MAX Out 401k vs How Much Is TOO MUCH?

[coreyP]

Hello FIRE world!

I am reaching out today looking for some clarity! I have been lurking around here for a while and I am currently in the transition period of the new FIRE mindset.

I have been doing a lot of research and have read a couple books, one of which is The Simple Plan To Wealth by JL Collins.

One set of conflicting information I have come across is that of suggesting maxing out your 401k to get the deferred tax advantage vs the information I get from MMM himself in his blog post "How Much is TOO MUCH in your 401k?"

My concerns are...
Is there such thing as too much in your 401k? I know that there are strategies to pull it out before your retirement age(roth conversion ladder, SEPP, take the 10% penalty) do we think that in 10-15 years the laws will be the same to where we can use this ROTH conversion to our advantage? Worse case scenario take the 10% penalty?
Should you only get to "your number" and then go with taxable accounts?

What strategy do you guys use? I certainly appreciate everyone's insight, thanks for taking the time!

Cheers

Corey

[Interest Compound]

As you noted, there are many ways to get money out of your 401k. The only situation where I wouldn't max it, is if I knew I'd need the money in a few years, and had no taxable investments to draw from.

In general, I always recommend maxing it.

[MDM]

...the information I get from MMM himself in his blog post "How Much is TOO MUCH in your 401k?"

coreyP, welcome to the forum.

In that blog post one finds "I still advise maxing out any tax-deferred savings accounts like the 401k."

What conflict do you see?

[dahlink]

I'm in a similar spot of wondering if I should put more into my 401k but mainly because I still want to maximize the Saver's tax credit.

With the new standard deduction being 12k for married filing jointly and only making 50k, I'm @ around 38k, which seems to be the magic number for getting 50% back on up to $2000. In practice, it's hard to get the full amount but for 2017 i got about $1600 by contributing to a spousal IRA.

So, I've started making ROTH contributions to my 401k instead of the Traditional 401k deferred contributions. As far as I can tell, I want to have a tax bill near $1600(saver's credit is not refundable; can only reduce taxes to $0) while having an AGI that does not exceed 38k...not even by $1. To do this I contribute to an IRA for the previous tax year to get it right, if needed.

So, if your AGI is near 38k(and you're married), I'd factor in how contributing to a Traditional 401k/IRA would impact the Saver's credit. It might make more sense to switch to ROTH contributions.

This is what I do, if I'm missing something please let me know.

Also, there's the EITC(earned income tax credit)...but I don't have any kids. This would probably change or even nullify my advice but I don't have kids to really utilize the EITC since the Saver's credit is higher than the EITC Married without children.

Bottom line, still max out your 401k if you can, but consider ROTH contributions for tax purposes when you factor in the credits.

links
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit

[MDM]

This is what I do, if I'm missing something please let me know.

The standard deduction does not affect one's AGI.  In other words, one's standard (or itemized) deduction has no effect on the saver's credit calculation, although it may affect how much of the saver's credit one gets to use.

The marginal rate chart in the case study spreadsheet may be useful.

[dahlink]

Thanks MDM, looks like I got some homework to do.

Reviewed 2017 return...you're totally right. Looks like the real AGI manipulation has came from IRA contributions and other items.

I guess I'd modify my advice to say if your 401k contributions have lowered your income enough to qualify for the 50% matching bracket of the saver's credit, it might be better to switch to Roth contributions at that point.

If you know of any other tax tips for MFJ with 0 dependents...pleas let me know =)

I'll also review the case study sheet in depth to see how it applies to me.

Thanks again!

[Apocalyptica602]

My wife and I are high income (combined we gross about ~230k) too much to deduct IRAs, so the 36k a year we can put into 401k's each year is a godsend.

Although I wouldn't prioritize maxing your 401k above the match unless you're already maxing all other tax advantaged space.

[MDM]

I guess I'd modify my advice to say if your 401k contributions have lowered your income enough to qualify for the 50% matching bracket of the saver's credit, it might be better to switch to Roth contributions at that point.

And excellent advice that is!  For those near but above a saver's credit tier, it's common to use traditional accounts to reach the tier.  When one is already under a given tier, it's easy enough to forget than Roth may now be preferable to traditional.

[DS]

https://www.google.com/search?q=mrmoneymustache+forum+how+much+is+too+much+in+401k&oq=mrmoneymustache+forum+how+much+is+too+much+in+401k&aqs=chrome..69i57j69i60.7267j1j7&sourceid=chrome&ie=UTF-8

https://forum.mrmoneymustache.com/ask-a-mustachian/too-much-money-in-401kira/

https://forum.mrmoneymustache.com/ask-a-mustachian/too-much-in-401k/

https://forum.mrmoneymustache.com/investor-alley/am-i-contributing-too-much-to-401kira/

https://forum.mrmoneymustache.com/continue-the-blog-conversation/how-much-is-too-much-in-your-401k/

https://forum.mrmoneymustache.com/investor-alley/is-there-too-much-in-my-401k/

https://forum.mrmoneymustache.com/investor-alley/too-much-in-my-401k/