Sell taxable to invest in 401k?

[nyxst]

I'm in an odd situation this year. I went to part-time this year for one year to finish some personal goals. In order to do this without changing my household budget, I temporarily stopped my 401k contribution. (All decided before this correction started...)
I have enough funds to cover the remainder of my year's expenses in a taxable account and now I am tempted to put my paycheck 100% into my 401k and sell the funds in my taxable account at a loss... The thought process is that I would be lowering my taxable income by doing this... but I fell like I don't know enough about taxable accounts or tax loss "harvesting" to know if any of this makes sense...
I need your collective experience to either face-punch or guide me... :)

[zolotiyeruki]

What is your expected tax bracket, and at what age do you hope to retire?  If you expect to be in a lower bracket due to working part time, you may find it preferable to contribute to a Roth 401k, so that you have more accessible funds in early retirement.

Generally, I would discourage people from cashing out a taxable account in favor of a 401k or IRA, due to the restrictions and the fact that most mustachians can easily stay in the 0% LTCG tax bracket.

[nyxst]

AGI is pretty solidly in the middle of 22% tax bracket... that wouldn't change either way.
I am 10 years+ from retirement.
I have a significant amount in a Roth IRA already (probably 25% of my total retirement savings) into which I have already maxed contributions to this year ($6k).

[zolotiyeruki]

You'll still be in the 22% bracket, even working part time? Nice! If you plan to use a Roth pipeline, you'll need to make sure that you have 5x expenses in accessible places, whether that be Roth contributions or taxable accounts. If you're already at that point, then by all means contribute to your 401k, for the tax savings

[ixtap]

Are you saying your taxable account is just big enough to cover the remaining expenses or that is only part of the account? I wouldn't necessarily spend taxable down to zero to do this, but I might be willing to make a dent.

Do you need to put 100% of paycheck to 401k to max it out?

[wageslave23]

The best way to go would be sell your taxable accounts at a loss. You can't buy or dividend reinvest into the same thing for 30 days before or after the loss sale. Then contribute to your 401k through your paycheck. 

[harvestbook]

I've done it before when striving for maximum tax efficiency.

You might sell out of taxable to the loss of $3000, which would offset income if you have no capital gains to offset. More than that would be carried into future years to offset capital gains. That's what I'm doing this year (although I will be moving the taxable to Roth instead of IRA because of our probable tax situation, I've sold for Trad IRA before). My philosophy is a tax deferred is a tax that may or may not ever be paid, depending on later Roth conversions, etc. I don't ever expect to have to pay capital gains taxes so $3000 is as far as I care to go.  Part of the goal is to keep a good blend of Roth, Trad, and taxable for flexibility later on.

In my bracket (usually 0%), taking 6k off is a big plus. Less so in a 22 percent bracket but it's something. Spitballing the math, if you sell $3k and deduct an extra $3k through your 401k roughly saves you 22 percent of $6k immediately, or $1320, not counting state taxes, etc. There are other factors but it may be worth doing a dry run of expected 2022 taxes to see.
 

The Bogleheads has a good wiki on tax loss harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting

[wageslave23]

I've done it before when striving for maximum tax efficiency.

You might sell out of taxable to the loss of $3000, which would offset income if you have no capital gains to offset. More than that would be carried into future years to offset capital gains. That's what I'm doing this year (although I will be moving the taxable to Roth instead of IRA because of our probable tax situation, I've sold for Trad IRA before). My philosophy is a tax deferred is a tax that may or may not ever be paid, depending on later Roth conversions, etc. I don't ever expect to have to pay capital gains taxes so $3000 is as far as I care to go.  Part of the goal is to keep a good blend of Roth, Trad, and taxable for flexibility later on.

In my bracket (usually 0%), taking 6k off is a big plus. Less so in a 22 percent bracket but it's something. Spitballing the math, if you sell $3k and deduct an extra $3k through your 401k roughly saves you 22 percent of $6k immediately, or $1320, not counting state taxes, etc. There are other factors but it may be worth doing a dry run of expected 2022 taxes to see.
 

The Bogleheads has a good wiki on tax loss harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting

You can still keep deducting $3k in future years even if you don't have capital gains to offset.

[nyxst]

Are you saying your taxable account is just big enough to cover the remaining expenses or that is only part of the account? I wouldn't necessarily spend taxable down to zero to do this, but I might be willing to make a dent.

Do you need to put 100% of paycheck to 401k to max it out?

No, I would use about a quarter of my taxable account if I maxed the 401k this year. 
I could either put in 100% of my check for a portion of the remaining year... or I could put in a portion of my earnings from all of my remaining  checks... I would assume that the first option would be better, but maybe the market will keep falling falling and its better to dollar cost average all year... ?

[Viking Thor]

401k is more efficient than taxable so would definitely max 401k this year since it sounds like that's doable for you.

Normally its not that big of a difference to max all at once vs spread over a few months. Technically more time in market is better on Average but a few months is not a lot of time. You could do much better maxing at once or much worse if the market crashes.

Personally I would just max it over the course of the year from paycheck. Also separately you could Tax Loss harvest in the taxable.

[ixtap]

We like to front load 401k, but for us it doesn't affect the matching. Always check the details of your company's match

[LightStache]

What really matters are the income tax rates you anticipate for future contributions and withdrawals.
 
If you already have $750K in tax deferred accounts and plan to keep contributing for ten more years, maxing contributions is probably not advisable because your eventual withdrawals will push you above the 22% bracket.

OTOH if you have $250K in tax deferred then you can keep on maxing for ten years.

Of course, there are a lot of details like your age, other retirement income sources, etc. that might push the needle one way or the other

[SeattleCPA]

What really matters are the income tax rates you anticipate for future contributions and withdrawals.
 
If you already have $750K in tax deferred accounts and plan to keep contributing for ten more years, maxing contributions is probably not advisable because your eventual withdrawals will push you above the 22% bracket.

OTOH if you have $250K in tax deferred then you can keep on maxing for ten years.

Of course, there are a lot of details like your age, other retirement income sources, etc. that might push the needle one way or the other

Totally agree with main point expressed in first sentence.

But to go off on a tangent I wonder if it might be harder than one would guess to start at $750K, max contributions for next decade, and end up in the 22% bracket. Those brackets start at roughly $42K (single) and $84K (married). But that means at least $54K total income (single) and $109K (married) if you use standard deductions.

All of above amounts get indexed for inflation so in a decade, however, so in a decade if we get 3% inflation the 22% bracket starts at $70K for single folk and at a $140K for married folks?

Divide those amounts by say 4% withdrawal rate, and you'd need to accumulate $1.75M in 2032 dollars if single or $3.5M in 2032 dollars to breach the 22% bracket.

That would require above average return to achieve... like what we've had in last decade... but would think another great decade is optimistic?

[achvfi]

I was thinking in the same vein, but rather continue doing mega back Door Roth by selling about 5% of our taxable funds.

For next few months we are going to have higher expenses and we do not have enough to spend and also continue MBR for next few months.

It got complicated as market fell a bit as I was thinking about it. But still it probably makes sense as I will be investing at similar low stock prices in 401k.

Its just so hard to sell at a loss :)

[nyxst]

Its just so hard to sell at a loss :)

Yes. It feels counter-intuitive to sell at a loss... but it's not really selling, it's just shifting it to a tax-friendly environment while getting a tax "bonus" for the realized losses.
I put it in play this week.
Hopefully it works out like I expect :) If not, it's not as if the plan is set in stone... I can just shift back. No biggie.

[achvfi]

Its just so hard to sell at a loss :)

Yes. It feels counter-intuitive to sell at a loss... but it's not really selling, it's just shifting it to a tax-friendly environment while getting a tax "bonus" for the realized losses.
I put it in play this week.
Hopefully it works out like I expect :) If not, it's not as if the plan is set in stone... I can just shift back. No biggie.

Right after posting here, I followed through. I sold a chunk of taxable and turned up after tax contributions. The plan is good, I just needed a little nudge. Thanks!