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Around the Internet => Continue the Blog Conversation => Topic started by: RidetheRain on October 04, 2017, 02:51:49 PM

Title: How Much Is Too Much in Your 401k
Post by: RidetheRain on October 04, 2017, 02:51:49 PM
So I just read this article (not sure how I missed it my first run through)
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ (http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/)

I came out of point #1 Old Man Money way more confused than I went into it. It says that the hypothetical person saved too much in the 401k and should turn to additional savings for the midterm years.

But later, it says that it's always best to max out tax-deferred accounts. How do these work together? I'll hit my old lady sweet spot in the 401k in the next few years and it sounds like the advice for this strategy conflicts. Continue funding 401k beyond match or scale back to just grab the max and instead fund IRA for SEPP/taxable?

Right now IRA pipeline-ing seems so much easier, but I'd really like to understand how this option is supposed to work. Who knows, I might like it better!
Title: Re: How Much Is Too Much in Your 401k
Post by: MDM on October 04, 2017, 03:28:30 PM
You might look at Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) to see if that helps - or makes things even less clear.
Title: Re: How Much Is Too Much in Your 401k
Post by: kendallf on October 04, 2017, 03:59:34 PM
So I just read this article (not sure how I missed it my first run through)
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ (http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/)

I came out of point #1 Old Man Money way more confused than I went into it. It says that the hypothetical person saved too much in the 401k and should turn to additional savings for the midterm years.

But later, it says that it's always best to max out tax-deferred accounts. How do these work together? I'll hit my old lady sweet spot in the 401k in the next few years and it sounds like the advice for this strategy conflicts. Continue funding 401k beyond match or scale back to just grab the max and instead fund IRA for SEPP/taxable?

Right now IRA pipeline-ing seems so much easier, but I'd really like to understand how this option is supposed to work. Who knows, I might like it better!

MDM's investment order post gives you a good priority list.  The MMM article is sort of confusing but the advice to focus on always funding your tax advantaged accounts is the best option for almost everyone.

Your question regarding 401k vs IRA doesn't really matter; you can transfer your 401k to an IRA when you retire and then start your pipeline so they're mostly functionally equivalent for now, although the 401k has much higher contribution limits.  Fund whichever one has the best investment options at the lowest fees, to the max you can, or even better, fund both.

For better analysis of the options, go read the Mad Fientist posts on tax avoidance:

http://www.madfientist.com/archives

Also check out the HSA as "ultimate retirement account" post there.
Title: Re: How Much Is Too Much in Your 401k
Post by: RidetheRain on October 04, 2017, 04:54:12 PM
So I just read this article (not sure how I missed it my first run through)
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ (http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/)

I came out of point #1 Old Man Money way more confused than I went into it. It says that the hypothetical person saved too much in the 401k and should turn to additional savings for the midterm years.

But later, it says that it's always best to max out tax-deferred accounts. How do these work together? I'll hit my old lady sweet spot in the 401k in the next few years and it sounds like the advice for this strategy conflicts. Continue funding 401k beyond match or scale back to just grab the max and instead fund IRA for SEPP/taxable?

Right now IRA pipeline-ing seems so much easier, but I'd really like to understand how this option is supposed to work. Who knows, I might like it better!

MDM's investment order post gives you a good priority list.  The MMM article is sort of confusing but the advice to focus on always funding your tax advantaged accounts is the best option for almost everyone.

Your question regarding 401k vs IRA doesn't really matter; you can transfer your 401k to an IRA when you retire and then start your pipeline so they're mostly functionally equivalent for now, although the 401k has much higher contribution limits.  Fund whichever one has the best investment options at the lowest fees, to the max you can, or even better, fund both.

For better analysis of the options, go read the Mad Fientist posts on tax avoidance:

http://www.madfientist.com/archives

Also check out the HSA as "ultimate retirement account" post there.

See, this seems to follow the second plan MMM wrote about and the most common one on this forum (so far as I can tell) which is the five-year pipeline. I'm totally on board with the Investment Order - that's what I use right now. But, it sounds like the "Old Man Money" concept doesn't touch 401k at all until age 65. It sounds like the rest of investments went directly to a taxable account which seems a little odd considering there are more tax-advantaged accounts out there. I'm not sure if this is actually an advisable strategy, but I'm not sure. I feel like there is a piece of information I'm missing in the puzzle.

I'll definitely check out the madfientist though! I always like to see more perspectives and ideas.
Title: Re: How Much Is Too Much in Your 401k
Post by: moof on October 20, 2017, 03:19:06 PM
The Mad Fientist links do a good job of walking through the different horse race comparisons of strategies.

In general it is best to avoid taxes now if possible, though the less taxes you pay now the harder the rules make it to get the money out early.  You will likely be taxed a lot less later (unless your balance outstrips expectations, but that is a good problem to have).  Getting the money out is the messy bit, and one that has so many nuances and trade offs that there is not a good way to provide a cookbook "Withdrawal Order".

Even if you have ALL your money stuck in a 401k/IRA, you can still retire early and get money out.  SEPP makes this possible, as does just paying the penalty (especially if you are close to 59.5).  It boils down to using your crystal ball to anticipate your likeliest post-retirement situation and come up with a strategy both while accumulating and during retirement that makes the best use of your money.

If you have plans for very large lumpy expenses, SEPP and Roth pipelines will likely be too restrictive, and that is about the only reason I see to put money into a taxable account instead of into an IRA (even then a Pay the Penalty strategy may still win).  Most folks who plan on modest retirement can probably be best served by a Roth pipeline if they have enough non-IRA money to access for 5 years, or by some combination of SEPP, taxable, and existing Roth principle to cobble together a low tax withdrawal strategy until they hit 59.5.

It is worth building a spreadsheet for each of several possible withdrawal strategies and do a horse race for your own situation to see what comes out best (least taxes and penalties).

In our case we will have higher initial withdrawals while we still have a few years of mortgage payments, and will not have 5 years of accessible savings to build a pipeline. The plan instead is to SEPP about 2/3 of the total nest egg (basically all the IRA/401k balance) for the 12 years between retirement and 59.5.  The gap will get covered mostly by Roth principle and taxable withdrawals.  The result will be near zero taxes until age 59.5.  IRA/Roth withdrawals will go up a bit at that point as the taxable will be almost tapped out at that point.  SSA comes in at the 19 and 22 year mark for the spuse and myself respectively and will cover about 80% of spending.
Title: Re: How Much Is Too Much in Your 401k
Post by: Acastus on November 10, 2017, 01:42:51 PM
The only caution for having too much money in a 401k is, if you want to retire early, you need enough money in accounts that are tax friendly. I do not have 5 years expenses in taxable accounts or Roth contributions, so I need a more complex withdrawal method.

I am doing some what ifs in preparation for FIRE. It is very useful to have accounts in 3 categories:  taxable, traditional 401k or IRA, Roth 401k or IRA. I am trying to keep my income in the 15% tax bracket so capital gains are taxed at 0%. I also want to qualify for ACA premium subsidies. That limits my AGI to $50k. I will get both the premium and cost sharing premiums for my family of 3. Sweet! If I go over, I still get the premium help, which is 80% of the potential, so still nice. I plan to spend more than 50k, and that is where tax flexibility comes in.

Traditional 401k can be tapped at 55, so yay! me for joining the FIRE party late. The 1st 25k is tax exempt, due to standard deduction of 12.7k and 12.2k for 3 exemptions. So I want to have at least 25k of AGI, probably more. The next 18k is taxed at 10%, and I would rather pay that than 15% later, so I will fill that up most of the way.

Taxable money has a low tax rate. Only the gains are taxable, not what you invested, and long term gains will be at 15% or 0%.  Currently, my taxable money averages 25% taxable and most of that is long term. So every 1000 I spend from there adds only 250 to my AGI. I plan to spend the rest of my annual withdrawal using this money, but keep my total AGI to 45k.
I will have some gains from mutual funds I cannot control, and I want to leave some buffer on the 50k limit.

Roth IRA can be spent as needed, since it does not add to AGI. I have about 2.5 years total expenses in 5+ year contributions. I will use this for contingencies, kid's college, and maybe paying off the house. Ideally, I can leave this alone until age 60, then spend it while I fill the Roth pipeline from IRAs. Assuming tax changes do not abolish the Roth pipeline.

Example:  35k traditional + 40k taxable yields 45k AGI and 1k tax.
                40k trad. + 20k taxable + 10k Roth =>  45k AGI, 1.5k tax.