Author Topic: Are we putting TOO MUCH into our 401ks?  (Read 2658 times)

FinanceFam

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Are we putting TOO MUCH into our 401ks?
« on: May 21, 2018, 01:01:02 PM »
Hi Folks,

I'm looking for input on a debate I've been having related to 401ks and taxable accounts and it seems like a lot of the conventional wisdom isn't geared toward our situation. In short, We've been maxing out our 401ks and also contributing to taxable accounts and a post-tax IRA but we're starting to wonder if that makes sense given our shorter-term priorities. I work in a stable position in real estate and would like to keep more liquidity to capitalize a couple of deals/projects if/when there's a downturn and pricing becomes more reasonable here.

Here's the situation:

We're both 31 and on track to contribute $18,500 each ($37,000 combined) to 401ks this year. In addition, my company will make a $12,000 profit share contribution and a $4,200 match. My wife's company will make a $2,500 match. That's a total of $55,700 going into a 401k annually if we continue to max out. The current balance of our retirement accounts is $165,000 because we've only been doing this for a few years after paying off our student loans.

In addition to the above, we save about $4,000/month that we've been putting into taxable brokerage accounts, a post-tax IRA and a money market account for short term liquidity. We have about $65,000 readily available there. This year I'll receive about $30,000 in post-tax bonus income that will also go to those accounts. They should reach $125,000 by the end of the year.

We own a home in Seattle and have about $550,000 in equity (<50% LTV mortgage at 3.8%). We don't plan to use the above funds for a residential downpayment so that isn't a consideration.

I'm wondering whether there are others out there that think you can be putting TOO MUCH into 401ks as a young professional. Given the harsh penalties for touching that money in the next 20 years it seems like prioritizing a more accessible nest egg mike make sense given our skillsets and interests. We're also very much in an accumulation phase now that we're done with student loans and have eliminated non-housing debt.

Any thoughts or input would be much appreciated!

 

RWD

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Travis

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #2 on: May 21, 2018, 01:14:53 PM »
Given your savings amounts and age, I'd say continue to max your tax-advantaged accounts. Your income will probably grow before you retire so save it all now.  You're saving enough to fill your 401K, IRAs, and put an equal amount in taxable.  Without knowing your total situation it's tough to say for sure though (FIRE amount, total household income, taxes, FIRE location, goals, etc). What specifically concerns you about putting half of your savings into your tax-advantaged accounts? Why would you want to touch your 401K early?

CorpRaider

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #3 on: May 21, 2018, 01:16:27 PM »
I personally plan to look more closely at this issue if and when I'm approaching a million in pretax accounts.

The key pieces of info you probably need to evaluate this are your marginal tax rates at time of contribution and those you guestimate at withdrawal.
« Last Edit: May 21, 2018, 01:18:57 PM by CorpRaider »

rbnsf12

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #4 on: May 21, 2018, 01:57:52 PM »
I've wondered about this too. I'm 25 and get that there are workarounds to tapping into retirement accounts early penalty-free but what if those loopholes are closed in the longer term? I don't see myself wanting to potentially access those funds until 10-15+ years out, at the earliest. Since I'm already maxing out my personal IRA and my employer's Simple IRA sucks (actively managed high-fee funds, still doing match @ 3% though), my next prioritized bucket will be my taxable brokerage account. My situation's fairly unique in that regard. If I had a better employer sponsored Simple IRA/401k (working on it), I'd probably reconsider.
« Last Edit: May 21, 2018, 02:08:48 PM by rbnsf12 »

boarder42

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #5 on: May 21, 2018, 02:00:39 PM »
nope see links above we're the same age as you with similar profit sharing dumping into tax advanataged accounts.  just stack em up watch em grow.  you will just need to watch it when you get close to the top of the 12% bracket plus your deductions times 25.  if you gave a bit more data on your expected SWR and how much you plan to save prior to FIRE we could quickly determine if you should swap to Roth 401k's at work at some point if thats an option.

boarder42

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #6 on: May 21, 2018, 02:01:24 PM »
I've wondered about this too. I'm 25 and get that there are workarounds to tapping into retirement accounts early penalty-free but what if those loopholes are closed in the longer term? I don't see myself wanting to potentially access those funds until 10-15+ years out, at the earliest.

go read the Mad Fientists' post from above the math he did shows typically taking the 10% penalty is still better than investing it in a taxable account.

rbnsf12

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #7 on: May 21, 2018, 02:56:48 PM »
I've wondered about this too. I'm 25 and get that there are workarounds to tapping into retirement accounts early penalty-free but what if those loopholes are closed in the longer term? I don't see myself wanting to potentially access those funds until 10-15+ years out, at the earliest.

go read the Mad Fientists' post from above the math he did shows typically taking the 10% penalty is still better than investing it in a taxable account.

Just to play devil's advocate, who's to say the 10% early withdrawal penalty won't increase as more people do this 10-15+ years out? Not sure how likely that'd be but just wondering.
« Last Edit: May 21, 2018, 02:59:42 PM by rbnsf12 »

bacchi

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #8 on: May 21, 2018, 03:34:32 PM »
I've wondered about this too. I'm 25 and get that there are workarounds to tapping into retirement accounts early penalty-free but what if those loopholes are closed in the longer term? I don't see myself wanting to potentially access those funds until 10-15+ years out, at the earliest.

go read the Mad Fientists' post from above the math he did shows typically taking the 10% penalty is still better than investing it in a taxable account.

Just to play devil's advocate, who's to say the 10% early withdrawal penalty won't increase as more people do this 10-15+ years out? Not sure how likely that'd be but just wondering.

Well, true, but who's to say that LTCG rates won't increase dramatically when the US deficit finally comes due?

Or what about Roth earnings being taxed on withdrawals?

Or what about HSAs being taxed once your account reaches $100k?

There's no point in predicting the future that far out.

sokoloff

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #9 on: May 21, 2018, 03:37:57 PM »
Just to play devil's advocate, who's to say the 10% early withdrawal penalty won't increase as more people do this 10-15+ years out? Not sure how likely that'd be but just wondering.
The number of people doing this is infinitesimal in the grand scheme of things. The echo chamber of ERE and MMM makes it seem like this is a common thing. It's not. Most people taking money out of 401(k)s early are taking out single/double digit thousands and doing it to live on/because they don't know any better.

People who were maxing it out for years and then want to do a real estate deal are a vanishingly small subset and not worth writing a tax code change to screw over, no matter how confiscatory the then-current government becomes, IMO.

trollwithamustache

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #10 on: May 21, 2018, 03:45:16 PM »
my accountant says you are putting to much in. He is correct too if you go with the assumption you will work until 65! His advice is based around the idea that early in life less 401k and mostly post tax savings, and later as your marginal tax rate increases he wants you to increase your contribution to the 401k.   I can see his point if you save multiple millions through a lifetime of 401k maxing and work up until required minimum distributions then you just pay a lot of income tax.

But for true mustache life? early pulled money even with the 10% penalty is quite possibly at a lower tax rate than your marginal rate when you are making the big bucks.





ysette9

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #11 on: May 21, 2018, 04:06:48 PM »
Too much savings in a 401(k)?
“Unpossible!” as my husband would say.

My plan recently added an in-plan Roth conversion option (like the mega backdoor Roth but the $ stays in the 401(k)) and I bumped up my contributions to 20% which is the max I can do. We are a little older than OP but are saving about 50-50 in tax-advantaged/taxable accounts also. I vote for filling up as much tax-advantaged space as possible since that is a limited resource and as your salaries grow, you are likely to have more and more savings go into taxable accounts anyway.

DreamFIRE

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #12 on: May 21, 2018, 08:09:45 PM »

As a single person, I'm putting $40,500 into my work retirement plan this year, plus I get a partial match on top of that.  It doesn't seem like "too much".

powskier

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #13 on: May 21, 2018, 09:40:42 PM »
By years end you'll have $125k liquidish available but you are trying to decide if you need more? Depends on the deals you want to do. From a risk management standpoint I would still max out every tax advantaged account all the way.
If you want to save less in tax advantaged in order to have more of your wealth in real estate, I think you may be concentrating too much into one area, albeit one you know. If real estate in your area heads south, your great income dries up and your personal deals/ real estate investments decline in value.
When markets are hot it's really fun, but trust me when it turns it's brutal.

MDM

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #14 on: May 22, 2018, 01:25:09 AM »
Do you have a Roth option in the 401k?

Have you projected your traditional account balance at retirement and the marginal rate you will pay using a 4% (or your choice) withdrawal ratio?

CorpRaider

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #15 on: May 22, 2018, 07:32:56 AM »
you will just need to watch it when you get close to the top of the 12% bracket plus your deductions times 25. 

Yeah, I think that's how I flagged approaching $1MM in pretax as the time to re-evaluate.  Assuming you are in a 20 something present bracket now. 

Sticking $56K PMT and $165K PV @ 7%; it seems like it takes about a decade to get to $1MM.  So maybe I would roll for 6-7 or so years and then check out tax brackets, your contribution rates, and what returns you earned, etc...

« Last Edit: May 22, 2018, 07:37:27 AM by CorpRaider »

boarder42

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #16 on: May 22, 2018, 07:34:22 AM »
you will just need to watch it when you get close to the top of the 12% bracket plus your deductions times 25. 

Yeah, I think that's how I flagged approaching $1MM in pretax as the time to re-evaluate.  Got a loooooong way to go for that.

are you single b/c its over 2MM for MFJ couples.

CorpRaider

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #17 on: May 22, 2018, 07:42:31 AM »
I am assuming I will be divorced by then.  Just kidding. 

I think I was looking at staying in the 10%/lowest bracket, but it's only 2% more for the next one now.  Thanks!  ($24K SD + $77,400) x 25 = $2,535,000.  I will probably need to dial back a little for SS and a defined benefit plan, but not much, and I don't think I will come remotely close to that number.  So....non-issue.
« Last Edit: May 22, 2018, 07:44:48 AM by CorpRaider »

nereo

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #18 on: May 22, 2018, 07:54:11 AM »
Just to play devil's advocate, who's to say the 10% early withdrawal penalty won't increase as more people do this 10-15+ years out? Not sure how likely that'd be but just wondering.
The number of people doing this is infinitesimal in the grand scheme of things. The echo chamber of ERE and MMM makes it seem like this is a common thing. It's not. Most people taking money out of 401(k)s early are taking out single/double digit thousands and doing it to live on/because they don't know any better.
True. The number of people who have under-funded their retirement drastically exceeds the number who have over-funded it.

Well, true, but who's to say that LTCG rates won't increase dramatically when the US deficit finally comes due?
 
I personally think this is the most likely scenario in the years-to-come. There's orders more magnitude of revenue to be generated by increasing the LTCG rates than there is by increasing the penalties from early withdraws. Increasing tax penalties on 401(k) distributions ("it's MY MONEY!") provides all sorts of bad press from hard-luck middle class types, whereas changes to the LTCG would bring it more in line with income tax rates.

boarder42

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #19 on: May 22, 2018, 10:09:55 AM »
Just to play devil's advocate, who's to say the 10% early withdrawal penalty won't increase as more people do this 10-15+ years out? Not sure how likely that'd be but just wondering.
The number of people doing this is infinitesimal in the grand scheme of things. The echo chamber of ERE and MMM makes it seem like this is a common thing. It's not. Most people taking money out of 401(k)s early are taking out single/double digit thousands and doing it to live on/because they don't know any better.
True. The number of people who have under-funded their retirement drastically exceeds the number who have over-funded it.

Well, true, but who's to say that LTCG rates won't increase dramatically when the US deficit finally comes due?
 
I personally think this is the most likely scenario in the years-to-come. There's orders more magnitude of revenue to be generated by increasing the LTCG rates than there is by increasing the penalties from early withdraws. Increasing tax penalties on 401(k) distributions ("it's MY MONEY!") provides all sorts of bad press from hard-luck middle class types, whereas changes to the LTCG would bring it more in line with income tax rates.

Except LTCGs benefit the rich typically and the rich are who fund campaigns to get politicians elected.

bacchi

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #20 on: May 22, 2018, 10:22:19 AM »
Except LTCGs benefit the rich typically and the rich are who fund campaigns to get politicians elected.

Eh, people with Romney's wealth have work arounds. They just stuff their Roth IRAs with "useless" stock that's about to explode. Or they use muni bonds.


FinanceFam

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #21 on: May 22, 2018, 11:16:01 AM »

As a single person, I'm putting $40,500 into my work retirement plan this year, plus I get a partial match on top of that.  It doesn't seem like "too much".

Is your employer doing some kind of profit share into the plan or something? If you're capped at $18,500 I assume that's how you're getting there?

ysette9

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #22 on: May 22, 2018, 11:20:57 AM »
It is capped at $18.5k for pre-tax contributions but you can put in more than that after tax. Your limits then are $54k or 100% of your compensation unless yo are hit by a “highly compensated employee” cap that could be lower.

DreamFIRE

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #23 on: May 22, 2018, 06:34:30 PM »

As a single person, I'm putting $40,500 into my work retirement plan this year, plus I get a partial match on top of that.  It doesn't seem like "too much".

Is your employer doing some kind of profit share into the plan or something? If you're capped at $18,500 I assume that's how you're getting there?

No profit share, but our retirement plan includes a 457B and 401a.  The limit on our 457B is the same as a 401K.  However, the limit on our 401a is $55K by itself, but the company match is included in that cap, so I can contribute pre-tax dollars in combination with the company match to equal $55K.  The 457B is $18,500, but with a $6,000 catch-up if you turn 50 or older during the year.  So my contribution + company match in the 401a and 457B combined maximum is $79,500.  I could put in more pre-tax dollars than the $40,500 that I mentioned before, but as a single person, I only put in enough to bring me down to where the 12% and 22% tax brackets meet (after subtracting other deductions as well.)  I then contribute $6500 to my Roth IRA, but those dollars are after taxes.

DavidAnnArbor

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #24 on: May 22, 2018, 08:09:51 PM »
In many states money in your 401k is protected against creditors.

PDXTabs

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Re: Are we putting TOO MUCH into our 401ks?
« Reply #25 on: May 23, 2018, 10:05:10 AM »
I would say keep doing what you are doing unless there is some specific reason that you would want the capital before actually retiring. For example, if you really want to start a business some day.

In many states money in your 401k is protected against creditors.

AFAIK it is protected against creditors in all states, as it is a fully ERISA protected fund. This differs from a personal IRA which does not have full ERISA protection.