Author Topic: Am I putting too much in 401K and other investment ?  (Read 1306 times)

djadziadax

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Am I putting too much in 401K and other investment ?
« on: July 03, 2019, 05:06:53 PM »
Hi,

I have started to think about how I will be withdrawing money once I FIRE in 2022...which made me take account of the different accounts and what is in there.

So here it is:

I max out:
403B defined contribution (5% me, 11% employer) 18K
403B pretax elective - 19K
Roth IRA - 6K
Rest in taxable account, around 20K

Balances - 380K in 403B, 35K in roth, 210K in taxable.

Now, it seems to me that I may be contributing too much to the pretax accounts.

I have about 420K in VTI and equivelent, 120K in a high yield divident paying stock which generates between 10-12K a year, and  one other regular stock 70K that is very undervalued and will go much higher in 2-3 yrs.

Goal for FIRE is 40K a year, so about 1MM which I think I will hit in 3 years - but is the distribution of money among the accounts appropriate...cant figure it out.

Thanks!



h82goslw

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Re: Am I putting too much in 401K and other investment ?
« Reply #1 on: July 03, 2019, 05:18:07 PM »
and  one other regular stock 70K that is very undervalued and will go much higher in 2-3 yrs.



And you know this how?

To your original question.....you're not paying taxes on earned income that's going into 401K investments now.  If you're making much less money in retirement than you are now, you'll pay less in taxes as you withdraw that money.  I would (almost) always defer paying taxes until later.

djadziadax

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Re: Am I putting too much in 401K and other investment ?
« Reply #2 on: July 03, 2019, 07:52:42 PM »
The stock is CLF - you can research it yourself, but it is extremely undervalued.

And thanks for reminding me that paying taxes later is better.

MDM

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Re: Am I putting too much in 401K and other investment ?
« Reply #3 on: July 04, 2019, 01:58:30 AM »
Goal for FIRE is 40K a year, so about 1MM which I think I will hit in 3 years - but is the distribution of money among the accounts appropriate...cant figure it out.
See the Investment Order post.  If you follow the procedure in there, what do you estimate for your marginal rate on traditional withdrawals?

mjb

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Re: Am I putting too much in 401K and other investment ?
« Reply #4 on: July 04, 2019, 03:38:25 AM »
Now, it seems to me that I may be contributing too much to the pretax accounts.

I use the Mad Fientist/Go Curry Cracker strategy of "pay no taxes now, and figure out how to pay no taxes later".

(My income and expenses are low enough that I can get my total tax to $0 without maxing out my 401(k). Everything after that goes to taxable.)

djadziadax

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Re: Am I putting too much in 401K and other investment ?
« Reply #5 on: July 04, 2019, 09:59:55 AM »
Goal for FIRE is 40K a year, so about 1MM which I think I will hit in 3 years - but is the distribution of money among the accounts appropriate...cant figure it out.
See the Investment Order post.  If you follow the procedure in there, what do you estimate for your marginal rate on traditional withdrawals?

Wow, this was a very useful excercize for many reasons...thanks MDM. Here are the calcs, makes sense?


Guaranteed - 12000 LTCG - 0% (royalty income taxed at LTCG)
Taxable QD - 2600 - 0%
Roth IRA (take 4% of balance) - 3000 at 0%

Trad              -24000  - 0% (MFJ plus deduction of 24K and 2K for one child) so that would be 1000$ back from the child credit? Wow, did not see that coming!

I will still need about 8K in income and if that comes from trad, it would bring the tax rate to 1.5% (24K +8K +32K-24K standard ded - 2K child credit = 6K taxable at 12% is $720) ...So if I continue to fund my accounts as I have so far, then I will pay 1.5% tax AND minimize tax at the moment.

One question, why would you not take 4% of your taxable account, why just 2% of the QD?

Thanks MDM!

djadziadax

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Re: Am I putting too much in 401K and other investment ?
« Reply #6 on: July 04, 2019, 10:02:48 AM »
Now, it seems to me that I may be contributing too much to the pretax accounts.

I use the Mad Fientist/Go Curry Cracker strategy of "pay no taxes now, and figure out how to pay no taxes later".

(My income and expenses are low enough that I can get my total tax to $0 without maxing out my 401(k). Everything after that goes to taxable.)

That is what I want, but my income now is high, and even with maxing out everything, I am still at 15% tax rate (state, local, fed).

MDM

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Re: Am I putting too much in 401K and other investment ?
« Reply #7 on: July 04, 2019, 10:39:50 AM »
Goal for FIRE is 40K a year, so about 1MM which I think I will hit in 3 years - but is the distribution of money among the accounts appropriate...cant figure it out.
See the Investment Order post.  If you follow the procedure in there, what do you estimate for your marginal rate on traditional withdrawals?

Wow, this was a very useful excercize for many reasons...thanks MDM. Here are the calcs, makes sense?


Guaranteed - 12000 LTCG - 0% (royalty income taxed at LTCG)
Taxable QD - 2600 - 0%
Roth IRA (take 4% of balance) - 3000 at 0%

Trad              -24000  - 0% (MFJ plus deduction of 24K and 2K for one child) so that would be 1000$ back from the child credit? Wow, did not see that coming!
The child tax credit would not be subtracted along with the standard deduction: see Difference Between Tax Deduction and Tax Credit.

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I will still need about 8K in income and if that comes from trad, it would bring the tax rate to 1.5% (24K +8K +32K-24K standard ded - 2K child credit = 6K taxable at 12% is $720) ...So if I continue to fund my accounts as I have so far, then I will pay 1.5% tax AND minimize tax at the moment.
That 1.5% is an "effective" rate and not what you want to use for comparison.  See Marginal Vs Effective Tax Rates And When To Use Each and Traditional vs. Roth.

But $32K from traditional withdrawal, plus $12K LTCG and $2.6K QD, with 1 child eligible for the CTC, gives $0 federal tax.  Don't know whatever state/local tax you may have.

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One question, why would you not take 4% of your taxable account, why just 2% of the QD?

Thanks MDM!
Using 2% of the taxable balance for qualified dividends is just an estimate of what the "unavoidable" income might be.  If one plans to be 100% bonds in taxable and expects the bonds to pay 3.5%, then one should use 3.5% of the taxable balance for "Taxable Interest, non-qual. dividends, etc."