Author Topic: Keep Maxing 401k ROTH + Catch-Up Contributions - or Minimize for matching  (Read 674 times)

NWOutlier

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Hi Everyone,

Just need a gut check before I make a move.

Should I Keep Maxing 401k ROTH + Catch-Up Contributions
or Minimize 401k ROTH contributions to keep maximum matching and instead put the money in my taxable account?

I'm still working, so I don't feel having money in the taxable account (VTSAX) is a drag on its dividend earnings..  both the taxable and roth will grow at the same rate, but the taxable will have more flexibility.

I will still continue to fund both my wife's ROTH IRA and my ROTH IRA including catch-up contributions...  my previous thoughts were to flood all ROTH dollars, because they were so much lower than my tax deferred dollars...

Current ROTH Contributions
410k - 19500
401k catch-up - 6500
Wife Roth IRA - 7000
My Roth IRA - 7000
Total is 40,000.00/yr going into ROTH dollars...  I could reduce this to keep my 401k matching, continue both roth IRA's ... and put the newly gained cash to my paycheck into my taxable account.

My current job is at risk of layoff as well, we've been reducing year over year for the past 4+ years... I'm in tech, my age (51, 52 this year) makes me feel it may be my time soon....

Thoughts?

Steve (NWOutlier)
« Last Edit: February 16, 2020, 12:42:15 PM by NWOutlier »

ixtap

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How much do you currently have in Roth IRA contributions?

Do you have a solid understanding of the rules for withdrawing your Roth 401k contributions?

How many years expenses can you currently cover with your taxable accounts?

It seems like you have a lot of avenues to explore before giving up the benefits of your 401k.

NWOutlier

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How much do you currently have in Roth IRA contributions?

Do you have a solid understanding of the rules for withdrawing your Roth 401k contributions?

How many years expenses can you currently cover with your taxable accounts?

It seems like you have a lot of avenues to explore before giving up the benefits of your 401k.

Total ROTH Dollars (401k + IRA) 129,780.15  (note, I would still be contributing 6% of my salary in ROTH 401k + 14k/yr to our IRA's)
Currently rules in my 401k ROTH are the requirement to wait till 59.5 (unlike a ROTH IRA)
Number of years expenses - maybe 4 years, but I would still only withdraw 36k a year in a pinch (little over 3% of total net worth) to ensure principal is maintained
     Taxable Account: 240k (not much)
     Total of all accounts (tax def, tax free, taxable) 1.4M

Seems I could even consider eliminating catch up contributions as well and put that in taxable.  still thinking this through.

end result would be: 401k ROTH 6% of salary, with 6000-7000/yr from employer match + 14k/yr into ROTH IRA's ... so I'm not eliminating the contributions, just reducing and redirecting



terran

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Unless your 401(k) has terrible fees, tax advantaged accounts always beat taxable. Perhaps the better question is whether you should be contributing to Roth or traditional 401(k). The sticky at the top of this section of the forum can help with both questions: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

NWOutlier

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I hear ya -

My concern is my tax deferred will be a challenge with RMD's... in about 20 years, so I figure I'll let the tax deferred just grow as is; I think it's just under 1M now....

ixtap

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How much do you currently have in Roth IRA contributions?

Do you have a solid understanding of the rules for withdrawing your Roth 401k contributions?

How many years expenses can you currently cover with your taxable accounts?

It seems like you have a lot of avenues to explore before giving up the benefits of your 401k.

Total ROTH Dollars (401k + IRA) 129,780.15  (note, I would still be contributing 6% of my salary in ROTH 401k + 14k/yr to our IRA's)
Currently rules in my 401k ROTH are the requirement to wait till 59.5 (unlike a ROTH IRA)
Number of years expenses - maybe 4 years, but I would still only withdraw 36k a year in a pinch (little over 3% of total net worth) to ensure principal is maintained
     Taxable Account: 240k (not much)
     Total of all accounts (tax def, tax free, taxable) 1.4M

Seems I could even consider eliminating catch up contributions as well and put that in taxable.  still thinking this through.

end result would be: 401k ROTH 6% of salary, with 6000-7000/yr from employer match + 14k/yr into ROTH IRA's ... so I'm not eliminating the contributions, just reducing and redirecting

Since you have at least 4 years of expenses and some Roth, you are probably a candidate for the Roth conversion ladder.

Can you do in service withdrawals? (ie, convert Roth 401k to IRA while still working)

Can you do after tax contributions for Mega backdoor Roth?

If you expect to retire earlier than 59.5, I highly suggest you do a look back to determine how much of your Roth IRA is contributions, as those can be withdrawn at any time without penalty.

MDM

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I'm still working, so I don't feel having money in the taxable account (VTSAX) is a drag on its dividend earnings..  both the taxable and roth will grow at the same rate, but the taxable will have more flexibility.
Why do you think both the taxable and Roth will grow at the same rate?  E.g., do you expect to pay no tax on annual dividends?

NWOutlier

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@MDM - since I am working still, the dividends that are taxed come out of my W2 income and not the taxable account income... I may be thinking of it weirdly, but I don't consider a tax drag while I'm working.

when I stop working... the dividend income (in theory my only income) will be taxed, and a drag on the account.

am I off by thinking of it this way?

Steve

MDM

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am I off by thinking of it this way?
Yes.  E.g., if you didn't have to pay the tax you could invest that amount of your W-2 income instead of sending it to the IRS.

See the calc'ns starting in row 129 of the 'Misc. calcs' tab of the case study spreadsheet to quantify the effect.  For a reasonably tax-efficient fund such as VTSAX it's not terrible, but if it's just a question of mouse-clicking on Roth vs. taxable....