Stop contributing to 401k?

[lampstache]

Recently, we've been struggling with whether or not we should continue to contribute the max to our 401k's? We have the ability to max and there is nothing preventing us from continuing to do so. If we did not contribute to the max we would redeploy those funds to our taxable account (VTSAX) or additional real estate opportunities. Part of the goal is to build larger staches (pun intended) that we can access easily if need be. We max our HSA and Roth IRAs every year and will continue to do so.

Current 401k balance between DH (36) & DW (34) is $323k. This does not include equity in our two investment properties, rental income, taxable or Roth IRA accounts. Using the Calcxml.com calculator assuming we contributed $10k a year (enough to get the match) and it grew 8% for the next 24 years we would have $1.93mm and would supply us with $144k per year for the next 30 years. This number coupled with social security (both parents work) and rental income we would have way more than enough to retire very comfortably when that day comes.

Are we wrong to question whether or not we should still be contributing to the max considering our long timeline?

Tell us what info we're leaving out or what we're not considering. Appreciate your thoughts, questions, and comments.

[Paper Chaser]

If we ignore the pre-tax benefits of maxing out the 401k and focus only on the potential return:
22,500 max per person = 45000 per year invested and growing for you as a couple.
If the goal is to get $1.9 million in the 401k alone (I'm not really clear if that's what you're shooting for, or if you'll be including IRAs, rental income, etc as part of that $1.9 million figure you threw out) then you get there in 13 years with 8% returns vs the 24 years you're planning with 8% returns and less invested.

Add potential for lower income taxes paid, plus the forced savings aspect of the pre-tax investing in a 401k, and an alternative investment would have to be pretty strong for me to advise against continuing to max the 401k.

If you're just trying to get to $1.9 million in total assets, then that likely reduces your working time quite a bit more. You'd probably want to post a case study at that point to get specifics.

[ATtiny85]

It doesn’t have to be all or nothing, push it 75% of max, rest in taxable.

I would really hesitate giving up that tax deferred space. You can’t get it back, and there’s so many unknowns around taxes.

[Malum Prohibitum]

Recently, we've been struggling with whether or not we should continue to contribute the max to our 401k's? We have the ability to max and there is nothing preventing us from continuing to do so. If we did not contribute to the max we would redeploy those funds to our taxable account (VTSAX) or additional real estate opportunities. Part of the goal is to build larger staches (pun intended) that we can access easily if need be. We max our HSA and Roth IRAs every year and will continue to do so.

Current 401k balance between DH (36) & DW (34) is $323k. This does not include equity in our two investment properties, rental income, taxable or Roth IRA accounts. Using the Calcxml.com calculator assuming we contributed $10k a year (enough to get the match) and it grew 8% for the next 24 years we would have $1.93mm and would supply us with $144k per year for the next 30 years. This number coupled with social security (both parents work) and rental income we would have way more than enough to retire very comfortably when that day comes.

Are we wrong to question whether or not we should still be contributing to the max considering our long timeline?

Tell us what info we're leaving out or what we're not considering. Appreciate your thoughts, questions, and comments.

Next year, 2023, the max is $22,500.   So if each of you contributed only $10,000 annually, enough to get the match, there would be $25,000 of unused 401(k) space.  What is your marginal tax rate?  If we assume 22%, then your federal income tax bill will be $5,500 higher in 2023 as a result of this decision.  Do you live in a state with a state income tax?

[MDM]

...assuming we contributed $10k a year (enough to get the match) and it grew 8% for the next 24 years...we would have way more than enough to retire very comfortably when that day comes.

What if you worked only for the next 14 years (or so) and retired that much earlier to do whatever you want?

[RWD]

It sounds like you might not be aware that you can withdraw from you 401k and the like before your retirement age. There are a few strategies, see this pinned thread:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

MMM himself even had a blog post on this subject:
https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

[lifeisshort123]

I often consider contributing less to my 401k, but I cannot imagine giving up the tax deferred space.   You give so much of that money (since it in some ways is your “last” dollars) in taxes.

[lampstache]

@Paper Chaser - You bring up a question for us that we don't know the answer to. What is our "number"? Truthfully, don't know and it feels hard to pin one down. We've got 4 kids under 10 and expense are wild at times and know that we'll have more expenses down the line as they get older. Due to that it feels hard to know what our number is since life is expensive right now vs what it will be when it's just the two of us.

We're not necessarily trying to retire as fast as we can and is not the goal, but we're working to get to a point where we work because we want to and not because we have to. For now we certainly enjoy the work we do and DH will always have his toes in something real estate related.

@ATtiny85 - We hear what you're saying. Harder said than done for us!

@Malum Prohibitum  - Total income wise we stretch into 24% territory. After deductions we're firmly in 22%. This is our first full year with rental properties and I don't quite understand what the affects of the rent/income received will be. Thanks for pointing out how much extra we would pay, yikes. We live in MN and will likely fall in 6.8% bracket if we max 401ks for both of us. Next bracket above would be 7.85%.

@MDM - Does sound nice when you put it that way. Hard to think about since all kids except one would be out of the house by then.

@RWD - I've read these before, but admittedly feel like we don't entirely understand what to do. Starts feeling a little more complex than what we're comfortable with when it reality it's probably not too bad.

@lifeisshort123 - I'm starting to lean this way after considering all of the responses. Sounds like we need to better strategize how our left over income can help us achieve our other investment goals.

[MDM]

This is our first full year with rental properties and I don't quite understand what the affects of the rent/income received will be.

If you have a Roth option in the 401k, compare traditional 401k contributions to Roth 401k contributions, not traditional vs. taxable.

Your marginal tax rate situation might be as simple as chart on the 'Tax Rates' tab of the case study spreadsheet (CSS) shows.  Or, due to various credits, phase-outs, etc., it might be more complicated.

If you can do some basic Excel entry, the CSS can show you the marginal tax rates you'll save over the whole range of your eligibility for traditional 401k contributions.  Or you can use other tax software to calculate those rates by entering different amounts and calculating by hand, etc.

Then you need to estimate your marginal tax rate on traditional withdrawals to make the t vs. R choice.  It's not a precise science, so don't agonize over it, but some time spent estimating is probably worthwhile.

[RunningintoFI]

An underrated aspect of 401k contributions but something to consider if you have rental real estate properties or any other asset that could wind up in a lawsuit is the ERISA protection that 401k's have. 

401ks are generally beyond the scope of legal seizure outside of child support or alimony payments.  For this fact alone, they are a useful risk mitigation strategy that should be maximized every year that one can.  This is especially true if the rental properties are not tied up in an LLC and the two of you don't have any sort of umbrella insurance policy.  Regular IRAs and real estate are far easier for others to gain access to.  Your 401k is the only thing you can almost guarantee will be there for you when you reach retirement age. 

[Runrooster]

we would have $1.93mm and would supply us with $144k per year for the next 30 years.

$1.93mm at 4% SWR is closer to $80k than $144k.

[lampstache]

@Runrooster - I guess this snapshot is what I was basing that number off of. Have me questioning now what I should believe or not!

[lampstache]

An underrated aspect of 401k contributions but something to consider if you have rental real estate properties or any other asset that could wind up in a lawsuit is the ERISA protection that 401k's have. 

401ks are generally beyond the scope of legal seizure outside of child support or alimony payments.  For this fact alone, they are a useful risk mitigation strategy that should be maximized every year that one can.  This is especially true if the rental properties are not tied up in an LLC and the two of you don't have any sort of umbrella insurance policy.  Regular IRAs and real estate are far easier for others to gain access to.  Your 401k is the only thing you can almost guarantee will be there for you when you reach retirement age.

@RunningintoFI - Thanks for the info as I was entirely unaware of this. Fortunately, we do have a $2 million umbrella policy that we started a few months ago.

[lampstache]

This is our first full year with rental properties and I don't quite understand what the affects of the rent/income received will be.

If you have a Roth option in the 401k, compare traditional 401k contributions to Roth 401k contributions, not traditional vs. taxable.

Your marginal tax rate situation might be as simple as chart on the 'Tax Rates' tab of the case study spreadsheet (CSS) shows.  Or, due to various credits, phase-outs, etc., it might be more complicated.

If you can do some basic Excel entry, the CSS can show you the marginal tax rates you'll save over the whole range of your eligibility for traditional 401k contributions.  Or you can use other tax software to calculate those rates by entering different amounts and calculating by hand, etc.

Then you need to estimate your marginal tax rate on traditional withdrawals to make the t vs. R choice.  It's not a precise science, so don't agonize over it, but some time spent estimating is probably worthwhile.

@MDM - We've used your spreadsheet a few times over the years to roughly estimate our taxes owed or potential refund. It's been awesome. Admittedly, we feel it ends up getting more technical than our knowledge base. Always something more to learn. Will attempt to dive into it further. Thanks!

[Runrooster]

I can’t see all the details in that picture, but I remember you said you were assuming 8% growth in the market. 8% is not what I consider a SafeWithdrawalRate.

[Laura33]

@Paper Chaser - You bring up a question for us that we don't know the answer to. What is our "number"? Truthfully, don't know and it feels hard to pin one down. We've got 4 kids under 10 and expense are wild at times and know that we'll have more expenses down the line as they get older. Due to that it feels hard to know what our number is since life is expensive right now vs what it will be when it's just the two of us.

Sounds like even more incentive to keep maxing your 401(k) while you can.  I have yet to see a situation where having more money than you need made things worse.  Even if you do decide on a number and hit it before you planned to, no one says you actually have to retire at that specific moment.  But boy does it feel good to know you can if you want to (ask me how I know).

[lampstache]

We've made the decision to max 401ks this year. Classic case of over analyzing what we should do.

Would much rather have more than we need than not enough. Thanks for adding your thoughts @Laura33!

[simonsez]

We've made the decision to max 401ks this year.

Great!

Roth 401k contributions are worth exploring if you have that option (can do a mix of traditional 401k and Roth 401k or 0% of one and 100% of the other and everything in between, whatever), especially in comparison to not utilizing all your 401k space and instead diverting some to taxable.  Just bear in mind if you ever decide to go fully to Roth 401k with your contributions, any employer matches are still usually put in the traditional 401k bucket.

Roth 401k can be rolled over to Roth IRA in retirement and it is not a taxable event (if you already have a Roth IRA now, it will be seasoned in the future and you'll have no problem withdrawing your contributions penalty-free).  Roth IRAs don't have RMDs (note the rules on RMDs has changed from 70 1/2 historically to 72 fairly recently to 73/75 with the new Secure 2.0) and gives you slightly more flexibility.

[Malum Prohibitum]

We've made the decision to max 401ks this year. Classic case of over analyzing what we should do.

Would much rather have more than we need than not enough. Thanks for adding your thoughts @Laura33!

Woo hoo!  Great news!  :)    And it will save you federal and state income taxes this year.  Tax loophole for the rich, and all that.