Author Topic: Do you go Whole Hog?  (Read 9019 times)

Honest Abe

  • Bristles
  • ***
  • Posts: 376
  • Emancipate Yourself from Mental Slavery
Do you go Whole Hog?
« on: October 01, 2012, 06:07:10 PM »
After some discussion with my lovely spouse, I'm going to max out my 457(b) plan starting in 2013. (That's the soonest they'll change my contribution.) Figures to be $653.84 per biweekly paycheck. That's alot of dough!

In addition, she will be kicking in $9600/year to her own 457(b). Possibly we'll increase hers if this year feels alright.

It's a little scary, I must admit. Maybe even a little crazy.

Has anyone else gone for the whole contribution limit? Any advice?

jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1079
  • Age: 42
  • Location: Connecticut
Re: Do you go Whole Hog?
« Reply #1 on: October 01, 2012, 06:49:34 PM »
We do, or at least we both aim to do so.  Last year we were still a few thousand short of using up all $34k of 401k space; this year I'm on track to contribute all $17k (I actually had to decrease my contribution for the last few months of the year since I was going to go over otherwise).  I'm encouraging my spouse to make sure he fills up all available space as well.  I did our taxes this spring and was thoroughly impressed at how much of a difference this makes tax-wise, since we've passed the point at which many deductions start getting phased out.  I didn't go "whole hog" all at once, though...I gradually increased my contributions every couple of months by 2% until I was maxing it out.  That gave me some time to get used to it and reduce some of my other expenses to compensate, plus I had some raises and there was the 2% payroll tax cut, which I put straight into the 401k.  I think it helps to do it a little at a time so that you realize that you're fine without the extra money.  I also recommend that if you get a bonus, you also withhold the 401k contributions from that.  It helps to jumpstart your contributions early in the year, and you can back it off later if you need to.
« Last Edit: October 01, 2012, 06:51:20 PM by jrhampt »

JohnGalt

  • Bristles
  • ***
  • Posts: 482
  • Age: 35
  • Location: TX
Re: Do you go Whole Hog?
« Reply #2 on: October 02, 2012, 02:49:49 PM »
I'm maxing out 401k and roth IRA contributions every year as well.

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: Do you go Whole Hog?
« Reply #3 on: October 02, 2012, 02:54:45 PM »
Over the course of this year, we ramped our 401k contributions up to max. Next year, we'll hope to hold it at max level for the whole year.  It's actually a bit comical because my wife is part-time, and that 17k/yr turns her paycheck into peanuts. :)

Use it up, wear it out...

  • Stubble
  • **
  • Posts: 224
  • Location: Brooklyn, NYC
Re: Do you go Whole Hog?
« Reply #4 on: October 02, 2012, 02:56:01 PM »
Sounds like we're talking pre-tax contribution limits here.

I max out my 401K pre-tax contribution every year.

However, the law does allow 401K plans to accept post-tax contributions as well - in 2012, up to $50K or 100% of your salary, whichever is less.

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: Do you go Whole Hog?
« Reply #5 on: October 02, 2012, 03:12:31 PM »
Sounds like we're talking pre-tax contribution limits here.

I max out my 401K pre-tax contribution every year.

However, the law does allow 401K plans to accept post-tax contributions as well - in 2012, up to $50K or 100% of your salary, whichever is less.

Does post-tax 401k have any advantage compared to say, a Roth IRA? or a regular ole brokerage account?

Use it up, wear it out...

  • Stubble
  • **
  • Posts: 224
  • Location: Brooklyn, NYC
Re: Do you go Whole Hog?
« Reply #6 on: October 02, 2012, 04:42:38 PM »
Does post-tax 401k have any advantage compared to say, a Roth IRA? or a regular ole brokerage account?

Not really. I think it's basically a holdover from the pre-Roth era. Post-tax contributions grow tax-deferred, and your plan may have negotiated lower fees than you can get on your own with a brokerage account.

$_gone_amok

  • Stubble
  • **
  • Posts: 149
Re: Do you go Whole Hog?
« Reply #7 on: October 02, 2012, 05:13:21 PM »
It is a great way to save more and spend less! 

prosaic

  • Stubble
  • **
  • Posts: 202
Re: Do you go Whole Hog?
« Reply #8 on: October 02, 2012, 06:12:54 PM »
Over the course of this year, we ramped our 401k contributions up to max. Next year, we'll hope to hold it at max level for the whole year.  It's actually a bit comical because my wife is part-time, and that 17k/yr turns her paycheck into peanuts. :)

I am in this position at my job job (I freelance as well).

I calculated that if I max out, my actual take-home, biweekly paycheck will be...$91. This is for a mid-career, half-time position. I cover all the family benefits (health, dental, vision, etc.) so that would be post-401k, post-premiums, post-taxes.

Heh.

sol

  • Walrus Stache
  • *******
  • Posts: 8488
  • Age: 43
  • Location: Pacific Northwest
Re: Do you go Whole Hog?
« Reply #9 on: October 02, 2012, 08:50:43 PM »
However, the law does allow 401K plans to accept post-tax contributions as well - in 2012, up to $50K or 100% of your salary, whichever is less.

This is something I should learn more about.  We both max our 401k plans and our Roth IRAs and then contribute to taxable investments. 

If we can continue to dump post-tax money into the 401k so that it grows tax free, that's a potentially large chunk of free money in retirement.

Any references for this $50k cap on 401k contributions so I can read up on it?

Use it up, wear it out...

  • Stubble
  • **
  • Posts: 224
  • Location: Brooklyn, NYC
Re: Do you go Whole Hog?
« Reply #10 on: October 02, 2012, 09:00:36 PM »

kkbmustang

  • Handlebar Stache
  • *****
  • Posts: 1286
Re: Do you go Whole Hog?
« Reply #11 on: October 02, 2012, 09:41:28 PM »
Sol-

That limit is in Internal Revenue Code section 415. The 50k number is indexed for COLA, so it changes as the 401(k) deferral limit changes. (This is in Code section 402(g), if you're interested.)

sol

  • Walrus Stache
  • *******
  • Posts: 8488
  • Age: 43
  • Location: Pacific Northwest
Re: Do you go Whole Hog?
« Reply #12 on: October 02, 2012, 11:12:18 PM »
If I'm reading this right, you can contribute up to $50k of your salary into a 401k on an after-tax basis, get tax-free growth, and only pay taxes on the earnings upon withdrawal.  That seems like a better deal than a taxable account only because of the tax-free growth, and a worse deal than a Roth or a pretax 401k.

Coupled to the age restriction on contributions, I think it would be a pretty narrow subset of people for whom this would be a good idea.  I'm still trying to figure out if I belong in that group.

Use it up, wear it out...

  • Stubble
  • **
  • Posts: 224
  • Location: Brooklyn, NYC
Re: Do you go Whole Hog?
« Reply #13 on: October 03, 2012, 06:25:57 AM »
Sol,

Sounds like you've got it right. Just one caution - I believe the 50K limit is inclusive, both pre and post tax combined. Not 100% sure about that.

Let us know what you decide, and how you got there!

jpo

  • Pencil Stache
  • ****
  • Posts: 518
  • Age: 33
  • Location: North Carolina
Re: Do you go Whole Hog?
« Reply #14 on: October 03, 2012, 07:03:10 AM »
I was considering it but read http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For my timeline, I don't need the maximum.

JohnGalt

  • Bristles
  • ***
  • Posts: 482
  • Age: 35
  • Location: TX
Re: Do you go Whole Hog?
« Reply #15 on: October 03, 2012, 07:23:28 AM »
I was considering it but read http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For my timeline, I don't need the maximum.

Not sure what about that article suggests that you shouldn't do the maximum...

"So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously."

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: Do you go Whole Hog?
« Reply #16 on: October 03, 2012, 07:42:02 AM »
I was considering it but read http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For my timeline, I don't need the maximum.

Not sure what about that article suggests that you shouldn't do the maximum...

"So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously."

I assume that he is going for Strategy #1 in that article, which is to consider 401k as your "age 60+ money" and nothing more. So, once you get it to a certain level, and project it forward to 60, they will focus on post-tax investments to get them from early retirement to age 60.

JohnGalt

  • Bristles
  • ***
  • Posts: 482
  • Age: 35
  • Location: TX
Re: Do you go Whole Hog?
« Reply #17 on: October 03, 2012, 07:57:07 AM »
I was considering it but read http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For my timeline, I don't need the maximum.

Not sure what about that article suggests that you shouldn't do the maximum...

"So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously."

I assume that he is going for Strategy #1 in that article, which is to consider 401k as your "age 60+ money" and nothing more. So, once you get it to a certain level, and project it forward to 60, they will focus on post-tax investments to get them from early retirement to age 60.

He also gives 2 other options that would lend towards maxing it out fully... I just don't want people reading this to get the impression that MMM says "Don't max out your 401k."


bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: Do you go Whole Hog?
« Reply #18 on: October 03, 2012, 08:03:25 AM »

He also gives 2 other options that would lend towards maxing it out fully... I just don't want people reading this to get the impression that MMM says "Don't max out your 401k."

Right, but there is more than 1 way to skin a cat.

For instance, if you only had enough to max your 401k (and no more), and have done so for many years, and decided that 2012 was the year to retire early (yay!)... you might end up having a bad time. The 120% rate for SEPP payments is terrible right now because of the 30yr treasury rate.

If this hypothetical 401k-heavy person was 40 years old, and wanted to start SEPP's at today's rate (1.1% ?), they'd only get $28k/yr on a $1M 401k stash.  Not the most stellar of options.  Not to say that you wouldn't be able to swing it, but people have all sorts of different situations, and like to have options.

Edit: I just re-ran a scenario where this hypothetical person did the 401k -> Roth IRA conversion pipeline method with 340k and SEPP with 660k, and they would manage to get $36k/yr.  So, I suppose you still have some "options" with a 100% tax-deferred portfolio. But, that Roth Pipeline takes 5 years to set up.
« Last Edit: October 03, 2012, 08:06:54 AM by bo_knows »

jpo

  • Pencil Stache
  • ****
  • Posts: 518
  • Age: 33
  • Location: North Carolina
Re: Do you go Whole Hog?
« Reply #19 on: October 03, 2012, 09:32:46 AM »
I was considering it but read http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For my timeline, I don't need the maximum.

Not sure what about that article suggests that you shouldn't do the maximum...

"So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously."

I assume that he is going for Strategy #1 in that article, which is to consider 401k as your "age 60+ money" and nothing more. So, once you get it to a certain level, and project it forward to 60, they will focus on post-tax investments to get them from early retirement to age 60.
Yep, this. Don't touch 401k until 60+.

Gonna run separate FIREcalc predictions for each stage: 60+ living off of 401k to determine amount needed, 45ish-60 to make sure I'll have said balance after stopping contributions at age 45, and 45ish-60 to make sure I have enough non-401k assets to burn until 60 and the 401k kicks in. Then I just need to work backwards to find out what I need to contribute to each stage, if that makes any backasswards sense.

TLV

  • Bristles
  • ***
  • Posts: 492
  • Age: 32
  • Location: Bellevue, WA
Re: Do you go Whole Hog?
« Reply #20 on: October 03, 2012, 02:25:00 PM »
If I'm reading this right, you can contribute up to $50k of your salary into a 401k on an after-tax basis, get tax-free growth, and only pay taxes on the earnings upon withdrawal.  That seems like a better deal than a taxable account only because of the tax-free growth, and a worse deal than a Roth or a pretax 401k.

It appears to me that it has the same complications on withdrawal as a traditional IRA that has both deductible and non-deductible contributions. When you do a withdrawal or rollover from the 401k, instead of the post-tax contributions coming out first (like a Roth IRA), some of the withdrawn amount will be taxable and some won't be depending on the proportion of post-tax contributions to the total value of the account.

It could still be a good deal for some people, but the complicated withdrawal rules make it much more difficult to determine if it is or not.

kkbmustang

  • Handlebar Stache
  • *****
  • Posts: 1286
Re: Do you go Whole Hog?
« Reply #21 on: October 03, 2012, 07:00:21 PM »
@Sol-

Is your 401(k) employer sponsored or is it your own 401(k)? The limit is the lesser of $50k or 100% of your income (your income being up to a maximum amount (this is the 401(a)(17) limit which I think is now up to $245k). There are also nondiscrimination tests and other tests that have to be satisfied before one can put this much in the 401(k).  The $50k total include 401(k) deferrals, employer matching/ profit sharing contributions and any forfeitures that are allocated to your account. It's not a cut and dry that you can just decide to put $50k in your 401(k).

madcityacct

  • 5 O'Clock Shadow
  • *
  • Posts: 11
Re: Do you go Whole Hog?
« Reply #22 on: January 03, 2013, 09:48:15 AM »
Cool - just went "whole hog" myself. 

Maxing out the 457b, the Roths, and the 403b.  After the mortgage is gone (<5yrs) - we'll start maxing the 401k.

Agree that it feels weird - even though it wont change the budget (as it was going to mortgage prepayment before)

Jack

  • Magnum Stache
  • ******
  • Posts: 4734
  • Location: Atlanta, GA
Re: Do you go Whole Hog?
« Reply #23 on: January 03, 2013, 10:24:15 AM »
I hadn't really thought about this until now, but it sounds like a good "stretch" goal for 2013.

However, for me the situation turns out to be relatively complicated because my wife is a 1099 contract worker (i.e., technically "self-employed") and the company I work for offers a SIMPLE IRA, not a 401k. I assume that means we're eligible to contribute $5500 (my IRA) + $5500 (her IRA) + $12,000 (my SIMPLE IRA) + ???? (her SEP-IRA or solo 401K or SIMPLE IRA or ????)?