Author Topic: When to slow solo 401k contributions down?  (Read 584 times)

protostache

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When to slow solo 401k contributions down?
« on: March 15, 2017, 02:45:05 PM »
This is almost a "401k vs taxable" post with a small twist. I opened a solo 401k in 2015 and my wife and I have contributed a little over $70k to date, in addition to money I rolled in from previous employer 401ks. cfiresim puts us at 100% success rate for a $60k spend at 70 years old. The way our wages are currently set we can contribute up to an additional $44k this year. We don't have a FIRE target, per se, but I definitely want to be done by the time I'm 50 in 2034.

At what point do we slow down the contributions in favor of taxable investing? My biggest concern is RMDs on the pre-tax funds. I know there's lots of ways around this right now, but my assumptions skew conservatively toward the Roth ladder becoming infeasible at some point in the future.

One complicating unknowable is what is happening right now with Obamacare. If we assume that Congress passes AHCA I may have to switch to W2 for my primary income source in order to have group coverage, which would force my decision.

boarder42

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Re: When to slow solo 401k contributions down?
« Reply #1 on: March 15, 2017, 02:52:43 PM »
even if the roth ladder is unfeasible Mad Fientist has research that proves why even doing trad and paying the penalty is better than taxable.

http://www.madfientist.com/how-to-access-retirement-funds-early/#ck_modal2
PM me about how to save 6% on your annual grocery Bill!

There is a 35k starwood bonus right now as well. PM me for the info.

TheAnonOne

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Re: When to slow solo 401k contributions down?
« Reply #2 on: March 15, 2017, 02:55:09 PM »
You are getting more money invested now, today, because you are not paying taxes on it.

People always assume 100k invested today taxable vs 100k 401k

When in reality, maxing my 401k saves me about 6k in taxes per person. That's 12k a year more investing, and that extra 12k ends up in my taxable.

So the answer for some is NEVER.

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MDM

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Re: When to slow solo 401k contributions down?
« Reply #3 on: March 15, 2017, 10:30:32 PM »
At what point do we slow down the contributions in favor of taxable investing?
Aside from health insurance issues, "never" is probably the best answer.

If you were to ask at what point to change from a solo 401k to a solo Roth 401k, that would be when your "guaranteed" (however you wish to define it) retirement income puts your marginal withdrawal tax rate up to the marginal tax saving rate you get from a traditional 401k now.

trollwithamustache

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Re: When to slow solo 401k contributions down?
« Reply #4 on: March 17, 2017, 11:41:42 AM »


This troll has a physical aversion to paying penalties so 401k money can't  come out until age 59.5  My method was to calculate a number for the 'stache in retirement accounts by age 40, with my assumed growth rate the 'Stach would support the assumed withdrawal rate if I retire at age 60. Once that number was hit in retirement accounts, I still added a bit, but after tax savings became more important and that savings creeps the fully FI date to lower ages.  Depending on house pay off dates ect, one may need a future cash flow/spend model that is more complicated than just a continuation of current spend with an inflation adjustment.

As for some of the other issues mentioned, I personally max out my HSA every year but do not count it in my projections. I have no idea how to accurately predict future health care costs, so this is a safety factor that makes me happy. (and may or may not be an accurate assumption)

MDM

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Re: When to slow solo 401k contributions down?
« Reply #5 on: March 17, 2017, 11:56:19 AM »
This troll has a physical aversion to paying penalties so 401k money can't  come out until age 59.5
It appears How to withdraw funds from your IRA and 401k without penalty before age 59.5 might be worthwhile.

protostache

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Re: When to slow solo 401k contributions down?
« Reply #6 on: March 17, 2017, 12:10:33 PM »


This troll has a physical aversion to paying penalties so 401k money can't  come out until age 59.5  My method was to calculate a number for the 'stache in retirement accounts by age 40, with my assumed growth rate the 'Stach would support the assumed withdrawal rate if I retire at age 60. Once that number was hit in retirement accounts, I still added a bit, but after tax savings became more important and that savings creeps the fully FI date to lower ages.  Depending on house pay off dates ect, one may need a future cash flow/spend model that is more complicated than just a continuation of current spend with an inflation adjustment.

As for some of the other issues mentioned, I personally max out my HSA every year but do not count it in my projections. I have no idea how to accurately predict future health care costs, so this is a safety factor that makes me happy. (and may or may not be an accurate assumption)

That's an interesting way to look at it. Assuming we max this year we're at 89% success on cfiresim for retiring at 60. Intuitively, a mix of tax buckets is better than one big tax bucket. Then again, our planned withdrawal amount is well within the 15% federal bracket and we're currently almost at the the top of the 25% bracket if we count the 401k deductions.

We're also maxing our HSA this year but again I don't know how long that will last if I switch to W2.

Cornel_Westside

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Re: When to slow solo 401k contributions down?
« Reply #7 on: March 17, 2017, 12:28:15 PM »
I'm not sure why you are concerned about the Roth ladder. We are pretty rare and not many people are taking advantage of this program to retire early. The people who do use it are older voters and widely feared. I don't see it being a priority for Congress ever. That said, I can't predict the future.

But even then, you can take SEPP which is much more inflexible, but does get your money out without paying the penalty. If you have some money in a Roth IRA for extra flexibility, a SEPP should be enough.

trollwithamustache

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Re: When to slow solo 401k contributions down?
« Reply #8 on: March 17, 2017, 03:26:02 PM »


This troll has a physical aversion to paying penalties so 401k money can't  come out until age 59.5  My method was to calculate a number for the 'stache in retirement accounts by age 40, with my assumed growth rate the 'Stach would support the assumed withdrawal rate if I retire at age 60. Once that number was hit in retirement accounts, I still added a bit, but after tax savings became more important and that savings creeps the fully FI date to lower ages.  Depending on house pay off dates ect, one may need a future cash flow/spend model that is more complicated than just a continuation of current spend with an inflation adjustment.

As for some of the other issues mentioned, I personally max out my HSA every year but do not count it in my projections. I have no idea how to accurately predict future health care costs, so this is a safety factor that makes me happy. (and may or may not be an accurate assumption)

That's an interesting way to look at it. Assuming we max this year we're at 89% success on cfiresim for retiring at 60. Intuitively, a mix of tax buckets is better than one big tax bucket. Then again, our planned withdrawal amount is well within the 15% federal bracket and we're currently almost at the the top of the 25% bracket if we count the 401k deductions.

We're also maxing our HSA this year but again I don't know how long that will last if I switch to W2.

how close are you to FI? It sounds like you may just keep slamming away at the 401k.

I like the Roth Ladder idea but I have always (incorrectly?) viewed it as an optimization for later since I don't want to take more income in the next few years at my current marginal tax rate.  It seems like if you can retire at 40, its a way to ladder $$ out for years  say 50 to 60. Or, if you semi retire to a cash side gig you can artificially lower your taxable income and the conversions take place at a much lower marginal tax rate.

If that's the case, I still want my magic number in 401k ect for age 60 on, and then would look to keep adding for the second half of Pre-age 60 ER.  It sounds like you still need plenty of post tax savings to pay the taxes/finance things while your ladders are working their way out. 


LAGuy

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Re: When to slow solo 401k contributions down?
« Reply #9 on: March 17, 2017, 06:39:32 PM »
The way I've looked at this is to target a separate aggressive withdrawal rate for my IRA (401k consolidation fund). The idea is to always be drawing something from your IRA with hopefully the last dollar coming out the day you die. That way you can take advantage of the progressive tax rates for many years. For myself, I've targeted a 6% withdrawal rate (note that's not my FIRE withdrawal rate just the IRA withdrawal/Roth rollover rate). Assuming you're in at least the 25% bracket right now, and you're targeting the 15% tax rate for your withdrawals as you've mentioned, that would come to a 401k balance of around $800,000 based on current tax rates. Anything over that and you'll probably be needing to pull your IRA funds out into the 25% tax bracket. Still, that's not the end of the world since avoiding paying 25% now and paying 25% later still allows the balance to grow tax free until you begin withdrawals. When you add in the fact that you're probably also paying state income taxes now (that you can shelter in your 401k as well) that you should be able to avoid later by moving, it's pretty much a slam dunk to be always maxing your 401k if you have the option. But if you're thinking you need to get some money into your taxable accounts and the 401k is pretty much taking every last dollar you can otherwise save, I feel that $800,000 number is probably around the point where it starts to become a wash for 401k vs taxable (for the tax brackets listed in the example here).

Edit: sorry, forgot the part where you're married. So double the numbers. $1.6M for a married couple is your break even point.
« Last Edit: March 17, 2017, 06:41:18 PM by LAGuy »