Author Topic: UPDATE: Spending cash savings in order to max out 401K  (Read 3438 times)

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
UPDATE: Spending cash savings in order to max out 401K
« on: October 26, 2016, 09:50:38 AM »
I was happily contributing $750/pay check to my 401K plan starting in January, planning to max out at $18,000 by the end of the year.  Then I was laid off in the middle of May.  So I only contributed approximately $7,000 at that point.  There was no match.

At my current (new) employer I am eligible to start contributions effective next paycheck, October 31st. Assuming I stay here through the end of December (long story, but I am not planning to stay here for long; starting new job search in November). I have 5 paychecks to use for my 401K contributions to try to max it out for the year.  There is no match either.

I have elected to contribute $1,900 per check, so combined with my 401K contributions from earlier this year, it will total about $16,500 for the whole year, not the max but close enough.

Doing this, I will be basically left with about $500 paycheck after the 401K deduction.  I will know the exact amount after I get paid on 10/31.  This means that I will need to live on cash savings through the end of the year.  My best estimate that I will need to pull about $3,000 per month from my savings for November and December.  So about $6,000 in total.  I have enough cash to do so (about $37K of cash at the moment), but it will eat into my emergency fund.

The benefit of doing this is that it will reduce my taxes for the year significantly and will put money into 401K.  Also, I can always change my contribution amount 5 days before any paychecks.

I am a single income, so not pulling money from emergency fund is not an option and the mount I listed above is what I will need to pull.  No way to reduce it, it is already reduced as much I could.  And I already maxed out my IRA and on track to max out HSA account by 12/31. 

I have a feeling that this is a good strategy, but I am not sure how I feel about reducing my cash reserves.    Can you please weigh in on this strategy.  Yey or nay?











« Last Edit: November 07, 2016, 02:22:20 PM by FiguringItOut »

BigHaus89

  • Stubble
  • **
  • Posts: 210
  • Age: 30
  • Location: NW
  • Ride the Spiral to the End
You have a lot of cash on hand(almost a year worth of EF). Are you planning on buying a house or something? If it helps you sleep at night, that's fine. I would look into investing any extra in a taxable brokerage account starting next year if you are maxing a tIRA, HSA and 401k.

This seems like a good strategy from an investing and tax savings standpoint until the end of the year.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2235
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
In my view one should have a solid emergency fund in case of emergencies like job loss before investing in a 401k or IRA or HSA, especially if there is no 401k match.

It sounds like you are pretty confident about finding jobs, but may work in an unstable industry.  I would consider your circumstances and decide for yourself the balance between the security of a larger emergency fund and the aggressiveness of investing and a resulting smaller emergency fund.  There is no right answer, and you can change it over time as things evolve.

But for me, once I set my target emergency fund, I would regularly use any available cash above that for investing.  I don't think I ever did what you are proposing, but if I were in the same circumstances and had extra cash, I would have absolutely done it.

It sounds like your $37K is the available balance of your savings account and that your actual emergency fund needs are less than that.  If that is the case, then yes, invest the extra in whatever your next goal is (401k, house, wedding fund, kids college, etc.).

Kapiira

  • Stubble
  • **
  • Posts: 148
  • Location: Albuquerque, NM
Do you have access to other types of funds if there's an emergency (eg HELOC or Roth IRA contributions)?  If so, I'd go forward with your plan with no hesitation.  I just became aware of these options and plan to reduce my emergency fund by doing exactly what you're talking about.

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
Do you have access to other types of funds if there's an emergency (eg HELOC or Roth IRA contributions)?  If so, I'd go forward with your plan with no hesitation.  I just became aware of these options and plan to reduce my emergency fund by doing exactly what you're talking about.

The only thing I can access is $3K in Roth IRA and about $5K in HSA. 
Reducing my cash by ~$6K will result in taking my emergency fund down to about 7 months. 

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
You have a lot of cash on hand(almost a year worth of EF). Are you planning on buying a house or something? If it helps you sleep at night, that's fine. I would look into investing any extra in a taxable brokerage account starting next year if you are maxing a tIRA, HSA and 401k.

This seems like a good strategy from an investing and tax savings standpoint until the end of the year.

No plans on buying a house.  I haven't been able to move this money into taxable brokerage account in the past 15 months, so I guess it does help me sleep at night. 

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC

It sounds like your $37K is the available balance of your savings account and that your actual emergency fund needs are less than that.  If that is the case, then yes, invest the extra in whatever your next goal is (401k, house, wedding fund, kids college, etc.).

Hard to say what my actual emergency fund needs.  I haven't been able to move this cash to a brokerage account and it represents about 8 months of my living expenses.  I wish I had a full year of expenses though, since I am single mom with two teens. But I can access about $8K total from my Roth and HSA accounts if need be.

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2143
  • Location: Cleveland
Are you done with the current employer in December no matter what, or are you only leaving when you find something new?

If the former, I'd hesitate to draw down emergency funds to contribute to a 401k. If the latter, then it sounds reasonable.

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
Are you done with the current employer in December no matter what, or are you only leaving when you find something new?

If the former, I'd hesitate to draw down emergency funds to contribute to a 401k. If the latter, then it sounds reasonable.

I'll leave only if/when I find another job.  So I may be here for couple more months or for a while.  Hope not for too long though.  Don't like this place.

GrOW

  • Bristles
  • ***
  • Posts: 273
    • Gringing Out Wealth
It is boring but consider having a written financial plan with a priority list for your money. If well thought out and updated after before or soon after major life events, it can take most to all of the concern out of these decisions.

For this example, what is your absolute bare minimum emergency fund? Less would honestly make you squirm. If this 401k decision would take you below that level, it's a non starter.

ooeei

  • Handlebar Stache
  • *****
  • Posts: 1143
I'd do it.  You have a job, and if you have trouble finding a new one you can stick around a bit longer.  It's taking 20% off your E-fund, but you'll never get that capacity for your 401k back. 

$30k still seems like a pretty big E-fund to me, but your comfort level is your comfort level.

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
It is boring but consider having a written financial plan with a priority list for your money. If well thought out and updated after before or soon after major life events, it can take most to all of the concern out of these decisions.

For this example, what is your absolute bare minimum emergency fund? Less would honestly make you squirm. If this 401k decision would take you below that level, it's a non starter.

I had a plan.  It was max out everything I can.  That was before I got laid off.
I don't know what my minimum emergency fund number is.  Haven't been able to come up with it.  So I've been holding on to cash instead of putting it into taxable brokerage account.  But the decision to spend $6K of it, although is not easy, doesn't seem to make me obsessed about it either. 

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
I'd do it.  You have a job, and if you have trouble finding a new one you can stick around a bit longer.  It's taking 20% off your E-fund, but you'll never get that capacity for your 401k back. 

Agree

$30k still seems like a pretty big E-fund to me, but your comfort level is your comfort level.

Being a single mom in very HCOL area makes this decision much harder.


SuperSecretName

  • Bristles
  • ***
  • Posts: 250
do it. 

you'll be fine for a few months with a lower e-fund. It's not even that low!

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10486
  • Age: 61
  • Location: NorCal
I would do it in a heartbeat. Then I would make a game of cutting my expenses to the bone for the fourth quarter to see how little I'd need to draw from savings to make it through the year. You can do it! In the not-too-distant future, you will be glad you did.

deeshen13

  • 5 O'Clock Shadow
  • *
  • Posts: 93
It's a no-brainer.

Ultimately the goal is to get as much money shoved in Qualifed (tax-deferred and tax-advantaged) accounts when you are young as possible. There are plenty of pretty easy ways to access that money before traditional retirement age if need be anyways.

I make about 52k/year, my contributions look like:
-18k to pre-tax 401k
-20k to after-tax 401k
-3.3k to HSA

After all that and the now much reduced taxes, my take home pay is like $150 per paycheck. Feels pretty badass.

I have enough Non-Qualified money to live off. PS, most people do not have access to an after-tax 401k option, but I lucked out.

Money is fungible. At the end of the day, I'm merely reallocating a shit ton of money from NQ to Qualified accounts.

Beardog

  • Stubble
  • **
  • Posts: 202
  • Location: central Mass area
I'd do it.  You have a job, and if you have trouble finding a new one you can stick around a bit longer.  It's taking 20% off your E-fund, but you'll never get that capacity for your 401k back. 

Agree

$30k still seems like a pretty big E-fund to me, but your comfort level is your comfort level.

Being a single mom in very HCOL area makes this decision much harder.


I totally support your impulse to have one year of living expenses in the bank as a single Mom with two teenagers.  Even though I had only myself to support, I maintained at least one year of living expenses in a bank account as soon as I could put it together.  You just never know what life is going to throw at you.  I wouldn't worry about using the Roth as a backup for depleting your emergency fund.  I might be more hesitant to use the HSA money as a backup.

NoStacheOhio

  • Handlebar Stache
  • *****
  • Posts: 2143
  • Location: Cleveland
Are you done with the current employer in December no matter what, or are you only leaving when you find something new?

If the former, I'd hesitate to draw down emergency funds to contribute to a 401k. If the latter, then it sounds reasonable.

I'll leave only if/when I find another job.  So I may be here for couple more months or for a while.  Hope not for too long though.  Don't like this place.

You could just split the difference. Increase your contributions, but not fully maxed out. Try to keep spending down for Q4, and tap savings to cover any overages.

radram

  • Pencil Stache
  • ****
  • Posts: 954
I was happily contributing $750/pay check to my 401K plan starting in January, planning to max out at $18,000 by the end of the year.  Then I was laid off in the middle of May.  So I only contributed approximately $7,000 at that point.  There was no match.

At my current (new) employer I am eligible to start contributions effective next paycheck, October 31st. Assuming I stay here through the end of December (long story, but I am not planning to stay here for long; starting new job search in November). I have 5 paychecks to use for my 401K contributions to try to max it out for the year.  There is no match either.

I have elected to contribute $1,900 per check, so combined with my 401K contributions from earlier this year, it will total about $16,500 for the whole year, not the max but close enough.

Doing this, I will be basically left with about $500 paycheck after the 401K deduction.  I will know the exact amount after I get paid on 10/31.  This means that I will need to live on cash savings through the end of the year.  My best estimate that I will need to pull about $3,000 per month from my savings for November and December.  So about $6,000 in total.  I have enough cash to do so (about $37K of cash at the moment), but it will eat into my emergency fund.

The benefit of doing this is that it will reduce my taxes for the year significantly and will put money into 401K.  Also, I can always change my contribution amount 5 days before any paychecks.

I am a single income, so not pulling money from emergency fund is not an option and the mount I listed above is what I will need to pull.  No way to reduce it, it is already reduced as much I could.  And I already maxed out my IRA and on track to max out HSA account by 12/31. 

I have a feeling that this is a good strategy, but I am not sure how I feel about reducing my cash reserves.    Can you please weigh in on this strategy.  Yey or nay?

I would absolutely max the IRA. $31,000 is still a huge e-fund.  If you lose your job, that means you have 3 people who can side hustle to survive. Yes, if you find yourself in a true emergency, teens can go to work mowing lawns, shoveling, washing cars, etc.  So can you.  Plus you have your roth as a backup to this backup. And you could also pull out 401k with a 10% penalty as a backup to the backup to the backup. I personally would rather live in my car than cash in any of my retirement savings, but they are still there for you if need be.

It is fantastic you are thinking this far ahead, but you NEVER get the opportunity to sock that money away again. DO IT. You have a great buffer to bridge the gap if it happens.

Good luck on your search.  Keep us posted.

FiguringItOut

  • Pencil Stache
  • ****
  • Posts: 742
  • Location: NYC
Re: Spending cash savings in order to max out 401K for savings and tax purposes
« Reply #19 on: November 07, 2016, 02:21:52 PM »
Thank you all for responding to my situation.
I got my paycheck on 10/31/16 and instead of $500 check, it was around $1,150.  I looked at my tax withholding, and they are all screwed up.  Meaning, I miscalculated when I filled out W-2.  This was also due to job changes, as at my previous job, I had it all figured out in Jan and set to basically net to zero on taxes owed/refunded at 12/31/16.  Oh well, looks like I'll be getting a refund after all. 

Anyway, when I posted this originally, I forgot that I had a full paycheck from 10/15/16 which was 'sent' to November as well.  (YNABers unite).  So between 10/15 full paycheck, 10/31 more than double what I expected paycheck, and me reshuffling my budget for November a little, looks like I will only need to pull out about $300 from savings.  That's only two zeros.  And I'll try to cut that down too.  lol  I originally though it would be $3,000, so extra zero. 

And by the looks of it, in December, I'll need to pull only about $2K from savings, instead of $3K as I thought.

All in all, I'm happy I did this and decided to max out 401K for the year.

radram

  • Pencil Stache
  • ****
  • Posts: 954
Re: Spending cash savings in order to max out 401K for savings and tax purposes
« Reply #20 on: November 08, 2016, 05:43:45 AM »
Thank you all for responding to my situation.
I got my paycheck on 10/31/16 and instead of $500 check, it was around $1,150.  I looked at my tax withholding, and they are all screwed up.  Meaning, I miscalculated when I filled out W-2.  This was also due to job changes, as at my previous job, I had it all figured out in Jan and set to basically net to zero on taxes owed/refunded at 12/31/16.  Oh well, looks like I'll be getting a refund after all. 

Anyway, when I posted this originally, I forgot that I had a full paycheck from 10/15/16 which was 'sent' to November as well.  (YNABers unite).  So between 10/15 full paycheck, 10/31 more than double what I expected paycheck, and me reshuffling my budget for November a little, looks like I will only need to pull out about $300 from savings.  That's only two zeros.  And I'll try to cut that down too.  lol  I originally though it would be $3,000, so extra zero. 

And by the looks of it, in December, I'll need to pull only about $2K from savings, instead of $3K as I thought.

All in all, I'm happy I did this and decided to max out 401K for the year.

I love it when a plan comes together.

Your future self will thank you. Enjoy the rest of your year.