Smart Money Podcast: Saving at the Pump and 401(k) limits

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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion of ways to save on gas now that prices are once again rising.

Then we pivot to this week’s question from Chelsea, who can’t contribute more than 8% to her company 401(k) because she’s considered a “highly compensated employee.” Her income also makes her ineligible for a Roth, so she’s looking for other options. “My company does offer a deferred compensation plan, but after reading some of the terms, I am wary of signing up. The biggest one that makes me cautious is the fact that the company can take your money from the deferred compensation plan if they become insolvent. That seems like a high risk. Any advice on how to increase my retirement contributions or other options I'd have to save?”

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Making too much money sounds like a good problem to have, but it can complicate saving for retirement.

Your ability to put money into a 401(k) if you’re one of the higher-paid employees at your company and not enough of your lower-paid colleagues contribute. That’s because of IRS anti-discrimination rules that are meant to keep tax-advantaged retirement plans from benefiting only the best-paid employees.

A high income also could prevent you from contributing directly to a . Roths don’t offer an upfront tax deduction, but withdrawals are tax free in retirement. The ability to contribute phases out with modified adjusted gross income of $124,000 to $139,000 for singles in 2020 and $146,000 to $206,000 for married couples filing jointly. (You could do a “” by contributing to a traditional IRA and then converting it to a Roth, since there’s no income limit on conversions, but that could trigger a tax bill.)

Some companies offer deferred compensation plans that allow you to set aside more pre-tax money. But these plans differ from 401(k)s in significant ways. There are no early withdrawal penalties, but the money also isn’t portable — you can’t to another plan when you leave and the money is paid out. Your deferred compensation also could be at risk if the company can’t pay its creditors. Your 401(k) account, by contrast, doesn’t belong to the company, and creditors can’t take your retirement money if the company goes broke.

Another way to save for retirement is with a regular, taxable brokerage account. You won’t get a tax deduction, but you can qualify for favorable capital gains tax rates if you hold your investments for at least a year. There are no limits to how much you can contribute and no early withdrawal penalties, plus you typically have many more investment options than a 401(k).

Understand your options. Each type of retirement account has its advantages and limits. Investigate what’s available, and consider talking with a financial advisor to determine what’s best for you.

Know how much to save. The amount you put aside is typically more important than where you put it. A good guideline is to save 15% of your net income for retirement.

Regularly increase your contributions. Many plans offer automatic escalation, so you can increase the amount you contribute over time.

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