Author Topic: High Employer Contribution to 401k  (Read 5381 times)

icebox92

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High Employer Contribution to 401k
« on: June 24, 2015, 10:28:54 AM »
Hi all!  This is my first post on the forum.  I have recently found and subsequently become addicted to MMM.  I have done some research on this forum looking for an answer to my question, but I can't find anything that specifically addresses my situation.  I apologize in advance if I missed a thread containing this info.

Here's my situation (its not really a case study - I don't think, if it is, let me know and I will provide the required info).

The DH and I are putting a plan together to retire in 6 years.  Our plan is to have enough cash in 6 years point to pay off the remaining balances on our two mortgages (duplexes), both of which are / will be used as rental properties,  and pay cash for our retirement house thus retiring mortgage free.  The rental income from the two duplexes will generate our yearly income.  Our safety margin will be our 401k from our current employer.

In order to make the above happen, we need to have $780,000 cash at the time we retire to pay off / buy the mortgages.  We are saving / spending at a rate which will allow us to do this ($280K currently in 401k, with $55k annual additions and additional $46K a year to a taxable investment account).  Then, I looked into the timing and disbursements into our ROTH IRA.  Essentially I don't want to pay a high tax now and start converting our 401k to our ROTH so we can withdraw the disbursements from the ROTH in 5 years, I want to wait to do that until we are in a lower tax bracket (we also can't do this rollover our plan until we leave the company, so its not even an option at this point).  However we need the cash at retirement to pay off the mortgages and our current contributions to the after tax investment account will not provide the required cash alone. 

So here is my main question:  We can stop contributing to our 401k's and just to a taxable account now.  I hate giving up the before tax savings though (our tax bracket is currently 25%).  That being said, our company (DH and I work for the same one) contributes 15% to our 401k.  This is not a match.  So if we put nothing into our 401k they will still contribute the 15%.  Yes I know that is insane good, but its true. With the company still putting away the 15% is that justification to give up the tax break and put everything into after tax investment accounts so that we have the cash readily available at retirement to pay off the mortgages / future home? 


MDM

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Re: High Employer Contribution to 401k
« Reply #1 on: June 24, 2015, 11:19:53 AM »
icebox92, welcome to the forum.

What about not paying the mortgages immediately on retirement, but instead putting that cash toward living expenses while you start converting your 401k/IRA to Roths?  You can pay the mortgage sometime later.

icebox92

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Re: High Employer Contribution to 401k
« Reply #2 on: June 24, 2015, 01:09:30 PM »
icebox92, welcome to the forum.

What about not paying the mortgages immediately on retirement, but instead putting that cash toward living expenses while you start converting your 401k/IRA to Roths?  You can pay the mortgage sometime later.

Hi MDM... well the reasoning is that the DH is much more conservative and at the moment is not willing to take the leap and quit unless we have no debt to service.  I can work on him to see the light and that it is more than possible to do what you state above, but right now that's not an options he is willing to entertain. 

MDM

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Re: High Employer Contribution to 401k
« Reply #3 on: June 24, 2015, 01:19:35 PM »
...we need to have $780,000 cash at the time we retire to pay off / buy the mortgages. 

We are saving / spending at a rate which will allow us to do this ($280K currently in 401k, with $55k annual additions and additional $46K a year to a taxable investment account). 

Rereading the OP, I don't understand - are you aiming for $780K in cash?  Or $780K in investments you plan to convert to cash at that time?

Jeremy E.

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Re: High Employer Contribution to 401k
« Reply #4 on: June 24, 2015, 01:24:12 PM »
You could start paying down the mortgages now instead of putting money in taxable accounts, maybe if they were almost paid off he would feel more comfortable. I don't know any ways to take out a large lump sum from a 401k without being taxed out the @$$. The best solution I can think of is convincing your husband to be less conservative, and just keep making payments on the houses. I think this is a much better choice compared to giving up tax savings now or taking a huge tax hit later.

Jeremy E.

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Re: High Employer Contribution to 401k
« Reply #5 on: June 24, 2015, 01:24:49 PM »
...we need to have $780,000 cash at the time we retire to pay off / buy the mortgages. 

We are saving / spending at a rate which will allow us to do this ($280K currently in 401k, with $55k annual additions and additional $46K a year to a taxable investment account). 

Rereading the OP, I don't understand - are you aiming for $780K in cash?  Or $780K in investments you plan to convert to cash at that time?
my understanding is that the OP needs 780k to pay off mortgages

icebox92

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Re: High Employer Contribution to 401k
« Reply #6 on: June 24, 2015, 01:33:56 PM »
...we need to have $780,000 cash at the time we retire to pay off / buy the mortgages. 

We are saving / spending at a rate which will allow us to do this ($280K currently in 401k, with $55k annual additions and additional $46K a year to a taxable investment account). 

Rereading the OP, I don't understand - are you aiming for $780K in cash?  Or $780K in investments you plan to convert to cash at that time?

$780K in investments that can convert into cash at retirement...

NathanP

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Re: High Employer Contribution to 401k
« Reply #7 on: June 24, 2015, 01:48:07 PM »
Just pay down the mortgage instead of investing in taxable accounts. Then, in retirement you can cover your living expenses and the (now smaller) mortgage via Roth conversions. Obviously you don't want to convert the full $780k in a single tax year...

I would continue to max the 401k contributions since you are in the 25% bracket.

icebox92

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Re: High Employer Contribution to 401k
« Reply #8 on: June 24, 2015, 01:56:05 PM »
Just pay down the mortgage instead of investing in taxable accounts. Then, in retirement you can cover your living expenses and the (now smaller) mortgage via Roth conversions. Obviously you don't want to convert the full $780k in a single tax year...

I would continue to max the 401k contributions since you are in the 25% bracket.

If we just pay down the mortgage retirement would be further out time wise because we wouldn't be capturing the interest we could earn on the investment.  Our mortgage rates are quite a bit lower than what we could earn via the investment and compounding interest.

MDM

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Re: High Employer Contribution to 401k
« Reply #9 on: June 24, 2015, 02:09:49 PM »
If we just pay down the mortgage retirement would be further out time wise because we wouldn't be capturing the interest we could earn on the investment.  Our mortgage rates are quite a bit lower than what we could earn via the investment and compounding interest.

You've got it.

I thought you were accumulating cash (e.g., in a savings account).  What you are doing looks fine, and you can avoid arguing because you've already won.  Assuming, that is, when it comes retirement time that DH will balk at the huge tax bill a lump sum withdrawal will cause, and consent to gradual withdrawals instead.

icebox92

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Re: High Employer Contribution to 401k
« Reply #10 on: June 24, 2015, 02:32:24 PM »
If we just pay down the mortgage retirement would be further out time wise because we wouldn't be capturing the interest we could earn on the investment.  Our mortgage rates are quite a bit lower than what we could earn via the investment and compounding interest.

You've got it.

I thought you were accumulating cash (e.g., in a savings account).  What you are doing looks fine, and you can avoid arguing because you've already won.  Assuming, that is, when it comes retirement time that DH will balk at the huge tax bill a lump sum withdrawal will cause, and consent to gradual withdrawals instead.

MDM - I hope I didn't come across as argumentative, if I did, I apologize. 

So from the above, are you stating your advice would be to continue to contribute to the 401k to achieve the tax break? Or cut all out contributions to the 401k's, let the company continue to contribute, and take all remaining after tax cash to the taxable investment accounts and give up the tax break we earn by maxing out the 401k's? 

CmFtns

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Re: High Employer Contribution to 401k
« Reply #11 on: June 24, 2015, 02:34:52 PM »
Assuming your mortgages are not high interest rate

Why don't you save money in investment accounts and max out all your retirement accounts with that 780k you were going to save to pay off mortgages.

Then when you retire move into your retirement house.
Pay the mortgage there with returns on the money in all your investment accounts using a conservative withdraw rate from your retirement accounts. If you have 780k in investments 4% would give you $31,200 per year for your expenses.

On to the duplexes... Unless they have large spans of vacancy their rent should cover the mortgages on those properties as well as provide positive cash flow. so you can add this cashflow, however big it is, to suplement the $31,200 above.

« Last Edit: June 24, 2015, 02:36:36 PM by comfyfutons »

icebox92

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Re: High Employer Contribution to 401k
« Reply #12 on: June 24, 2015, 02:38:11 PM »
Why don't you save money in investment accounts and max out all your retirement accounts with that 780k you were going to save to pay off mortgages.

Then when you retire move into your retirement house.
Pay the mortgage there with returns on the money in all your investment accounts using a conservative withdraw rate from your retirement accounts. If you have 780k in investments 4% would give you $31,200 per year for your expenses.

On to the duplexes... Unless they have large spans of vacancy their rent should cover the mortgages on those properties as well as provide positive cash flow. so you can add this cashflow, however big it is, to suplement the $31,200 above.

DH won't entertain retirement unless we have no debt.  Thus why the mortgages have to go.  The investment account will serve as our safety net.

CmFtns

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Re: High Employer Contribution to 401k
« Reply #13 on: June 24, 2015, 02:46:42 PM »
DH won't entertain retirement unless we have no debt.  Thus why the mortgages have to go.  The investment account will serve as our safety net.

I can not think of a tax efficient way to pay off the mortgages by the time you want to retire...You will be hit very hard by taxes if you take all that out of your 401k at once when you retire. You will also be hit very hard with taxes if you don't contribute to your 401k and all that money is taxed at 25%.

The effect of these taxes will be more than the interest you would accrue on the mortgages by paying them off slowly over time. Especially because the retirement accounts over long periods of time(which mortgages are) will grow faster than a mortgage at 4% or so.

Would he consider retirement with mortgages if you had retirement account assets far exceeding the value left on the morgages

Jeremy E.

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Re: High Employer Contribution to 401k
« Reply #14 on: June 24, 2015, 02:47:27 PM »
Just pay down the mortgage instead of investing in taxable accounts. Then, in retirement you can cover your living expenses and the (now smaller) mortgage via Roth conversions. Obviously you don't want to convert the full $780k in a single tax year...

I would continue to max the 401k contributions since you are in the 25% bracket.

If we just pay down the mortgage retirement would be further out time wise because we wouldn't be capturing the interest we could earn on the investment.  Our mortgage rates are quite a bit lower than what we could earn via the investment and compounding interest.
So you don't want to pay down your mortgage because the returns the stock market gives you are better than the low interest.... But your post is about paying off your mortgage.... It's obvious that what you need to do is make minimum payments for the duration of the mortgage, work an extra 6 months to be more conservative for your husband, and don't worry about paying the mortgages off early.

CmFtns

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Re: High Employer Contribution to 401k
« Reply #15 on: June 24, 2015, 02:51:12 PM »
A mortgage is debt but it is not high interest debt. Consider this: mortgage rates are around 4% right now and historical inflation average is around 3.2 so 4-3.2=.8% so that mortgage value is not even increasing much more than inflation

CmFtns

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Re: High Employer Contribution to 401k
« Reply #16 on: June 24, 2015, 02:57:20 PM »
Just pay down the mortgage instead of investing in taxable accounts. Then, in retirement you can cover your living expenses and the (now smaller) mortgage via Roth conversions. Obviously you don't want to convert the full $780k in a single tax year...

I would continue to max the 401k contributions since you are in the 25% bracket.

If we just pay down the mortgage retirement would be further out time wise because we wouldn't be capturing the interest we could earn on the investment.  Our mortgage rates are quite a bit lower than what we could earn via the investment and compounding interest.
So you don't want to pay down your mortgage because the returns the stock market gives you are better than the low interest.... But your post is about paying off your mortgage.... It's obvious that what you need to do is make minimum payments for the duration of the mortgage, work an extra 6 months to be more conservative for your husband, and don't worry about paying the mortgages off early.

The logic applied here applies to after you retire as well...

If you believe delaying extra payments on mortgages is beneficial because the market will give higher returns than mortgage interest then apply the same logic to your lives after retirement...

seattlecyclone

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Re: High Employer Contribution to 401k
« Reply #17 on: June 24, 2015, 03:04:04 PM »
Keep contributing to the 401(k). Since you plan to get your retirement income from your rental property and the 401(k) is a backup, there's no reason to do Roth conversions before you retire. Remember, if things go well you won't need any of that money at all! If something happens with the rentals during the first five years of retirement, a 10% early withdrawal penalty probably won't kill you. By doing this you may even come out ahead by paying (post-retirement marginal rate + 10%) than you would by paying (pre-retirement marginal rate) if you made the conversions now. Start the Roth conversions once you're no longer working and your tax rate is lower.

You have six years to work on your husband. Debt doesn't have to be scary if you have plenty of resources to manage it! I think increasing your mortgage payments now might be better than planning to sell $700k worth of stock all at once to pay off the mortgages. While investments do tend to perform better than mortgage payments, the capital gains tax you'll pay on such a large transaction will narrow the gap significantly. If, on the other hand, you can convince the husband that it's all right to liquidate the taxable account up to the top of the 0% bracket during the first few years of retirement rather than selling all your stock at once, that might be an even better plan.

madamwitty

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Re: High Employer Contribution to 401k
« Reply #18 on: June 24, 2015, 06:01:52 PM »
I agree with seattlecyclone. How long has it been since you first broached the topic of RE with your DH? It may be that all he needs is time to get used to the idea.

MDM

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Re: High Employer Contribution to 401k
« Reply #19 on: June 24, 2015, 07:14:39 PM »
MDM - I hope I didn't come across as argumentative, if I did, I apologize. 

So from the above, are you stating your advice would be to continue to contribute to the 401k to achieve the tax break? Or cut all out contributions to the 401k's, let the company continue to contribute, and take all remaining after tax cash to the taxable investment accounts and give up the tax break we earn by maxing out the 401k's?

LOL!  No, not argumentative here - I was referring to your discussions with your own DH. :)

Keep doing the 401k, and any other tax-advantaged thing you can do.

jbfishing

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Re: High Employer Contribution to 401k
« Reply #20 on: June 24, 2015, 07:40:13 PM »
Have you considered selling one or both rentalls to pay off mortgages?  Can invest any remaining and then save for retirement instead of saving to pay off mortgages.

icebox92

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Re: High Employer Contribution to 401k
« Reply #21 on: June 25, 2015, 11:40:04 AM »
Thank you everyone for your responses...  I think it comes down to what MDM and seattlescyclone mention...  I need to work on the hubs and get him to see that retaining the rental mortgages isn't actually a bad thing.  Might take some work, but its doable.  Thanks again for all the input!