Sunday, May 17, 2009

Knowing your AGI

I'm up early thinking about money, as I do. I've been searching for articles on how Adjusted Gross Income (AGI) is calculated, and how to reduce the number, if necessary. I've been contributing to a Vanguard Traditional IRA, but as far as AGI is concerned, that's dumb. If I contribute the same money to a 401(k) for the exact same purpose of retirement, I get more from my money.

I think that's wild.

There are so many things that AGI controls. Like, first-time homebuyer tax credits and Roth IRA contribution limits, and student loan interest deductions.

I've never understood why a 401(k) is treated so much differently than an IRA. First, you can contribute three times more and second, you get huge pre-tax benefits. (Being married screws up all sorts of traditional IRA deduction possibilities) What's that about? The catch is that it's not in my best interest to use a 401(k) for retirement planning because of all the hidden administrative fees, high expense ratios, and 12b-1 type stuff. So if I use a 401(k) the government gives me tax advantages right now by lowering my AGI, but the plan administrator can nickel and dime me as a reward, and my retirement fund suffers. Go-go-gadget lack of transparency!

I guess the key is to change jobs frequently and roll the 401(k) into somewhere like Vanguard ten minutes after the exit interview.

Just to be clear, this isn't about looking for tax loopholes. It's about looking for gotchas, where if I happen to put my retirement money in one place versus another place there are all sorts of unintended consequences. It's not like I'll see any of this money for 30 years anyway. And since I don't have a pension, this is the fine line that will (hopefully) keep me from fighting the felines for a can of cat food someday.


Maya said...

Oooh, interesting. I've been wondering what to do with my 403b (?) money from the old job. Do you think I should put it in my Vanguard IRA?

Christy said...

Hi, Maya. I can only tell you what I've done, though it will also depend on what options you have for investing in your 403(b) and who manages it.

Up until last year I still had some money in a 403(b), then I moved it over to Vanguard index funds because the fees are very low. I posted an entry about Vanguard awhile back here:

I like VFINX (Vanguard 500 Index Fund Investor Shares) myself. If you're interested I'd suggest doing some research on index funds. If you want to buy into stocks and not index funds, then the purchase price is higher through Vanguard and you might look at something like Fidelity instead.

All that said -- and as you know -- the stock market isn't great right now. I've decided to approach it with a buy-and-hold attitude with small amounts invested over time. (You can probably tell I'm hesitating to give advice, but it doesn't hurt to share information.)

Also, if you qualify for a Roth IRA, you might aim for that in the long run. You'll have to roll your 403(b) money over into a traditional IRA first and then convert it though and there are tax consequences there too -- sorry if I'm repeating stuff you already know.

I hope that helped. If you have any questions, I can try to point you in the right direction.

RM_Apply said...

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