Fire'd, Spouse works. Invest in 401k or Not.

[soccerluvof4]

I probably should of asked this awhile ago but hindsight is 20/20. Anyhow my question is since I have been fire'd (7 years on April 2) and my DW after a couple years went back to work for Health Insurance and she just likes it I have been back n forth on contributing to 401k.

Here are the reasons I am asking.

We have a NW of Investment of about 2.7 excluding 529's I separate out since its money spent in my book.
Of that I had over 400k in cash and the rest 65/35 Stocks bonds. The cash was accumulated via Real Estate transaction and is now about 370k since most recently I am now withdrawing from my investments but have instead spending my cash down.

No mortgage and with the increase in Real Estate and especially on lake properties I could List my house tomorrow for 1.2M even though it still needs a lot of work. But I would walk away for sure either way with 1M. So for sake of this will say over all net worth.

3.7M (and i know that is more than what one should want to have in their personal property % of NW but it wasn't that High when i bought it just 3 years ago in a month.)


So we budget 120k a year or 10k a month and of that My DW makes about 52k a year gross and after taxes, contributing to HSA and 401k she brings home about 3k a month so I was withdrawing 7k a month from my investments but now coming out of my Cash or Cash like investments.

Originally we were maxing out her 401k because of the 5% match and then I changed it to put in enough just to get the match and get the max to live on as opposed to withdrawing.

My question is simply is it really worth investing anything into her 401k and instead just using anything after contributing to HSA towards our Cost of Living along with taking down our cash to avoid withdrawing sooner? I am not looking for anything else than that and why the cash and so on as if there is a correction like we had a year ago March of course I will invest more into the market and I understand Cash drag and so on.

So simply is it really worth contributing anything into her 401k at this point or to withdraw even less or I should say put off longer withdraws. I am thinking in doing so my taxes will be extremely low if the next 3 years + I am not taking any withdraws.

What say you? By the way I am 57 and she is 53 and in a couple years we should have a pretty big drop in our expenses though we want to have the choice of the 120k or not.

Thanks

[Turtle]

There are some questions brought to mind after reading your post.

1.  Is there a Roth 401k option at her employer? 

2.  How much of your current net worth as a couple are in your 401k or hers?  Does she have another 401k from a previous employer, for example.

3.  Are there decent index fund based choices available in her 401k plan?

4.  What do you have in the way of umbrella insurance / liability coverage?  (401k funds have additional lawsuit protections)

[soccerluvof4]

There are some questions brought to mind after reading your post.

1.  Is there a Roth 401k option at her employer? 

2.  How much of your current net worth as a couple are in your 401k or hers?  Does she have another 401k from a previous employer, for example.

3.  Are there decent index fund based choices available in her 401k plan?

4.  What do you have in the way of umbrella insurance / liability coverage?  (401k funds have additional lawsuit protections)

1) Not sure if there is a Roth Option

2) We have  Me 368k from my company, 98k from her past Employer and 70k from Current.

3) yes

4) We have Auto and Home umbrellas

[yachi]

If there is any chance Medicaid is in your future for long term care, you might want to know that Medicaid looks differently at your retirement accounts and your wife's retirement accounts.  If you're looking for a tie breaker, it makes sense to build up accounts in your spouse's name if most of the funds are in your name in order to preserve her funds if yours are needed for long term care.

400K in actual cash sounds like a lot, but if you want it available for real estate investments it could make sense to keep it as cash.  I read it at first as being in an taxable account.

[soccerluvof4]

If there is any chance Medicaid is in your future for long term care, you might want to know that Medicaid looks differently at your retirement accounts and your wife's retirement accounts.  If you're looking for a tie breaker, it makes sense to build up accounts in your spouse's name if most of the funds are in your name in order to preserve her funds if yours are needed for long term care.

400K in actual cash sounds like a lot, but if you want it available for real estate investments it could make sense to keep it as cash.  I read it at first as being in an taxable account.

No its cash and I dont need for real estate going forward which is why I am spending it down to a more sufficient level of cash and or we have a larger correction.

[dandarc]

What's your marginal tax rate? Seems likely it is probably low, maybe even zero, at least until you clear out all that cash over the next few years. If that assumption is correct, and there is a Roth option available, then your wife should max out the Roth 401K - you'd effectively be moving some of that cash into a Roth 401K, which is usually going to be a good move long term.

[JGS1980]

Hi soccerluv,

I think it depends on if there's a 401K employer match and your expected taxes. Did you have to pay any federal taxes in 2020?

This is what I would do:

1. If the employer gives a match ->take it! Certainly take the free money if the employer would give you a 50% match on her contributions (up to whatever limit they set). 50% return is basically unbeatable, right? This can be 401K [if you had to pay federal taxes last year] or Roth 401K [preferred if you didn't have to pay fed taxes last year]

-where your monthly spending money comes from, in my opinion, doesn't really matter. Money is money. What matters is your return on that money.

JGS

[soccerluvof4]

Hi soccerluv,

I think it depends on if there's a 401K employer match and your expected taxes. Did you have to pay any federal taxes in 2020?

This is what I would do:

1. If the employer gives a match ->take it! Certainly take the free money if the employer would give you a 50% match on her contributions (up to whatever limit they set). 50% return is basically unbeatable, right? This can be 401K [if you had to pay federal taxes last year] or Roth 401K [preferred if you didn't have to pay fed taxes last year]

-where your monthly spending money comes from, in my opinion, doesn't really matter. Money is money. What matters is your return on that money.

JGS

What's your marginal tax rate? Seems likely it is probably low, maybe even zero, at least until you clear out all that cash over the next few years. If that assumption is correct, and there is a Roth option available, then your wife should max out the Roth 401K - you'd effectively be moving some of that cash into a Roth 401K, which is usually going to be a good move long term.

I did pay taxes in 2020 but I just started doing this about 6 months ago after talking with someone at vanguard about all the cash I had so this year expect to pay really little or no taxes since I only withdrew about 36k and my DW's Gross is only about 52k. With 3 dependents, 529 contributions etc.. should be pretty low I would expect and next year would be just her Wages.

[JGS1980]

Any 401K match?

[soccerluvof4]

Any 401K match?

5%

[JGS1980]

Any 401K match?

5%

Then it sounds like Roth 401K at least up to the match is an easy win for you both.

[Turtle]

What does your spouse want to do? 

With existing balances being less than half of yours, I'd be inclined to go ahead and put in the full 26K for this year and 27K for next, especially if there's a Roth 401k option at her employer.

Are you both also putting into Roth IRA each year?  Sounds like your taxable income is low enough to do so.