Author Topic: 401k question  (Read 3230 times)

unseenstache

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401k question
« on: July 11, 2014, 12:25:13 PM »
Hello,

I currently have no debt out side of a 144k mortgage on 170k home.  Our household savings rate is  roughly 33% per month.  About $1500.   I work for an employee owned company that has been consistently profitable for 50 + years.  My job is very steady and I am early into my working career.  30 Y/O...been here 5 years.   Because it is employee owned, we received company stock essentially, which is more or less a free 401k.  Its an ESOP company.  If i leave this alone it should, based on past performance, last 20 years of historical data, dramatically outperform savings I can do in my own 401k, even at max.  Realistically leaving me with more than enough in retirement.

I currently contribute 6% to 401k with no employee match.  My question is...is it  really worth it for me to up my contribution and max my 401k.  My thinking is that over 59 1/2 I will be all set.  And I want to retire early.  At age 50.   Essentially I need investments to bridge that gap.   

I am thinking the best thing for me to do is to Max Roth IRA in Vanguard every year for myself and my wife.  Then pay down the mortgage early with extra savings.  And finally invest in Vanguard taxable index funds.   Does this seem correct?   

matchewed

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Re: 401k question
« Reply #1 on: July 11, 2014, 12:34:22 PM »
You need to compare the rate of your mortgage against an assumed return of investment in the 401k. During this comparison you have to consider the tax savings of a 401k and the fees of the 401k.

ESOP money gets rolled into similar tax treatment accounts when you leave or cash out an ESOP. That means it goes to a traditional IRA typically which is subject to the same 59.5 age rule you already know about. So it is no better or worse than the 401k. You may not need other investments to bridge a 9.5 year gap.

Relevant links to read.

http://www.madfientist.com/retire-even-earlier/
http://jlcollinsnh.com/stock-series/
http://www.bogleheads.org/wiki/Investment_Policy_Statement
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

PloddingInsight

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Re: 401k question
« Reply #2 on: July 11, 2014, 12:39:53 PM »
How much of your investments are company stock?  Are you allowed to divest?  Owning a lot of stock in the company you work for is a huge risk that should be avoided if possible.

Other than that you plans sound ok to me.

Don't worry too much about withdrawing early from the 401k, though.  Remember if you are retired you do not have income.  So after the 10% penalty, if you are only withdrawing enough to live on each year and your lifestyle is mustachian, you probably would not pay a lot of income taxes.  10% plus a tiny amount of income taxes is probably better than paying income tax now plus capital gains taxes on several years' worth of investments in a taxable account.

matchewed

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Re: 401k question
« Reply #3 on: July 11, 2014, 12:42:44 PM »
How much of your investments are company stock?  Are you allowed to divest?  Owning a lot of stock in the company you work for is a huge risk that should be avoided if possible.

Other than that you plans sound ok to me.

Don't worry too much about withdrawing early from the 401k, though.  Remember if you are retired you do not have income.  So after the 10% penalty, if you are only withdrawing enough to live on each year and your lifestyle is mustachian, you probably would not pay a lot of income taxes.  10% plus a tiny amount of income taxes is probably better than paying income tax now plus capital gains taxes on several years' worth of investments in a taxable account.

From my experience you cannot divest an ESOP. They're usually retirement vehicles. I haven't looked into them for a long time though.

unseenstache

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Re: 401k question
« Reply #4 on: July 11, 2014, 12:45:23 PM »
The plan is split 50/50 between company stock and outside investments.  So it is at least slightly diversified.  I do understand the risk of having 50% in company stock.  But, at least, there is a lot of historical data of solid returns and 50+ of year over year profitability. 

I believe I understand what you are both saying.  Especially if I used the 401k to Roth conversion year over year to generate a pipeline as MMM points out in his post. 

To the divestment question, I could essentially early withdraw a percentage every few years if I wanted, and roll that into my 401k tax free with no penalty.  So I assume that means I could divest to some degree.   

Thank you for your input! 

« Last Edit: July 11, 2014, 12:47:09 PM by jeffunseen »

RiskDown

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Re: 401k question
« Reply #5 on: July 11, 2014, 01:40:30 PM »
Remember to calculate tax avoidance when making this decision.  From my experience, when you calculate it in, it makes maxing out a 401k a better move, in most situations, over most competing options.

kkbmustang

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Re: 401k question
« Reply #6 on: July 11, 2014, 01:48:11 PM »

...

To the divestment question, I could essentially early withdraw a percentage every few years if I wanted, and roll that into my 401k tax free with no penalty.  So I assume that means I could divest to some degree.   

Thank you for your input!

Yes, you can. It is called the Diversification Right (and, correspondingly, the diversification election). See here: http://www.butcherjoseph.com/a-refresher-on-the-esop-diversification-requirements,1231/