Author Topic: Does it make sense to stop contributing to a 401K at some point?  (Read 1867 times)

frugallyfe

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I am about 80% of the way to FI. About 25% is in retirement accounts (401K and IRAs). Since I'm going to try to live on my investments for several decades before I can even access retirement money, should I stop contributing to the company 401k and my IRA? Wouldn't it be better to have access to more money now?


joe189man

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #2 on: June 30, 2021, 11:20:14 AM »
disclaimer: I don't know much about this but...

i have looked at this for our situation as we never opened an IRA and are now over the income limits

I did a post on this with more info - https://forum.mrmoneymustache.com/investor-alley/investment-order-question-taxable-vs-other/

for us at some point the 401ks will grow beyond our needs with no additional funds, and i calculated at what ages/balances that may happen and when we should focus solely on funding a taxable brokerage account to get us to ~age 60 to access 401k funds

there is likely a better way as @EliteZags posted, but we don't have an ira so...

ericrugiero

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #3 on: June 30, 2021, 12:43:14 PM »
I don't think it makes sense to stop in your situation. Most of your money is not in retirement accounts so it can be accessed before 59 1/2.  The money that is in retirement accounts can be accessed via a Roth conversion ladder or you can wait till 59 1/2.  With several decades before traditional retirement age it makes sense to put as much into your 401K/IRA and then convert it to Roth after you retire and your income is lower. 

If you didn't have any money outside of retirement accounts, it might make sense to save enough to cover 5 years expenses while you start a Roth conversion ladder. 

mckaylabaloney

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #4 on: June 30, 2021, 01:04:54 PM »
disclaimer: I don't know much about this but...

i have looked at this for our situation as we never opened an IRA and are now over the income limits

I did a post on this with more info - https://forum.mrmoneymustache.com/investor-alley/investment-order-question-taxable-vs-other/

for us at some point the 401ks will grow beyond our needs with no additional funds, and i calculated at what ages/balances that may happen and when we should focus solely on funding a taxable brokerage account to get us to ~age 60 to access 401k funds

there is likely a better way as @EliteZags posted, but we don't have an ira so...

You can just open an IRA now (or whenever), regardless of your income. It can sit empty until you are ready to move your 401k into it. You could even contribute to it if you wanted to for some reason, though those funds wouldn't be tax-advantaged (and so AFAIK there would be no good reason to contribute). It's not illegal or anything to contribute to a traditional IRA if you're over the income limit; you just can't deduct those contributions from your taxes.

Personally, I have a traditional IRA that sits at $0.00 for 364 days out of the year. One day a year it has ~$6000 in it because I do a backdoor Roth (so, I contribute to my traditional IRA and then immediately convert that money to my Roth IRA). When I retire, I'll move my 401ks into that empty traditional IRA and probably do some sort of Roth ladder. There's nothing stopping you from doing the same!

ETA: I was assuming you meant you don't have a traditional IRA, but if you're talking about not having a Roth IRA, the same thing applies: your income is not a barrier to opening an account, and even better, you CAN contribute to a Roth IRA regardless of your income by using the backdoor method.
« Last Edit: June 30, 2021, 01:07:48 PM by mckaylabaloney »

MustacheAndaHalf

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #5 on: July 02, 2021, 01:11:47 PM »
I am about 80% of the way to FI. About 25% is in retirement accounts (401K and IRAs). Since I'm going to try to live on my investments for several decades before I can even access retirement money, should I stop contributing to the company 401k and my IRA? Wouldn't it be better to have access to more money now?
If you're going to burn through 75% of your portfolio before age 60, how are you going to live on the remaining 25% for the decades after that?

And if you aren't going to use up 75% of your portfolio before age 60, you don't need access to 401k / IRAs.  You can keep saving money in tax advantaged accounts, and reap tax advantages until you need the money.

After you stop working, your lower tax bracket can allow you to convert Traditional IRAs into Roth IRAs, locking in the tax rate.  After 5 years, you can withdraw what you contributed to a Roth IRA (but not the increase - the growth).  Maybe having a Roth IRA would make you feel more comfortable?

I think it would be a mistake to stop building up tax benefits in IRAs / 401ks.  But an even bigger concern is why you think 75% of your portfolio (the portion in taxable) is not enough to last until IRAs are available.

Dicey

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #6 on: July 04, 2021, 11:31:53 AM »
Do you get a match from your employer? Never leave that money on the table.

nereo

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ixtap

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #8 on: July 04, 2021, 01:20:32 PM »
disclaimer: I don't know much about this but...

i have looked at this for our situation as we never opened an IRA and are now over the income limits


Sounds like a perfect set up for backdoor Roth.

TempusFugit

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #9 on: July 05, 2021, 02:08:22 PM »
It is an interesting question.  If you live to 72, the government will force you to start taking minimum distributions from your 401k, which, depending on your balance, could be large enough to trigger significant taxes.   

To truly optimize, there would, one expects, be some point after which you should stop maximizing contributions to the 401k in favor of regular after tax accounts.  I agree that it would probably never make sense to leave any employer match on the table, but there may well be some scenarios where you might not want to maximize your contributions.

I guess what it comes down to is your current tax rate, which you would pay on money that you did not contribute to the 401k, compared to the expected tax rate you will have to pay on any RMD (required minimum distribution) when you reach 72 and have to start taking them even if you don't need that amount to support your lifestyle.  You would have to look at how many years you might be able to draw down the 401k in a tax advantaged way (conversions to Roth pipeline at a rate that keeps your cap gains taxes low or zero) which would probably at best offset gains in the account (let's hope).

I think it was mentioned in the thread that there is the more obvious reason you might stop contributing to the 401k, which is that if you retire early and need to fund your lifestyle for a few years before you can get to your 401k funds without penalty (a Roth pipeline which takes 5 years to work).  If you don't already have the money to support yourself for those 5 years, you need to save that up in non-retirement accounts, which may require redirecting the money you would otherwise contribute to the 401k.   




nereo

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #10 on: July 05, 2021, 03:18:40 PM »
It is an interesting question.  If you live to 72, the government will force you to start taking minimum distributions from your 401k, which, depending on your balance, could be large enough to trigger significant taxes.   

To truly optimize, there would, one expects, be some point after which you should stop maximizing

Is there a scenario in which the taxes paid on forced distributions taken from your 401(k) would exceed a similar-sized distribution taken from taxable accounts?
« Last Edit: July 05, 2021, 04:59:13 PM by nereo »

ender

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #11 on: July 05, 2021, 04:02:40 PM »
I've started to wonder if the ACA "tax" that comes in the form of lower subsidies makes this less blatantly advantageous.


rmorris50

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #12 on: July 05, 2021, 05:07:20 PM »
I think yes there can come a time when it doesn’t make sense. My spouse and I are retirement rich, with 2.4m of our 3m NW tied up in some sort of pre-tax retirement account. We are now focused on build the after-tax piece more, and only defer up to company match.

I also think tax rates will go up in the future. I really should retire in the next year and start a 72t, really start getting all this money out of the tax deferred accounts in some sort of tax efficient way.


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chesebert

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #13 on: July 05, 2021, 05:36:52 PM »
Contribute to Roth 401k and then rollover to Roth IRA to leave as inheritance or just enjoy the tax free gain. You max out tax advantaged no matter what.

ender

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #14 on: July 05, 2021, 06:32:40 PM »
I also think tax rates will go up in the future. I really should retire in the next year and start a 72t, really start getting all this money out of the tax deferred accounts in some sort of tax efficient way.

Keep in mind what your risk here actually is.

Historically when tax rates go up, they don't materially change much for the average Mustachian spending thresholds. Below say $100k for a married couple has minimal fluctuation in the taxes you owe.

If you make and spend $500k/year? That's a bigger worry. Or if you end up with megabucks in your tIRAs? Sure.

But the "tax rates go up" thing is really overblown for the average spender unless you think that taxes are going to cripple folks making about the median household income or be dramatically different for 401k withdrawals vs regular income.


rmorris50

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Re: Does it make sense to stop contributing to a 401K at some point?
« Reply #15 on: July 05, 2021, 07:04:42 PM »
I also think tax rates will go up in the future. I really should retire in the next year and start a 72t, really start getting all this money out of the tax deferred accounts in some sort of tax efficient way.

Keep in mind what your risk here actually is.

Historically when tax rates go up, they don't materially change much for the average Mustachian spending thresholds. Below say $100k for a married couple has minimal fluctuation in the taxes you owe.

If you make and spend $500k/year? That's a bigger worry. Or if you end up with megabucks in your tIRAs? Sure.

But the "tax rates go up" thing is really overblown for the average spender unless you think that taxes are going to cripple folks making about the median household income or be dramatically different for 401k withdrawals vs regular income.
I think we are saying the same thing. If I retire now and take 72t (I am 47) I can probably keep taxes low under a wide range of future tax changes. Let my 2.4m grow another 12 years without touching it, or even longer, you’re talking mega forced distributions, and I just my heirs nephews and nieces and the IRS rich.


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