I recently had an increase in income and would like to know how it affects the way I should save for retirement.
To keep this question generally helpful, please assume an annual salary of approximately $100,000, company subsidized healthcare, and 401k matching up to 3% plus 3% "safe-harbor" contributions (not my exact situation, but pretty standard and close enough to be helpful). You can assume I am single and mid-life (around 35), but an answer that covers all filing types would be helpful as few stay single forever. This is in the United States, specifically Pennsylvania.
I always had a simplistic view of traditional IRAs that they contributions were 100% tax deductible, probably because my income was low enough that that was always the case. However, I found out today that beyond a certain annual income ($61,000) the contributions are only partially deductible and over a slightly higher threshold ($71,000) they are not deductible at all. This was shocking to me and I wondered what other things might change with my new, higher income.
It seems like as long as AGI stays below $117,000 I can still contribute the maximum amount to a Roth IRA. I also never knew about that limit until today. This wouldn't save me anything in terms of taxes as the contributions are after-tax income, but I assume it does still save me from paying capital gains taxes on the appreciation regardless of my high income?
A 401k is available and seems like a good option due both to matching, and tax-deductibility of the contributions. However, if I understand correctly any gains will be taxed as income when withdrawn, historically a much higher rate than the capital gains tax.
Am I correct in assuming then that the optimal strategy would be to:
[If AGI Under $117k]: Invest in my 401k to get the company match until I hit the matching limit, and then to switch to investing all remaining funds in a Roth IRA?
[If AGI Over $117k]: Invest in my 401k up to the contribution limit, and then invest any remaining money in a standard investment account?
The ultimate goal for determining our choice of strategy is, of course, to have the greatest amount of wealth possible in retirement.