Author Topic: Too much in pre-tax (401k and IRA) and not enough in after tax  (Read 1524 times)

SpendyMcSpend

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At this point, because of an unexpected sum I received from a former employer, I have about $260,000 in pre-tax savings at age 3 (I had 205,000 but got that sum this month).  I have about $5000 in after tax savings, and a little bit of debt left ($12,000).  I make $130,000 plus bonus per year, and it still makes sense to max out my 401k in my state (high state taxes and relatively high federal taxes).  Or does it?  Should I cut back on the 401k and start aggressively saving after-tax in a brokerage instead?  I know I could do both but my rent is a bit high ($2000 - not high for the area but high for my income).  Help! 
« Last Edit: August 01, 2018, 03:04:32 PM by SpendyMcSpend »

Mgmny

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #1 on: August 01, 2018, 03:18:42 PM »
At this point, because of an unexpected sum I received from a former employer, I have about $260,000 in pre-tax savings at age 3 (I had 205,000 but got that sum this month).

Age 3?

MDM

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #2 on: August 01, 2018, 05:25:07 PM »
At whatever age you are, what do you expect for your marginal tax rate on withdrawals, vs. what you would save by using traditional this year?

Mgmny

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #3 on: August 02, 2018, 05:12:54 AM »
You make enough that your marginal tax bracket is high, and you should have no problem maxing out 401k at 18500 a year. You will only need 5 years of expenses when you RE before you complete a Roth conversion ladder, and based solely on the fact that your rent alone is 2k and you are struggling to put 18500 a year in a 401k on a 130+k salary, I'd say you have a long ways to go from $260k saved to hit your FIRE number.

Sibley

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #4 on: August 02, 2018, 07:50:33 AM »
What Mgmny said. OP, put together a case study, post it, and let us poke holes in your spending. You should have no problem maxing 401k and Roth, and then putting money into taxable.

And I'm 6 now, so welcome 3 year old :) (spent a very long time at 5, 6 is more grown up and just not as fun. Maybe I'll regress.)

jlcnuke

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #5 on: August 02, 2018, 10:04:18 AM »
Without specifics, I'd wager you're better off maxing the 401k as most people are with your income.  As mentioned though, max out your Roth IRA too each year.  However, with such a large employer contribution you need to make sure you're not exceeding your total employer + Employee 401k contribution this year (combined can't exceed $55k for 208 iirc).

SpendyMcSpend

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #6 on: August 02, 2018, 10:53:46 AM »
You make enough that your marginal tax bracket is high, and you should have no problem maxing out 401k at 18500 a year. You will only need 5 years of expenses when you RE before you complete a Roth conversion ladder, and based solely on the fact that your rent alone is 2k and you are struggling to put 18500 a year in a 401k on a 130+k salary, I'd say you have a long ways to go from $260k saved to hit your FIRE number.

I'm not struggling to, I do it every year.  But should I put part of that after-tax instead?  My rent is 2k because the average rent for a one bedroom in my area is $2700 a month.

SpendyMcSpend

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #7 on: August 02, 2018, 10:55:44 AM »
You make enough that your marginal tax bracket is high, and you should have no problem maxing out 401k at 18500 a year. You will only need 5 years of expenses when you RE before you complete a Roth conversion ladder, and based solely on the fact that your rent alone is 2k and you are struggling to put 18500 a year in a 401k on a 130+k salary, I'd say you have a long ways to go from $260k saved to hit your FIRE number.

I'm not struggling to, I do it every year.  But should I put part of that after-tax instead?  My rent is 2k because the average rent for a one bedroom in my area is $2700 a month.

My point is that, I think I have enough in my 401k for my "after 59 1/2" money.  I will not be living in this area after age 45 or so, just while I'm working.

Mgmny

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #8 on: August 02, 2018, 10:58:02 AM »
You make enough that your marginal tax bracket is high, and you should have no problem maxing out 401k at 18500 a year. You will only need 5 years of expenses when you RE before you complete a Roth conversion ladder, and based solely on the fact that your rent alone is 2k and you are struggling to put 18500 a year in a 401k on a 130+k salary, I'd say you have a long ways to go from $260k saved to hit your FIRE number.

I'm not struggling to, I do it every year.  But should I put part of that after-tax instead?  My rent is 2k because the average rent for a one bedroom in my area is $2700 a month.

My point is that, I think I have enough in my 401k for my "after 59 1/2" money.  I will not be living in this area after age 45 or so, just while I'm working.

401k is not just "After 59 1/2" money. There is 72T and the roth conversion ladder. You can use 401k money as soon or as late as you'd like with proper planning.

SpendyMcSpend

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #9 on: August 02, 2018, 11:02:20 AM »
I am curious about that.  I read articles on how to do a Roth conversion and I get more and more confused.  Right now,  I have a 401k, and a rollover IRA, as well as a small Roth.  How, in layman's terms, do I convert my 401k money so that it is usable before 59 1/2?  Do I need to make nondeductible contributions to my current 401k, or to my IRA, and if so, how do I do that?

Mgmny

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #10 on: August 02, 2018, 11:17:39 AM »
I am curious about that.  I read articles on how to do a Roth conversion and I get more and more confused.  Right now,  I have a 401k, and a rollover IRA, as well as a small Roth.  How, in layman's terms, do I convert my 401k money so that it is usable before 59 1/2?  Do I need to make nondeductible contributions to my current 401k, or to my IRA, and if so, how do I do that?

Madfientist explains this better than I can in a post to you:

https://www.madfientist.com/how-to-access-retirement-funds-early/


SpendyMcSpend

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #11 on: August 02, 2018, 11:45:41 AM »
Thank you! !

Bird In Hand

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #12 on: August 02, 2018, 01:50:12 PM »
401k is not just "After 59 1/2" money. There is 72T and the roth conversion ladder. You can use 401k money as soon or as late as you'd like with proper planning.*

*Well, in most cases you'd have to quit working at your employer to get penalty-free access to its 401(k) funds via rollover to IRA + SEPP.  Probably not an issue in most cases.  But it's an obnoxious inconvenience for those of us who have "too much" saved in pre-tax accounts and would like to switch to part time at our current employer but supplement income with SEPP.  Basically you'd have to quit, rollover, and get rehired at the same place.

Paul der Krake

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #13 on: August 02, 2018, 02:02:11 PM »
You should max out your 401(k) AND save after-tax. At your income level you should be able to save more than 18.5k per year after tax, and your taxable will eventually catch up.

SpendyMcSpend

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #14 on: August 02, 2018, 02:23:00 PM »
Let's say I save 50% of my after-tax income after my 401k max.  That is about $2300 a month after-tax savings totaling about $27,500 a year.  With the 401k being $18k, I doubt I'd catch up in taxable savings.  So would it make sense to put only $9k say, in my 401k, and save the additional $6,000 (so I'm saving $33,500 after tax) vs. maxing the 401k and saving $27.5k.

kpd905

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #15 on: August 02, 2018, 07:01:52 PM »
No, keep maxing out the 401k.  You do not need the taxable account to reach the same value as your 401k.  You only need five years worth of expenses in the taxable account.

Grab the tax savings now and invest it.

Mgmny

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Re: Too much in pre-tax (401k and IRA) and not enough in after tax
« Reply #16 on: August 02, 2018, 07:45:18 PM »
401k is not just "After 59 1/2" money. There is 72T and the roth conversion ladder. You can use 401k money as soon or as late as you'd like with proper planning.*

*Well, in most cases you'd have to quit working at your employer to get penalty-free access to its 401(k) funds via rollover to IRA + SEPP.  Probably not an issue in most cases.  But it's an obnoxious inconvenience for those of us who have "too much" saved in pre-tax accounts and would like to switch to part time at our current employer but supplement income with SEPP.  Basically you'd have to quit, rollover, and get rehired at the same place.

Ayyyyy, I said with proper planning!!! I just didn't go into what proper planning meant