know if we’re missing anything and should change our decision.
Up to this point, we’ve only ever had the option of contributing to an IRA. But we know how best to prioritize contributions to retirement plans when we have more available to us:
1) Workplace plan up to a match.
2) IRAs up to the maximum
3) Workplace plan up to the maximum
4) Non-tax-advantaged accounts
The reason that the IRAs come before the workplace plan generally is that we have full control over how money in an IRA is invested, but with a workplace plan we would be limited to the funds offered by the employer, which might not be exactly our preferred choice or more expensive. However, free money (the match) is worth it even with slightly lower/non-optimal investment returns.
But the deal is that our employer isn’t offering a match to Kyle, which means that our first priority is to max out our Roth IRAs.
How Much to Max Out IRAs?
We have maxed out our Roth IRAs in the last two years, but we had to roll over contribution room to do so. So we have proportionally more contribution room left for 2014 than we should just to max out this year.
As of the beginning of July, we have $7,450.93 in contribution room in our IRAs for 2014.
I tallied up the paychecks that we can anticipate receiving through the end of the year (assuming Kyle stays at his current position that long). For each paycheck, I wrote down what we expect to save for retirement. Right now we’re saving about 17.5%, but once I’m no longer receiving a paycheck we’ll drop the saving rate from Kyle’s postdoc paycheck down to 15%. All that together only adds up to $5,205 in contributions in 2014, or $2,245.93 in contribution room left.
How Much Am I Going to Earn?
I do plan to earn some money in September and following (my last day of work at my university is August 31). As with all of our extra income, I want to save 15% of it toward retirement. To use up all of the contribution room calculated above, I would have to earn $14,972.87 in the course of four months. I don’t want to be negative about my own abilities, but I would be quite shocked if I earned that much. My goal is only to earn about $5,000, and even replacing my current salary wouldn’t come close to $15,000. If I do earn more money than my goal that’s great, but it’s probably not going to be enough to max out our IRAs at our desired savings rate.
What If Things Don’t Go According to Plan?
If I earn more than $15,000, we can start contributing to the 401(k) or I can open a retirement account for self-employed individuals. The main types of income I’m striving for in the fall are self-employment and if they continue into 2015 and beyond it actually would be good to have a retirement account I can contribute to for that income.
My unfounded guess is that Kyle will move on to his “real” postdoc around the first of next year. However, if he ends up staying at his postdoc at our current university into 2015, we’ll probably start contributing to his 401(k). Our income should be a lot higher in 2015 than 2014 so I’m hoping that the Roth IRAs won’t be sufficient to cover the 15% we want to contribute.
Google didn’t answer this for me – which makes me think that this is a dumb I’ve-never-had-a-real-job question – but I’m assuming Kyle can set up a contribution to a 401(k) at basically any time after he starts. There’s not like a once-per-year open enrollment period for retirement plans, right?
It feels strange that we finally have access to a workplace-based retirement account but that we aren’t going to take advantage of it! But there really doesn’t seem to be a reason to deal with the paperwork of setting it up and then rolling it to a (Roth?) IRA in just a few months when we could just keep it up with our current Roth IRAs.
If you were in our situation, would you start contributing to a 401(k)? Do you have a match with your employer, and if not do you have a retirement account with them?