Author Topic: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?  (Read 1422 times)

Cycling Stache

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I am hoping/aspiring/planning to stop working on February 1, 2019.  (Even writing that sentence feels like a big step!)

My wife insists that she wants to continue working for the next 10 years at least.  She makes approximately $80k per year, and our annual spending will be approximately $80k with her employer's much more expensive health care plan.

We will make approximately $100k gross in 2019 if I retire 2/1/19 (wife's $80k plus about $20k for me).

We will have approximately $450k in a taxable Vanguard account.  The rest is in retirement accounts.  We are 42 and 44.  Here are the questions:

(1)  Should I try to maximize my 401(k) as much as possible in the first month of 2019?  With accrued annual leave, I believe I could contribute $12k or so before I leave.  The tradeoff seems to be maximizing retirement saving and avoiding the tax now when we likely have a pretty good amount in non-retirement accounts versus going ahead and paying the 12% (?) tax on that money to lock in a low-tax rate and buy flexibility with the money.  I also have never done a Roth, so I'm not sure what the significance would be for trying to do one for a month or two, or whether it's worth even considering.

(2)  Should I have my wife continue to maximize her 401(k) ($19k in 2019) and then replace the additional money needed for spending from the taxable Vanguard account?  This would avoid taxes now, and effectively begin shifting $10k-$20k (depending on dividends) from taxable to retirement accounts.  Does that limit us too much, or is it good for possible other issues like maybe kids' (12 and 9) college financial aid?

(3)  If we continue to max withhold for my wife's 401(k) plan, what is the impact if we buy VTSAX in the retirement account while simultaneously selling VTSAX from the taxable account to pay for annual spending?  The words "wash sale" ring a bell, but I don't recall what that means in practice.

My plan was just to maximize retirement saving as much as possible, but I started to question that as I contemplated the specifics.  I was drawn to the idea of how low taxes will be if max withholding, but is that being shortsighted if what we're avoiding is a 12% tax rate and giving up some flexibility?

I appreciate any specific input.  Thank you!

jacoavluha

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #1 on: September 21, 2018, 02:49:01 PM »
your wife makes 80k gross? before any retirement contributions, taxes, health insurance, etc?
spending is 80k, does that include taxes?

mintleaf

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #2 on: September 21, 2018, 05:51:42 PM »
It sounds like you already have plenty of flexibility in the $450k taxable account plus your wife's continued income. I would probably try to use every bit of income as an opportunity to stuff more money into pre-tax accounts. Even if you both stop working and start burning through the taxable account faster than is sustainable, you'll have plenty of time to see that coming and set up a roth ladder, or find additional income.

dandarc

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #3 on: September 21, 2018, 05:57:20 PM »
(3)  If we continue to max withhold for my wife's 401(k) plan, what is the impact if we buy VTSAX in the retirement account while simultaneously selling VTSAX from the taxable account to pay for annual spending?  The words "wash sale" ring a bell, but I don't recall what that means in practice.
Only matters if you are selling at a loss in the taxable account - you won't be able to claim the loss on taxes if you buy VTSAX within 30 days in any of your accounts before or after selling at a loss.

MDM

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #4 on: September 21, 2018, 07:07:49 PM »
We will have approximately $450k in a taxable Vanguard account.  The rest is in retirement accounts.
How much is "the rest" and how much of that is in traditional accounts?

Any pensions expected?

TomTX

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #5 on: September 22, 2018, 07:31:21 AM »
That overall spending rate seems high unless you have an awful lot in the retirement accounts.

bacchi

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #6 on: September 22, 2018, 11:27:44 AM »
A wash sale loss doesn't disappear, either. It just bumps forward.

If the market takes a dive in the next 5 months, and you're worried about a wash sale, just buy VFINX.

Cycling Stache

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #7 on: September 26, 2018, 09:27:26 AM »
To answer some of the questions for context.

Net worth is approximately $2.1 million.  Paid off house worth $750k (Boarder just cried, I know).  $1.3 million (rounding) is invested, $900k in retirement accounts and $450k in after-tax account.  We will move to a lower cost of living area at some indeterminate point, which will unlock some of the money in the house as well.

My spending figures do not include taxes, but no state income tax, so whether the extra $20k goes in the retirement account really impacts the total tax we'll pay.

Looking back at the figures, spending is likely to drop to around $70k once I stop working.  If I take the dividends from the taxable account (rather than reinvest them), my wife's salary plus the dividends will come close to paying our annual expenses.  So it's primarily a question of whether it's better to put $20k each year in the retirement account if it means coming up with the $20k from the $450k taxable account.  That's the one I'm not sure about.

I'm pretty sure we're set financially.  We've already accrued social security a federal pension worth about $50k starting at 67, and I would guess our annual expenses at that point with kids out of the house, lower cost of living, etc. will be close to that.  Also, with the money in the market for the next 10 years or so, statistically it's likely to double, although obviously that's not guaranteed.  Regardless, we're not tapping the investments so long as my wife works.  It's just a question of whether to effectively shift $20k per year from the taxable account to the retirement accounts.

I appreciate the input.  My instinct is to continue maxing the retirement withholding just because it's tax advantaged space, but part of me thinks that if we're at the 12% marginal tax rate with only one salary, maybe we should just pay the 12% tax now on the theory that it's unlikely ever to be much lower than that, and also buy ourselves some flexibility with the money (kids college, etc.).

seattlecyclone

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Re: Reducing to One Salary in 2019 - How To Handle 401(k) Contributions?
« Reply #8 on: September 26, 2018, 09:49:23 AM »
I'd keep contributing to the retirement accounts, but maybe switch to Roth now that your income will be cut in half from what it was before, and your wife's income is about what you will be spending anyway. That way when she does eventually leave her work you'll have a pretty good amount of Roth principal that can be withdrawn tax-free at any age. If your wife works more than 10 years, you'll be pretty close to the age where you can make qualified withdrawals at that point. If she quits sooner, you'll likely need to employ a Roth ladder, but the rest of your taxable account and the Roth principal should be enough to get you through the first five years.