Not max out 401k?

[Little Woman]

Hi all,

I am new to the MMM community. I would like ask for your opinion in regards to our plan to not max out 401k.

Here are some backgrounds.
1) We are double income family with 2 kids that requires a good expense in private school/after school care.
2) Our income hits 25% bracket (or 28%?? not sure).
3) Currently expense is just basic expense with no mortgage. So we are able to max out 401k, Roth IRA and still some extra money for saving.
4) We have 75% in 401k and 25% in Roth IRA. Feel too heavy on 401k. We have about 40-50k as emergency fund. Basically we don't have extra cash on hand for stock market or real estate investment for now.

So we would like to save more cash on hand, waiting for stock market downtown to buy. So we were thinking about reducing contribution in 401k, but still max out Roth IRA and put remaining money aside.

Given our tax bracket, does this make any?

Also, what is your recommendation in terms of proportion between 401k, Roth IRA and taxable investment?

Thanks!

[Frankies Girl]

Hi all,

I am new to the MMM community. I would like ask for your opinion in regards to our plan to not max out 401k.

Here are some backgrounds.
1) We are double income family with 2 kids that requires a good expense in private school/after school care.
2) Our income hits 25% bracket (or 28%?? not sure).
3) Currently expense is just basic expense with no mortgage. So we are able to max out 401k, Roth IRA and still some extra money for saving.
4) We have 75% in 401k and 25% in Roth IRA. Feel too heavy on 401k. We have about 40-50k as emergency fund. Basically we don't have extra cash on hand for stock market or real estate investment for now.

So we would like to save more cash on hand, waiting for stock market downtown to buy. So we were thinking about reducing contribution in 401k, but still max out Roth IRA and put remaining money aside.

Given our tax bracket, does this make any?

Also, what is your recommendation in terms of proportion between 401k, Roth IRA and taxable investment?

Thanks!

No, it does not make sense - at least to me.

Maxing your 401K means two things - you reduce your taxable income, and are saving/investing money that is tax deferred. If you have the opportunity to max them without eating too far into your other obligations, it seems foolish to me not to max those out ASAP.

You are also trying to time the market but "waiting for stock market downtown to buy" this is almost universally wrong to try to do since NO ONE can accurately predict what the market will do. You are much better served by investing your money in regular intervals by dollar cost averaging. As long as you're looking at a buy and hold long-term, the ups and downs even out. You can't be looking at daily and monthly or even yearly downturns since those don't mean much in a 20-30 year investor's portfolio. The thing that WILL make a difference is how long you're actually in.

And wow, having 40-50K sitting in a low interest savings account as an emergency fund seems wasteful. I'd probably take a good look at moving some of that over to something. If you have access to your investment accounts, and credit, I personally wouldn't hold more than $10K in a plain old savings for emergency funds.

If you both maxed your 401Ks, then there is a possibility that you'd drop to a lower tax bracket (woot!), and you'd be saving a great amount of money that will be growing tax-deferred for you. THEN I'd max both Roths, and whatever is left over would go into the taxable account.

And just so I cover this part too... you can access retirement accounts before you're old. There's several different ways to funnel the 401K/IRA money with low or no-tax options. It's not locked in until you're 59.5.

Have you read jlcollins' stock series? It sounds like you might be where I was last year - stock market was kind of scary and investing made me pretty nervous... might want to give it a read. It definitely helped me figure stuff out.
http://jlcollinsnh.com/stock-series/

And also MMM's take in a nutshell:
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

The more you learn, the less scary all of this will seem.

[atlantic61]

I would tend to agree with most of what Frankies Girl says.

However, what kind of investment options does your 401 have? My company uses Fidelity, but there are only 2 index funds available, one for the S&P 500 and one for bonds, with the rest being managed funds. Alas many other 401s are in the same boat. So unless you have some great choices there and, of course, you have maxed out whatever matching your company offers, I would go for the Roth, which has so many good things associated with it.

First, all of your own contributions are available to be withdrawn at any time tax free. While this would probably not be your first choice for emergency funds, it is there. And there are no required minimum distributions; you can keep funding it as long as you are working; and best of all, everything is tax free.

So assuming run of mill 401, my preference would be:
1. 401 up to match
2. roth up to max contributions
3. 401 up to max allowed
4. money to taxable investments

I would agree your emergency fund is awfully high, if you use the 3-6 month rule of living expenses. I would take whatever amount of money you feel comfortable taking from that and use it to fund the above rankings, or, at worst, use it in less risky investments like a CD.

[ender]

If you are still in the 28% bracket as a couple with 2 kids, you've got to be grossing close to 180k a year, right?

[WillPen]

This is a good post and something I have been contemplating as well -- Can we (or should we) max out our annual 401k contributions? The alternative being having more to invest in our taxable account, which we can access much more easily for down payments on a new home or whatever.

[avonlea]

Given our tax bracket, does this make any?

What tax bracket do you plan to be in when you retire?  I think it makes sense to use investment dollars outside of tax-deferred employer retirement plans if, in the future, you'll remain in the same tax bracket as the one you are in now.  Based on what you've said, it doesn't sound like that will be your situation.