Author Topic: Clarification for maxing out retirement accounts  (Read 1900 times)

HealthyDollar

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Clarification for maxing out retirement accounts
« on: August 17, 2014, 02:42:52 PM »
Hi everyone! I've been lurking around this site and forum for quite a while now but just finally signed up for an account. There's too much good information on here not to participate! :)

Anyway, my wife and I are both 26 years old, debt free (we don't have a mortgage... yet) and contribute into our company-provided 401k's just enough to get the full company match. Beyond that, we're taking all of our excess money each month (roughly somewhere 40-50% of our take-home pay) to put toward our emergency fund (I want to get it to 6 months of expenses).

My question for all of you is this: If our goal is going to be early retirement (say mid-40's or something), why should we max out our 401k's and even an IRA due to the penalties we'd face for early withdrawals? I've done some reading about the 72t (SEPP) rules for IRA, but I still don't know enough to be comfortable with maxing out 401k's as opposed to heavily investing in a taxable account at Vanguard, for example.

Thanks for any help you can offer.

Joel

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Re: Clarification for maxing out retirement accounts
« Reply #1 on: August 17, 2014, 02:45:24 PM »
The tax savings now are the reason why you should max your tax deferred accounts. There are ways to get the money out early if needed.

Dodge

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Re: Clarification for maxing out retirement accounts
« Reply #2 on: August 17, 2014, 02:49:44 PM »
This question comes up every once in a while.  It's still best to max out your retirement accounts.  Here are some resources:

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

Here's an explanation of how to access your IRA/401k money early, without a penalty.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

Nords

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Re: Clarification for maxing out retirement accounts
« Reply #3 on: August 17, 2014, 02:58:51 PM »
My question for all of you is this: If our goal is going to be early retirement (say mid-40's or something), why should we max out our 401k's and even an IRA due to the penalties we'd face for early withdrawals? I've done some reading about the 72t (SEPP) rules for IRA, but I still don't know enough to be comfortable with maxing out 401k's as opposed to heavily investing in a taxable account at Vanguard, for example.
Because:
1.  The 401(k) match.  (Or, for U.S. military, the Thrift Savings Plan's low expense ratios.)
2.  The tax-deferred accounts are easier to get at than you may realize, and 72(t) is probably the least desirable approach.
2.a.  The possibility of tax-free growth in a Roth IRA as opposed to the annual taxing of the annual gains in a taxable account.

This post was written for a military audience, but it's the same technique for a 401(k) or a Roth 401(k) as for a TSP/Roth TSP.
http://the-military-guide.com/2014/03/20/early-withdrawals-from-your-tsp-and-ira-after-the-military/

You can also stop contributing to those tax-deferred accounts a few years before you ER:
http://the-military-guide.com/2013/02/14/when-do-you-stop-contributing-to-tax-deferred-accounts/