Author Topic: Sanity check: Max out retirement contributions?  (Read 4588 times)

RedmondStash

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Sanity check: Max out retirement contributions?
« on: February 08, 2016, 05:43:17 PM »
Are there any disadvantages to fully maxing out our 401k and SEP contributions each year, even if that means moving money from our taxable, non-retirement account? I can't think of any, but we've just recently left our financial planner, who was reluctant to move money from a non-retirement "bucket" to a retirement "bucket," preferring our retirement contributions to come from our employment income. I just want to make sure I'm not missing anything.

I did a bunch of research late last year and now have a much better understanding of IRA, Roth, SEP, and 401k accounts, and of the more immediately taxable nature of income from non-retirement accounts. At this point, we'd probably put all our money into retirement accounts if we could. I'm kind of kicking myself for waiting so long to really understand the benefits; in past years, we have not always maxed out our retirement contributions, even though we had money in our non-retirement account.

Spouse is now old enough to freely access retirement accounts, so no issues about getting our hands on money if we need to. Plus we're both still working and saving.

Also -- is it a tax-loss-harvesting no-no if at the end of the year, we sell some funds at a loss, move that money into an SEP, and then buy the same funds? The point would be to contribute to the SEP, not to harvest losses, but it might end up that way. If it is a problem, any suggestions as to a solution?

Thanks for the sanity check.

ender

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Re: Sanity check: Max out retirement contributions?
« Reply #1 on: February 08, 2016, 05:48:04 PM »
Quote
who was reluctant to move money from a non-retirement "bucket" to a retirement "bucket," preferring our retirement contributions to come from our employment income

What reasons did he give for this?

If you have huge capital gains on the funds, it might make sense to not (depending on your tax rates, you might save or lose money with this choice). Depending on your income, you may also become ineligible for certain tax credits if you have too much investment income and realize too much in capital gains.




RedmondStash

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Re: Sanity check: Max out retirement contributions?
« Reply #2 on: February 08, 2016, 05:57:01 PM »
Quote
who was reluctant to move money from a non-retirement "bucket" to a retirement "bucket," preferring our retirement contributions to come from our employment income

What reasons did he give for this?

She said something vague about how moving money from one bucket to another wasn't really a gain, but putting more money in was. Maybe. I don't recall exactly. I think it also had to do with how she had a strategy in place for everything already, and moving money would make her change the strategy because the proportions or amounts would be different.

If you have huge capital gains on the funds, it might make sense to not (depending on your tax rates, you might save or lose money with this choice). Depending on your income, you may also become ineligible for certain tax credits if you have too much investment income and realize too much in capital gains.

Tax credits for too much in capital gains? I thought capital gains taxes were pretty straightforward. I'd love more info on the subject.

ender

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Re: Sanity check: Max out retirement contributions?
« Reply #3 on: February 08, 2016, 06:00:27 PM »
Quote
who was reluctant to move money from a non-retirement "bucket" to a retirement "bucket," preferring our retirement contributions to come from our employment income

What reasons did he give for this?

She said something vague about how moving money from one bucket to another wasn't really a gain, but putting more money in was. Maybe. I don't recall exactly. I think it also had to do with how she had a strategy in place for everything already, and moving money would make her change the strategy because the proportions or amounts would be different.

Probably most people who cash out the funds don't actually contribute to others, making it a net loss for them.


Quote
If you have huge capital gains on the funds, it might make sense to not (depending on your tax rates, you might save or lose money with this choice). Depending on your income, you may also become ineligible for certain tax credits if you have too much investment income and realize too much in capital gains.

Tax credits for too much in capital gains? I thought capital gains taxes were pretty straightforward. I'd love more info on the subject.

Things like EITC are dependent on your investment income. If you cash out some funds and realize $3500 in investment income because of your capital gains, you are suddenly not eligible for EITC.

Without knowing your incomes or situation it is impossible to know if this actually applies.

RedmondStash

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Re: Sanity check: Max out retirement contributions?
« Reply #4 on: February 08, 2016, 07:35:34 PM »
Ah, I see, thank you, ender. We are not eligible for the EITC, not this year. Possibly sometime in the future. I'll file that tidbit away for later.

PhysicianOnFIRE

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Re: Sanity check: Max out retirement contributions?
« Reply #5 on: February 08, 2016, 08:28:58 PM »
Also -- is it a tax-loss-harvesting no-no if at the end of the year, we sell some funds at a loss, move that money into an SEP, and then buy the same funds? The point would be to contribute to the SEP, not to harvest losses, but it might end up that way. If it is a problem, any suggestions as to a solution?

Thanks for the sanity check.

Yes, this would create a wash sale.  Look for a similar, but not identical fund in the SEP (an example would be Total stock / S&P 500 / large cap).  31 days later, you can exchange back to the original fund within your SEP.

Goldielocks

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Re: Sanity check: Max out retirement contributions?
« Reply #6 on: February 08, 2016, 08:47:35 PM »
Retirement accounts have two disadvantages:

1.  you can't access them until age 59.5, so you need to have a generous FU or emergency or other savings account to support opportunities that life throws at you.    (does not apply to you)

2. It is possible for some people to pay more money in taxes, pulling them out of the retirement account, that what you saved when you put them in... if you put it in at a mid level or lower tax bracket, and take it out at a higher bracket.

Lastly, not really a problem, as you can plan around it.. but here, the retirement accounts need to be rolled over into a Retirement Income Fund, after a certain age, (71 ?) that forces you to take a percentage out (and pay taxes) each year.  Many people have other income streams and don't want to be forced to do this until they are ready.  keeping some money out of the retirement "bubble" can give you more options.

PhysicianOnFIRE

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Re: Sanity check: Max out retirement contributions?
« Reply #7 on: February 09, 2016, 02:49:44 PM »
Retirement accounts have two disadvantages:

1.  you can't access them until age 59.5, so you need to have a generous FU or emergency or other savings account to support opportunities that life throws at you.    (does not apply to you)

This is a common misconception.  There are many exceptions to the rule. 

Roth IRA contributions can be taken out penalty free after 5 years.
457(b) is available when you leave your employer.
401(k) is available if you leave your employer in the year you turn 55 or later (not helpful to many in the FIRE crowd I realize)
IRA can be accessed penalty free with SEPP
More ideas here at WCI  http://whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/

RedmondStash

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Re: Sanity check: Max out retirement contributions?
« Reply #8 on: February 09, 2016, 05:57:51 PM »
Thanks, all. I appreciate your thoughts. It's pretty clear that for us, maxing out our retirement accounts is the way to go, for the few years we have left in employment.

MDM

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Re: Sanity check: Max out retirement contributions?
« Reply #9 on: February 09, 2016, 11:22:47 PM »
This is a common misconception.  There are many exceptions to the rule. 

Roth IRA contributions can be taken out penalty free after 5 years.

It's even better: Roth IRA contributions can be taken out penalty free any time you want, including the day after you make them.  It's the traditional to Roth conversion money that has to "season" for 5 years.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ and http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Goldielocks

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Re: Sanity check: Max out retirement contributions?
« Reply #10 on: February 10, 2016, 12:10:23 AM »
Retirement accounts have two disadvantages:

1.  you can't access them until age 59.5, so you need to have a generous FU or emergency or other savings account to support opportunities that life throws at you.    (does not apply to you)

This is a common misconception.  There are many exceptions to the rule. 

Roth IRA contributions can be taken out penalty free after 5 years.
457(b) is available when you leave your employer.
401(k) is available if you leave your employer in the year you turn 55 or later (not helpful to many in the FIRE crowd I realize)
IRA can be accessed penalty free with SEPP
More ideas here at WCI  http://whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/

Thanks!  You are right.  I don't think of Roth IRA as a locked in account, but rather as an emergeny / extra savings an FU money account, too..   I am not familiar with 457(b)...   

The comments on the 401(k), IRA and such -- although correct, and you can get your money out, eventually, it is hard to do so quickly (withing 3 months of a stated need / want), so these provisions aren't that great as a backup option for emergency / short term cash, although they can still be planned for use during FIRE.

RedmondStash

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Re: Sanity check: Max out retirement contributions?
« Reply #11 on: February 10, 2016, 09:13:09 AM »
Thanks! We plan to start shuttling money from traditional IRA to Roth once our income dips low enough after at least one of us retires.

MustacheAndaHalf

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Re: Sanity check: Max out retirement contributions?
« Reply #12 on: February 10, 2016, 09:58:13 AM »
Also -- is it a tax-loss-harvesting no-no if at the end of the year, we sell some funds at a loss, move that money into an SEP, and then buy the same funds?
Reinforcing what another poster said, you have the opportunity to have the IRS share in your loss.  If you sell, you deduct the loss from your taxes.  If you then trigger a wash sale, the tax deduction is gone.  And because you triggered a wash sale into a retirement account, it's probably gone forever.

Simple solution: pick a similar fund instead of an identical fund.  For example, Vanguard Total Stock Market ETF ("VTI") has differences with Schwab US Broad Market (SCHB).  One has 3750 stocks, the other 2000.  They track a different index, and have different fees (surprisingly, SCHB is cheaper at 0.03%).  If you insist on Vanguard only, there's the S&P 500 which is ~72% overlap with Total Stock Market, so it's not the same.  You just want something you can hold more than 1 month, before you swap back to the fund you like.

PhysicianOnFIRE

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Re: Sanity check: Max out retirement contributions?
« Reply #13 on: February 10, 2016, 10:09:38 AM »
This is a common misconception.  There are many exceptions to the rule. 

Roth IRA contributions can be taken out penalty free after 5 years.

It's even better: Roth IRA contributions can be taken out penalty free any time you want, including the day after you make them.  It's the traditional to Roth conversion money that has to "season" for 5 years.

See https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ and http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Indeed!  Thank you MDM for the clarification.