Author Topic: When to stop putting money into 401k?  (Read 1061 times)

Lulu0204

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When to stop putting money into 401k?
« on: February 27, 2019, 09:49:25 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!

TheAnonOne

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Re: When to stop putting money into 401k?
« Reply #1 on: February 27, 2019, 10:06:22 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!

Never.

You can access a 401k WITHOUT fees through various methods discussed on these forums. (Equal payments/roth ladder)

You want to give up a 20-30%(or more w/ state) tax savings to avoid paying a basically non-existent fee? Be my guest!

MDM

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Re: When to stop putting money into 401k?
« Reply #2 on: February 27, 2019, 10:45:34 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?
Yes.  E.g., if you are under age 50, it's after you have contributed $19K for 2018. ;)

See Investment Order for more.

Goldielocks

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Re: When to stop putting money into 401k?
« Reply #3 on: February 27, 2019, 10:52:18 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!


Never.

You can access a 401k WITHOUT fees through various methods discussed on these forums. (Equal payments/roth ladder)

You want to give up a 20-30%(or more w/ state) tax savings to avoid paying a basically non-existent fee? Be my guest!
FWIW, it is not a tax savings, it is tax deferral...
If you will be in a guaranteed higher tax bracket upon withdrawal than when you contribute, even allowing for the Roth conversion ladders and such over many years before age 59,  then it may be time to consider your strategy.

That is not a situation for very many people.   You need to have low taxes now, no employer match, and a super-sized 401k.  In which case you could probably retire already and just work part time as you fancy it.

beltim

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Re: When to stop putting money into 401k?
« Reply #4 on: February 27, 2019, 11:00:32 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!


Never.

You can access a 401k WITHOUT fees through various methods discussed on these forums. (Equal payments/roth ladder)

You want to give up a 20-30%(or more w/ state) tax savings to avoid paying a basically non-existent fee? Be my guest!
FWIW, it is not a tax savings, it is tax deferral...
If you will be in a guaranteed higher tax bracket upon withdrawal than when you contribute, even allowing for the Roth conversion ladders and such over many years before age 59,  then it may be time to consider your strategy.

That is not a situation for very many people.   You need to have low taxes now, no employer match, and a super-sized 401k.  In which case you could probably retire already and just work part time as you fancy it.

Even if you're going to be in the same tax bracket when you retire, I'd rather have my investments in taxable accounts than a 401k.  Tax deferral of gains - which are then taxed at ordinary income tax rates - may not be better than paying taxes on the investment now, but paying much lower qualified dividend/ long term capital gains taxes later.

Boofinator

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Re: When to stop putting money into 401k?
« Reply #5 on: February 27, 2019, 11:12:33 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!


Never.

You can access a 401k WITHOUT fees through various methods discussed on these forums. (Equal payments/roth ladder)

You want to give up a 20-30%(or more w/ state) tax savings to avoid paying a basically non-existent fee? Be my guest!
FWIW, it is not a tax savings, it is tax deferral...
If you will be in a guaranteed higher tax bracket upon withdrawal than when you contribute, even allowing for the Roth conversion ladders and such over many years before age 59,  then it may be time to consider your strategy.

That is not a situation for very many people.   You need to have low taxes now, no employer match, and a super-sized 401k.  In which case you could probably retire already and just work part time as you fancy it.

Even if you're going to be in the same tax bracket when you retire, I'd rather have my investments in taxable accounts than a 401k.  Tax deferral of gains - which are then taxed at ordinary income tax rates - may not be better than paying taxes on the investment now, but paying much lower qualified dividend/ long term capital gains taxes later.

Maybe I'm misunderstanding you, but this seems to be a very misguided statement. Ignoring fees, tax deferral of gains will never lose to paying taxes now (at the same tax bracket) and then paying capital gains tax. To illustrate the point, say you have $10k with which to invest, earned income is taxed at 25%, and capital gains at 15%. Using tax-deferred, you invest the full $10k, but if using after-tax you can only invest $7.5k. Over the years, the investments double, at which point you want to withdraw the funds. For the tax deferred, you pay 25% on $20k, leaving you with $15k. For the taxable, you have $15k but then have to pay 15% on the gains, leaving you with $13,875.

hdatontodo

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Re: When to stop putting money into 401k?
« Reply #6 on: February 27, 2019, 11:16:33 AM »
Keep the 401k age 55 rule in mind too

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TexasRunner

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Re: When to stop putting money into 401k?
« Reply #7 on: February 27, 2019, 11:20:25 AM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!

@Lulu0204 you need to read everything here:  https://www.madfientist.com/how-to-access-retirement-funds-early/

beltim

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Re: When to stop putting money into 401k?
« Reply #8 on: February 27, 2019, 11:43:57 AM »

Even if you're going to be in the same tax bracket when you retire, I'd rather have my investments in taxable accounts than a 401k.  Tax deferral of gains - which are then taxed at ordinary income tax rates - may not be better than paying taxes on the investment now, but paying much lower qualified dividend/ long term capital gains taxes later.

Maybe I'm misunderstanding you, but this seems to be a very misguided statement. Ignoring fees, tax deferral of gains will never lose to paying taxes now (at the same tax bracket) and then paying capital gains tax. To illustrate the point, say you have $10k with which to invest, earned income is taxed at 25%, and capital gains at 15%. Using tax-deferred, you invest the full $10k, but if using after-tax you can only invest $7.5k. Over the years, the investments double, at which point you want to withdraw the funds. For the tax deferred, you pay 25% on $20k, leaving you with $15k. For the taxable, you have $15k but then have to pay 15% on the gains, leaving you with $13,875.

Your example is fine.  However, you are incorrect that tax deferral of gains will never lose to paying taxes now, though.

As a counter example, say you're currently in the 12% tax bracket, and plan to be in retirement (not an uncommon situation).  Again, we'll use 10K as your investment example.
401k:
10K invested doubles to 20K.  When you withdraw it, you take away 12% in tax, leaving you 17,600.

Taxable:
10K taxed at 12% leaves you 8800 to invest.  It doubles, but since you're in the 0% qualified dividend and long term capital gains tax bracket, you pay no taxes on the gains, leaving you with 17,600.

In this case, the two are the same, which is what I said originally: " tax deferral of gains...may not be better."

But, it's pretty easy to imagine cases where tax deferral of gains is worse.  One example you alluded to: you change tax brackets.  This can happen when you start to receive Social Security, you start having to collect RMDs, or you start receiving a pension.  Another example, without changing tax brackets: an intermediate loss!  To wit:

401k:
10K invested doubles to 20K.  When you withdraw it, you take away 12% in tax, leaving you 17,600.

Taxable:
10K taxed at 12% leaves you 8800 to invest.  The market crashes - oh no!  Your investment, on paper has fallen in half.  You're smart, though - you sell and immediately repurchase.  Your loss you can exclude on your current taxes (it'd actually take 2 years, but I hope you'll forgive this approximation), and, since you're smart, you invest the 4400 * 0.12 = $528 in tax savings.
Then, to get to the final doubling from the 401k example, we have to quadruple the (4400 + 528) = 4928, times 4 is $19,712.  When you withdraw this in retirement, since you're in the 0% qualified dividend and long term cap gain tax bracket, you get to keep all $19,712.  You finish $2112 ahead of the version of you that invested in the 401k.


Boofinator

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Re: When to stop putting money into 401k?
« Reply #9 on: February 27, 2019, 12:17:40 PM »

Even if you're going to be in the same tax bracket when you retire, I'd rather have my investments in taxable accounts than a 401k.  Tax deferral of gains - which are then taxed at ordinary income tax rates - may not be better than paying taxes on the investment now, but paying much lower qualified dividend/ long term capital gains taxes later.

Maybe I'm misunderstanding you, but this seems to be a very misguided statement. Ignoring fees, tax deferral of gains will never lose to paying taxes now (at the same tax bracket) and then paying capital gains tax. To illustrate the point, say you have $10k with which to invest, earned income is taxed at 25%, and capital gains at 15%. Using tax-deferred, you invest the full $10k, but if using after-tax you can only invest $7.5k. Over the years, the investments double, at which point you want to withdraw the funds. For the tax deferred, you pay 25% on $20k, leaving you with $15k. For the taxable, you have $15k but then have to pay 15% on the gains, leaving you with $13,875.

Your example is fine.  However, you are incorrect that tax deferral of gains will never lose to paying taxes now, though.

As a counter example, say you're currently in the 12% tax bracket, and plan to be in retirement (not an uncommon situation).  Again, we'll use 10K as your investment example.
401k:
10K invested doubles to 20K.  When you withdraw it, you take away 12% in tax, leaving you 17,600.

Taxable:
10K taxed at 12% leaves you 8800 to invest.  It doubles, but since you're in the 0% qualified dividend and long term capital gains tax bracket, you pay no taxes on the gains, leaving you with 17,600.

In this case, the two are the same, which is what I said originally: " tax deferral of gains...may not be better."

But, it's pretty easy to imagine cases where tax deferral of gains is worse.  One example you alluded to: you change tax brackets.  This can happen when you start to receive Social Security, you start having to collect RMDs, or you start receiving a pension.  Another example, without changing tax brackets: an intermediate loss!  To wit:

401k:
10K invested doubles to 20K.  When you withdraw it, you take away 12% in tax, leaving you 17,600.

Taxable:
10K taxed at 12% leaves you 8800 to invest.  The market crashes - oh no!  Your investment, on paper has fallen in half.  You're smart, though - you sell and immediately repurchase.  Your loss you can exclude on your current taxes (it'd actually take 2 years, but I hope you'll forgive this approximation), and, since you're smart, you invest the 4400 * 0.12 = $528 in tax savings.
Then, to get to the final doubling from the 401k example, we have to quadruple the (4400 + 528) = 4928, times 4 is $19,712.  When you withdraw this in retirement, since you're in the 0% qualified dividend and long term cap gain tax bracket, you get to keep all $19,712.  You finish $2112 ahead of the version of you that invested in the 401k.

Yes, tax loss harvesting is the one bonus of taxable investments. And yes, the 401k is somewhat unfair to people with lower incomes, making taxable a more reasonable comparison. I'll agree, tentatively, that for people of very low income and wits enough to perform tax loss harvesting, a taxable account might beat a 401k, though I would still recommend the 401k as 1) your assumption of a 50% drop is very unlikely to occur in any given year, 2) the chance to meaningfully tax loss harvest at all with those kinds of annual contributions will likely not occur most years, and 3) the chance of being in the same tax bracket during contributions and withdrawals is highly unlikely.

beltim

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Re: When to stop putting money into 401k?
« Reply #10 on: February 27, 2019, 12:22:46 PM »
The 12% tax bracket covers married couples earning between 43 and 101k per year - i.e. a large majority of Americans. I think this covers more people than you think.

I will say, though, that you should have enough in a 401k or IRA to fill up the standard deduction amount.

PathtoFIRE

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Re: When to stop putting money into 401k?
« Reply #11 on: February 27, 2019, 12:45:45 PM »
Don't forget:

-Many 401ks have super low fee funds (especially federal employees with TSP)
-Just about any 401k match will bump the math in favor of 401k over aftertax

Boofinator

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Re: When to stop putting money into 401k?
« Reply #12 on: February 27, 2019, 01:00:45 PM »
The 12% tax bracket covers married couples earning between 43 and 101k per year - i.e. a large majority of Americans. I think this covers more people than you think.

I will say, though, that you should have enough in a 401k or IRA to fill up the standard deduction amount.

True, I'll give you that. (Though not exactly sure what you mean by the second paragraph. I would think you wouldn't want to contribute to tax-deferred if you were in the effective 0% tax bracket.)

For very low income, if you had to choose one or the other, then I believe 401k wins by a bit, with a lot less work involved. That being said, the best of both worlds is being able to max the 401k's and contribute to taxable (the latter in my opinion is probably even better than Roth if you aren't taxed on dividends and know how to tax loss harvest, though above about $10k per year in taxable I'd also want to do the Roth IRA (assuming I exceed traditional deduction limits)).

Goldielocks

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Re: When to stop putting money into 401k?
« Reply #13 on: February 27, 2019, 01:23:52 PM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!



Never.

You can access a 401k WITHOUT fees through various methods discussed on these forums. (Equal payments/roth ladder)

You want to give up a 20-30%(or more w/ state) tax savings to avoid paying a basically non-existent fee? Be my guest!
FWIW, it is not a tax savings, it is tax deferral...
If you will be in a guaranteed higher tax bracket upon withdrawal than when you contribute, even allowing for the Roth conversion ladders and such over many years before age 59,  then it may be time to consider your strategy.

That is not a situation for very many people.   You need to have low taxes now, no employer match, and a super-sized 401k.  In which case you could probably retire already and just work part time as you fancy it.

Even if you're going to be in the same tax bracket when you retire, I'd rather have my investments in taxable accounts than a 401k.  Tax deferral of gains - which are then taxed at ordinary income tax rates - may not be better than paying taxes on the investment now, but paying much lower qualified dividend/ long term capital gains taxes later.

Maybe I'm misunderstanding you, but this seems to be a very misguided statement. Ignoring fees, tax deferral of gains will never lose to paying taxes now (at the same tax bracket) and then paying capital gains tax. To illustrate the point, say you have $10k with which to invest, earned income is taxed at 25%, and capital gains at 15%. Using tax-deferred, you invest the full $10k, but if using after-tax you can only invest $7.5k. Over the years, the investments double, at which point you want to withdraw the funds. For the tax deferred, you pay 25% on $20k, leaving you with $15k. For the taxable, you have $15k but then have to pay 15% on the gains, leaving you with $13,875.
-- If you get matching. always go for the matching.   I mean, FREE MONEY.  Go get it.

Yes, the numbers quoted above / scenario is correct -- because you still need to pay extra taxes on the growth, for identical investments, for the non-reg compared to the registered.


My example:
$10k.   25% marginal tax bracket at all times.  Invested for capital gains only (so 50% of the gain is taxed in non-registered).
15 years at 5% annual growth.

After tax value of each of these
401k:  $15,591
Non-Reg: $14,580
 -- This is why if you will be the SAME bracket and don't have another tax strategy for the Non-reg, it is better on paper to use the 401k.


BUT! Human behaviour considerations:
A)  401k - you can't touch it for emergencies, a sudden purchase.  (barring the roth ladder that takes planning)
B)  I pay for my annual taxes on the non-registered out of my free cashflow, annually as I tend to buy / sell it over the years.  THEREFORE, I HAVE  $15,591 at the time of withdrawal from my non-registered, and pay very little, if any, tax. This tax money each year is like extra "forced savings" that leaves the final after tax cash value much higher after 15 years.   YES, technically it is more money invested, net, but I simply do not notice it or think about it as I am not selling investments to cover it.
C)  When I get a tax refund (another discussion point.. long explanation for why I get one), I actually spend at least it instead of investing all of it. Sure, I spend it on paying my annual insurance and property taxes that come due around then, but the point is that getting a tax refund because of IRA investments actually tricks me into investing LESS than the original $10k.

With the human behaviours above  the results of the $10k look for me like:
After tax value after 15 years, $10k, 5% growth using capital gains and buying / selling during the investment period:

401k (IRA):$14,000
  (because I only invested $7500 originally from my cash account, not via payroll, and then spent $1500 of the subsequent $2500 tax refund and re-invested only $1000 of it).
NON-Reg:  $15,000  (because I paid the taxes as I went over the years..  so the ACB of my investment was increasing to reduce the final tax owing)

mschaus

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Re: When to stop putting money into 401k?
« Reply #14 on: February 28, 2019, 12:44:43 PM »
Are there any blog posts that discuss when enough is enough for your 401k and to start investing in more liquid assets that you can use before 59.5?

Thanks!

https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/