Author Topic: Load up the 401K???  (Read 3740 times)

COguy

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Load up the 401K???
« on: August 20, 2012, 05:40:51 PM »
I know this subject gets covered over and over on the blogosphere.  But, here goes:

I recently got a promotion and a raise+bonus.  All of my earnings will still be in the 25% bracket (but, I plan to try to stay in the 15%  or whatever low bracket once I save enough, so tax deferral is a good thing).  Up until now, I haven't really made enough to max out my 401k and save some taxable monies as well (what can I say, I like to grow the taxable stash more than the tax-deferred). 

Now, I am thinking of bumping up my contributions to my 401k to make it to the max by the end of the year.  At the beginning of the year I only put in a paltry 10%.  I have since gone up to 20% and am thinking of going even higher for the rest of the year to hit the $17,000 cap, but I will not be saving nearly as much as I would want in taxable space so it is a sort of sacrifice. 

The way it will pan out for the next 4 months for me will be a maxed out 401k contribution+maxed out ESPP and a small amount every 2 weeks to my taxable savings.

So what do you guys think.  Should I just go for the gusto on the 401k and max it out and save less in my taxable space?  Or should I just pay the taxes in the 25% bracket and invest in taxable accounts?

Side note, Just in case somebody asks, I have already maxed my IRA as well.

tannybrown

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Re: Load up the 401K???
« Reply #1 on: August 20, 2012, 10:03:13 PM »
I'd say max the 401k if possible.  Any money put in the 401k is definitely preferable to putting money in a taxable account, even if you can't max out the 401k. 

mindaugas

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Re: Load up the 401K???
« Reply #2 on: August 22, 2012, 09:12:21 AM »
the bigger question is whether you think you will be in a higher tax bracket when you retire. If not then go tax deferred. You can also look into a ROTH 401k if your company offers it. It's not tax deferred, but can have a benefit if you're bracket will go up at retirement.

COguy

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Re: Load up the 401K???
« Reply #3 on: August 22, 2012, 09:36:26 AM »
I doubt I will be above the 15% bracket in retirement.  The way I set it up, I put the max in my Roth each year, providing some tax free income. 

Right now I am in the 25% bracket and I think it is pretty obvious at some time in my future, tax rates will go up.  Even If that is the case and I follow half the mustachian principles in retirement, I think it will be hard to get into what is the 25% bracket today.  Even if taxes go up from the 15% bracket, it doesn't seem like the 15% bracket today will end up becoming a 25%+ bracket in the future.

 Funny how learning to decrease one's dependence on money makes one very heard to tax.

Sounds like I should just suck it up and get the 401k filled and forget about it.  Thanks for the advice.

jrhampt

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Re: Load up the 401K???
« Reply #4 on: August 22, 2012, 12:50:55 PM »
Short answer is yes.  I didn't start investing in a taxable account until after I was maxing out my 401k.  The reason for this is that I do our taxes (married, filing jointly, 28% tax bracket) and was thoroughly impressed by how much maxing out your 401k (especially 2 401ks) can reduce your AGI and thus, your taxes.  My husband has always invested outside his 401k, but we were in a lower tax bracket back then.

COguy

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Re: Load up the 401K???
« Reply #5 on: August 23, 2012, 10:30:19 AM »
No debt involved here.  In fact, I don't think I have ever made an interest payment in my life.  I have been saving 60% of my income and I got a raise recently and it allows me to max my 401k, but because my contributions were lower for the last 8 months it requires me to contribute a large amount to "catch up" which will cause me to only save a couple hundred per pay check outside of retirement accounts which is much lower than I am used to.

But, I am a math guy and if we look at this from a purely mathematical approach, maxing the 401k makes sense.