Author Topic: 401K Contribution Conundrum  (Read 2650 times)

FrugalBuff

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401K Contribution Conundrum
« on: October 17, 2017, 06:25:20 PM »
Hello all,

I am 31 years from being able to draw income from my 401k and I have $150k in my account. Without contributing anything more, I could end up with more the $1M in that account before 59 and 1/2. I have a new employer that will contribute $38k per year to my 401k without me contributing anything. At the moment I have $22k in student loan debt at 3-4% interest, and only 2 months of expenses in my emergency fund. Should I continue to contribute to my 401k? Or should I use more of my pay for after tax investing that I can access before 60? Obviously my first priority is to top off my emergency savings. Certainly I will end up with the highest net worth if I contribute the IRS max, but I feel like I'll end up working until I'm 59.5 before I enjoy any retirement income. I know about the Roth conversion ladder, but I've heard that some people are interested in passing legislation to prevent early withdrawals using that method.

Thanks for your insight!


 
« Last Edit: October 17, 2017, 06:48:03 PM by FrugalBuff »

RecoveringCarClown

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Re: 401K Contribution Conundrum
« Reply #1 on: October 17, 2017, 06:39:42 PM »
Well, first off it is 59.5 to withdraw penalty free.  Whether the Roth conversion will remain is debatable, but why not practice optimism here?

FrugalBuff

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Re: 401K Contribution Conundrum
« Reply #2 on: October 17, 2017, 06:46:23 PM »
You're right about 59 1/2. I don't know what I was thinking.

It seems like depending on the conversion ladder, being out of the workforce for 15 years, and having it go away would be disastrous. That's why I don't practice optimism in this case.

slugsworth

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Re: 401K Contribution Conundrum
« Reply #3 on: October 17, 2017, 07:05:21 PM »
Umm penalty is a word people don't like, but paying the penalty is still better than not using a tax deferred account. Mad fientist ran the numbers - here is a link

http://www.madfientist.com/how-to-access-retirement-funds-early/

This should remove one option from your list.

chasesfish

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Re: 401K Contribution Conundrum
« Reply #4 on: October 17, 2017, 07:09:54 PM »
Its going to be okay....I'd recommend contributing some to the new 401k and knocking at your student loans.

You'll probably make more in the future too.

aceyou

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Re: 401K Contribution Conundrum
« Reply #5 on: October 17, 2017, 07:16:56 PM »
Welcome FrugalBuff. 

Yup, you are in a fantastic situation.  Bad things can happen, but RecoveringCarClown is right, you have too many reasons for optimism to be worried about this.  A few options you have:

- Roth conversion, which you already know about.
- pay the penalty..many worse things could happen.
- 72T distributions.  The Millionaire Educator, and many others do this.   

Also, even if bad things do happen legislation wise, there's still time and flexibility on our sides.  Things don't just happen all at once over night.  There would be time to prepare and make adjustments.  And there will always be new opportunities in the future that we don't even know about yet, because they don't even exist yet.  Or new laws that benefit us in other ways. 

This website isn't mainly about getting rich.  It's about understanding that by being frugal and building a stashe and always learning and by participating in an intelligent community, we'll always be ready for life's curves. 

And for what it's worth, my wife and I are putting 72,000/year into tax deferred accounts each year.  We will absolutely be retired before age 50 and are not nervous one bit about accessing our money at that time.  If something weird happens, we'll figure it out a way to be on a beach sipping a cool drink together :)

Classical_Liberal

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Re: 401K Contribution Conundrum
« Reply #6 on: October 18, 2017, 12:51:25 AM »
One of the most important pieces of info here is... what's your current tax rate?  If it's 25% or above the answer is a nobrainer, max it out.  Less than 25% and we have something to talk about.

DS

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pecunia

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Re: 401K Contribution Conundrum
« Reply #8 on: October 18, 2017, 07:38:23 PM »
I had an NDSL loan when I went to school lotsa years ago.  Interest rate was 3 % or so.

I just wonder if you make more than the loan interest rate in the 401K, it might be better to pay the minimum on the loan and dump the rest into the long term savings.  Those long term savings will accrue over the 31 years and be making you money after your loan is paid off.  There will be inflation.  The loan will not rise with inflation over the years, but there is a chance that the return on the 401K may take a bump with the inflation as whomever you have this invested with should work to make you money even in inflationary times.

But,......if the bankers soak you with a high interest rate on your student loan, pay it off.

 

Wow, a phone plan for fifteen bucks!