Author Topic: 401K or Investment Account  (Read 1891 times)

NolanCF

  • 5 O'Clock Shadow
  • *
  • Posts: 4
401K or Investment Account
« on: March 11, 2015, 03:29:22 PM »
Since I'm hoping to FIRE in the next 5-7 years (I've been inadvertantly living the MMM lifestyle since I was 18, and just discovered this blog recently), I was wondering if it would be wiser for me to not max out my 401K each year, and to rather put it all into the investment account which is outperforming it and does not penalize me for taking it out in the next 30 years.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 3285
  • Age: 83
  • Location: The laboratory
  • Ghouls Just Wanna Have Funds!
Re: 401K or Investment Account
« Reply #1 on: March 11, 2015, 03:38:39 PM »
Max your 401k to get any match at least, but in general, unless you have horrific high-fee choices, it's a very good idea to hit the full max (18,000 as of 2015) in your tax deferred workplace investment accounts.

This comes up a whole bunch on here - the idea that you have to pay a penalty to access your "retirement" accounts before traditional retirement age (hey, I asked myself when I was new!).

You can access your funds any time before 59.5 without penalty. SEPP and the Roth Pipeline are two common methods.

http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/msg415140/#msg415140

http://forum.mrmoneymustache.com/forum-information-faqs/question-about-retiring-early-with-a-401k/

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

zurich78

  • Stubble
  • **
  • Posts: 180
Re: 401K or Investment Account
« Reply #2 on: March 11, 2015, 09:43:39 PM »
Since I'm hoping to FIRE in the next 5-7 years (I've been inadvertantly living the MMM lifestyle since I was 18, and just discovered this blog recently), I was wondering if it would be wiser for me to not max out my 401K each year, and to rather put it all into the investment account which is outperforming it and does not penalize me for taking it out in the next 30 years.

There are other benefits to doing your 401K.  Lowers taxable income, you can buy/sell as often as you like at no cost (which I like esp for rebalancing my AA), in a worst case scenario, your 401K is protected even in a bankruptcy, and it is tax deferred so you will probably be in a lower tax bracket when you're ready to retire.

humblefi

  • Stubble
  • **
  • Posts: 106
    • Humble FI
Re: 401K or Investment Account
« Reply #3 on: March 12, 2015, 08:14:49 AM »
Without knowing more particulars of your situation, it is hard to advise one way or another. Lets say you have $100 to invest.
+ Pre-tax, $100 into 401K...say in VTSAX.
+ Post tax in your investment account, lets say you will invest $75 into VTSAX (assuming a 25% tax bracket...we do not know if you are in this bracket).

You lost the advantage of $25 extra working for you in your 401K. To fix this difference, you will need an investment vehicle that makes up for the difference && allow you to withdraw money in a few years. You say that your investment account is outperforming your 401K. Can you shed some light on the investments? I ask because....
+ It is possible that your 401K has bad investment choices...high expense ratios, etc etc
+ It is possible that your selection of the funds in your 401K may not be optimal.

So, if you share some of the above details, folks on this forum can help you better.

Hope that helps.