The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: COguy on August 20, 2012, 05:40:51 PM
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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.
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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.
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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.
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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.
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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.
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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.