The Super-Saver's guide to retirement contributions

In this post you will learn :

  • How to contribute $111,500 per year in your retirement account per year.
  • How to contribute up to $35,500 in your Roth-IRA per year.

In this post, you will see how a super-saver maximizes his retirement contributions. I decided to write this post after reading about the news that millennials are spending more on coffee than on retirement.

Let's see what is the maximum amount of money someone can contribute to any retirement plans. Here's an hypothetical person named John.

John, 32

  • He makes 135000$ with his day job
  • He files as single.
  • He has a side jobs that generates 150000$
  • His employer gives 5000$ 401k match
  • He is not over 50 years old, so don't need to do additional matching.

Here are the contribution he is making every year:

Traditional IRA with back door conversion Roth IRA

John contributes 5500$ into a Traditional IRA. Then he uses backdoor conversion. However when doing this, you need to be careful about the pro-rata rule, but we will leave this for another post [1]. Therefore, he ends up with 5500$ in a Roth IRA account.

Maxing out his Roth-401k account

John's employer provides a 5000$ match if he maxes his 401k contributions. He decides to use a Roth 401k, since it effectively saves more than just a pre-tax 401k.

Contribute to an After-tax 401k

John's employer also allows him to contribute to his after-tax 401k. There is a difference between a Roth 401k and after-tax 401k and we saw why you should prioritize the Roth 401k over the after-tax 401k

Contribution to a solo-401k

John also own a business and generates about $150000/year with it. He opened up a solo-401k account and contributes $18000 in deferred salary. His company contributes 25% of the earning in the solo-401k. His total in the solo-401k is $53000.

Let's see the sum of all the contributions he made. I also show 2 steps, the initial contribution and any conversion if necessary.

Step 1: Initial contributions
Traditional IRA $5,500
Roth 401k $18,000
After-tax 401k $30,000
solo-401k $53,000

Now after the contribution are made, he decides to make 2 Roth IRA conversions:

  • Traditional IRA to Roth IRA
  • After-tax 401k to Roth IRA

His contributions now look like this :

Step 2; After roll-over conversions
Roth IRA (from Traditional IRA) $5,500
Roth-401k with employer match $23,000
Roth IRA $30,000
solo-401k $53,000

The total will look like this:

Roth/pretax 401k Roth IRA Solo-401k
$23,000 $35,500 $53,000

This is for a nice total of 111,500$ of total contributions in your retirement account per year. Not bad. This is how a typical aggressive super-saver would take advantage of the current law to have the maximum of tax-free/tax-deferred money to invest.

Getting over the Roth-IRA contribution limit

Since John earns more than $133,000[1:1], he is not allowed to contribute to a Roth-IRA. But you will notice that doing the backdoor conversion allows you contribute even more. In his case he contributes $35,500$ instead of the $5,500$ he would he if made less than $118,000.

Tell me what you think. Do you think it is a good idea to follow John's aggressive saving plan?

How much are you planning to contribute this year?

References:

  1. IRS Roth-IRA limits ↩︎ ↩︎