Updated: Jun 11, 2021
So this week we're reading the question of the week:
My wife Jen is getting forced out of her job with a major US insurance company. She doesn’t want to work for them with their current practices but we are trying to build our retirement being that we are within 10 years of retirement. Would it be practical for her to work at a job without a retirement contribution while we max out mine? Could she open a Roth IRA and create her own per se?
Thank you Tom for the question.
First off. We are sorry to hear that your wife will have to part ways with her employer.
We certainly understand when a situation arises where things do not work out for both parties and it can be a stressful situation to leave a job and then take the time to find a new one.
So let’s address the first question . . . is it okay if she takes a new job that doesn’t have a retirement contribution plan and at the same time Tom will maximize his full 401(k) plan.
There is no problem with taking this path. Right off the bat if your wife invests with her after-tax money then the good thing is that she will not be subject to future tax on her contributions except for the gains on the investments.
She can also take her investment gains tax-free providing that she is over 59½ years of age and she has to hold that money for five years. So with 10 years left in retirement she is in the clear.
So the first thing is that she needs to qualify for a Roth. If she files as a single person, her Modified Adjusted Gross Income (MAGI) must be under $139,000 for the tax year 2020 and under $140,000 for the tax year 2021.
MAGI can be defined as your household’s adjusted gross income with any tax-exempt interest income and certain deductions added back.
Now if Tom and his wife file jointly the MAGI has to be under $206,000 for the tax year 2020 and 208,000 for the 2021 tax year.
So let’s say that they qualify for the Roth so this means Tom’s wife can invest:
$6,000 if she’s under 50.
$7,000 if she’s age 50 or older.
The Downside of not Having an Employer-based Retirement Plan
By not having a plan as an option this means she misses out on the opportunity to have the potential employer match. For example, with a $3,000 match over 10 years that equates to $30,000 in contributions and taking our typical 7% gain over that time, the compound interest comes to a total investment of $44,350. So in this example, this $14,350 that could have been realized.
Putting a New Financial Plan
We are assuming that Tom and Jennifer are over 50 years of age and with that being said, Tom can contribute $19,500 to his 401(k) plan and this means that his catch up contributions can also be applied at $6,500 that would give him the maximum investment of $26,000 and his wife can contribute $7,000 to her Roth IRA.
If the scenario is that Tom is only reaching the $19,500 level they can opt to take her contribution away and give that money to Tom’s 401(k) and that would increase the tax-deferred deduction meaning they’d owe less tax to the IRS at the end of the year.
So let’s assume the best case scenario and that is the maximum 401(k) contribution and the Roth IRA and/or brokerage account investment and this equates to them accumulating $33,000 into their retirement accounts over the next 10 years.
Hence, taking our 7% number they would have $487,858 dollars as they get ready for retirement. Very nice!
To go one step further if Jennifer took a job with an employer match using our hypothetical $3,000 employer match, they’d have $532,209.
Altering Investing Decisions
As Tom and his wife have 10 years left until they don’t have to answer to a boss or the “man” anymore, they need to decide how they want to budget their money.
As we always point out, it is always up to the individual to make decisions with his or her money. Typically as people reach five years or less before retiring people begin to become more conservative with the investment choices. The whole point in doing this is to err on the side of caution to maint