Ratcheting Up Our 403(b) Contributions

Just over a month ago, I wrote about some of the financial goals that I’ve set for 2007. Giving the way things are shaping up, however, I’m already starting to re-think things. Here’s what I originally had planned:

(1) Max out our Roth IRAs for 2007 by the end of April.
(2) Continue maxing out my defined contribution plan at work (5% contribution + 8.2% match).
(3) Save a minimum of $6000 in my optional 403(b) with a stretch goal of maxing it out at $15,500.
(4) Max out the ‘employer’ contribution to my SEP-IRA (25% of net self-employment income).

The way things look right now, I’m starting to worry (in a good way) that we’ll be very close to the limit for making Roth contributions. Thus, I’ve decided to defer goal #1 until later, and to start throwing our weight behind goal #3 (both #2 and #4 will remain unchanged).

Here’s my reasoning…

First of all, while it’s possible to correct Roth IRA contribution mistakes, it’s a bunch of extra work that I don’t really want to deal with. By holding off, we can be absolutely sure that we’re allowed to contribute before doing so. If not, then we’ll make a non-deductible contribution to our Traditional IRAs and then simply convert it in 2010 when the income limits for Roth IRA conversions disappear.

Second, contributing to my 403(b) reduces our modified adjusted gross income (MAGI). This increases the likelihood that we’ll actually be allowed to make the Roth contribution, because Roth contribution limits are based on MAGI.

What this means in practical terms: I previously set up automatic 403(b) contributions of $500/month. It’s too late to change that for February, so I’ve changed our contributions for the final ten months of the year to $1,450/month such that we hit the magical $15,500 threshold by the end of the year. At that point, we’ll decide between Roth contributions vs. non-deductible Traditional IRA contributions. With the coming changes in the tax code, we should be able to convert Traditional IRA contributions into our Roth IRAs in 2010 regardless of our income level.

Of course, this means that we’ll have to have the cash on hand to make the lump sum IRA contributions when the time comes, so we’ll be saving for those along the way.