Author Topic: Maxing out 401k when we're in the 15% bracket  (Read 5779 times)


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Maxing out 401k when we're in the 15% bracket
« on: March 30, 2012, 01:28:59 PM »
My wife and I are in the 15% bracket now (after the standard deduction and personal exemptions) and are currently contributing only up to the company match in the 401k, along with Roths.

I've read here that putting $17k in the 401k and maxing it out is a no-brainer, since your taxable income in early retirement is surely less than when you're working. 

Basic question: However, given that we're in the 15% bracket now, and likely to be in the 15% bracket later, does it really provide an advantage? 

More complicated question: Given that tax brackets could change 10 years from now, is it possibly worse to max out our 401k (at least until we're making more money and are pushed into a higher bracket)?

More complicated question still: We currently only max one Roth, and recently started putting an extra $700 a so per month in a taxable Vanguard brokerage account (in order to fund the 5 years between the start of ER and when we can start using the rolling Roth contributions).  It's dawning on me that this is probably not smart.  I'd be better off choosing EITHER the 401k or maxing out the 2nd Roth, and only putting funds in the Vanguard brokerage account that are needed for the 5 year "bridge", and only after the Roth (and maybe the 401k) are maxed, right? 

« Last Edit: March 30, 2012, 02:21:14 PM by tannybrown »


  • Bristles
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Re: Maxing out 401k when we're in the 15% bracket
« Reply #1 on: March 30, 2012, 03:01:03 PM »
I would definitely max the Roth before adding more to taxable accounts. If you need the money early, you can still take out your contributions without penalty, and the earnings would likely have been small anyway (since its early) so it's a small loss to not be able to access them yet. If you can wait to withdraw it until traditional retirement, then you'll have gained all the tax savings on the earnings (which will have been larger due to the longer time).

As for the 401k - it does depend a lot on how tax rates change, but another factor is how you invest - if you trade frequently (and have options to do so in the 401k), then the tax-deferred account is almost certainly better. If you take a more passive approach like MMM (vanguard total stock market index), then taxes on the gains are less of an issue, especially since long term capital gains are taxed at 0% if you're in the 15% bracket (though that may change). If I were in the 15% tax bracket, I would contribute just enough to 401k to get matching, because I think my marginal rate won't be any better than that in retirement. If you get future raises that bring you to the 25% bracket, though, I would increase the 401k contribution so the government won't take an extra 10% of your raise.

One other thing to consider - are state taxes going to be any different in retirement? For example, I currently live in WA, which has no state income tax, but in retirement it's likely that we'll move to UT, which has 5%. This reduces the benefits of deferring taxes for us, since we'd pay 25% marginal now, and 20% (instead of 15%) in retirement.


  • Stubble
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Re: Maxing out 401k when we're in the 15% bracket
« Reply #2 on: March 30, 2012, 03:08:01 PM »
Do either of your companies offer ROTH 401k plans?  Since you're in the 15% tax bracket it may make more sense to contribute to this.  My company began offering this option last year and I would imagine more companies may pick up on this.


  • Guest
Re: Maxing out 401k when we're in the 15% bracket
« Reply #3 on: March 31, 2012, 11:09:55 PM »
Thanks for the responses, TLV and psalmela.

TLV: I'm not sure which state we'll retire in yet -- it's possible that might even change after FI.  But it's something we ought to consider as we're planning, so thanks for the idea.

As for our investment style, it's pretty much what MMM suggests: buying into various stock and bond index funds.  So we don't move stuff around much.

psalmela:  Yes, our company does offer a Roth 401k contributions.  I think this would be a great place to put extra contributions after we max the Roth, as then we can roll those funds into the Roth directly with no tax implications once we sever employment.

Follow up: Does anyone know if the funds rolled into a Roth from a Roth 401k still have to sit in the actual IRA for 5 years before they can be withdrawn w/o penalty?


  • Guest
Re: Maxing out 401k when we're in the 15% bracket
« Reply #4 on: April 03, 2012, 11:06:23 AM »
bump -- hoping to get some feedback from those who advocate maxing the 401k.


  • Pencil Stache
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Re: Maxing out 401k when we're in the 15% bracket
« Reply #5 on: April 03, 2012, 11:52:17 AM »
We max out our 401(k), but we are in a higher tax bracket. Personally, I know we would continue to max it out even if we were in 15% for two reasons:

1) Out of sight, out of mind. The automatic withdrawal from our paychecks helps us save. Most Mustachians probably don't have such a discipline problem, though, and are able to save without the psychological aid.

2) Safety from litigation. Funds in 401(k)s are protected from creditors or sue-happy folks. IRAs have some protection, but it isn't as strong as that for 401(k)s (for some reason). Alternatively, we could get personal liability insurance.

For us, it is really just a personal preference, and I wouldn't suggest everyone do what we do. We have always planned on relying on 72t, so we don't sweat the age restrictions. If we were in 15% I would push my employer to offer ROTH 401(k).


  • Walrus Stache
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Re: Maxing out 401k when we're in the 15% bracket
« Reply #6 on: April 03, 2012, 12:32:33 PM »
Even for someone in the 15 percent bracket, I would recommend saving enough in the 401k to at least provide enough income in retirement to "fill up" your lowest tax brackets in retirement.  15 is your top bracket now, but in retirement the 401k will throw income into your bottom bracket first.