Author Topic: Stop Contributing to 401K, take the tax hit and increase taxable savings???  (Read 3942 times)

Common sense

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Hi There,

My wife and I have circa $300K in tax deferred Roth and 401K contributions.  In reading through old MMM articles he stated that once he got to circa $160K in tax deferred savings he focused more on taxable/real estate because that $160K will grow to circa $600K by age 59.5.  I am currently 36 and would prefer to stop working sooner rather than later, and could do that much faster if I sold my primary residence, see this post, http://forum.mrmoneymustache.com/ask-a-mustachian/sell-house-$2-200-000-and-invest-profit-or-stay-and-work-longer/msg738992/#msg738992.

My FIRE income goal is $60,000 which puts my nest egg at $1.5 million which I feel would be achievable by 45 years of age given my income/savings rate, current expenses, and mortgage.  If I stay in my house, which I have been negotiating to sell with the mrs.,  I could have the mortgage paid off and $1.5 million saved by age 45.

My big question is when to stop funding the 401K and just take the tax hit so that I have taxable investments that I can live on from age 45-59.5.  Any help from those that have or plan to deal with similar issues would be greatly appreciated.

seattlecyclone

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dandarc

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One more link

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Quote from: MMM
So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously.

Fuzzy Buttons

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Hi There,

My wife and I have circa $300K in tax deferred Roth and 401K contributions.

Just a nit-pick, but there's no such thing as a "tax deferred Roth".  Do you mean you have $300k in traditional IRA and 401(k) accounts?

Lots of good links others have shared on accessing tax deferred accounts early.  One more thing to consider - just pay the penalty.  At $60k yearly expense and married filing jointly, you'd be in the 15% bracket in retirement most likely.  If you're deferring income now at the 25% or higher marginal rates, then even if you pay a 10% penalty to access it you're not any worse off than you are now.  Certainly that's doable for the 5 years until you get a Roth ladder going.  I'm in the same position (though I'm older), and I figure my goal for the rest of my life is not to pay 25% federal tax on anything if I can avoid it. 

seattlecyclone

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Beyond all the info about how to access your retirement accounts early, I just don't see how you get from $300k to $1.5 million in nine years without having a good chunk of taxable savings. Even if you're both able to max out mega backdoor Roth accounts in your 401(k), you'll need some very good investment returns to make that work. Even if that does describe you, you'll have a good chunk of mega backdoor Roth principal to withdraw during the first few years of your retirement where you'll be converting your tax-deferred accounts to Roth.

Common sense

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Keep investing in your 401(k)! Max that thing out every year!

See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ and https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ for more information.

Got it thanks.  I've read those early withdrawal articles before but they seem horribly complicated, and I'd prefer to wait until 59.5 but the tax benefits are very appealing.

Keep investing in your 401(k)! Max that thing out every year!

See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ and https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ for more information.

+1.

And:  http://www.madfientist.com/retire-even-earlier/

Got it thanks.

One more link

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Quote from: MMM
So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously.

Got it.  I have two rental properties as well, and invest in taxable items as well, but was really wondering when to stop the 401 contributions.

Hi There,

My wife and I have circa $300K in tax deferred Roth and 401K contributions.

Just a nit-pick, but there's no such thing as a "tax deferred Roth".  Do you mean you have $300k in traditional IRA and 401(k) accounts?

Lots of good links others have shared on accessing tax deferred accounts early.  One more thing to consider - just pay the penalty.  At $60k yearly expense and married filing jointly, you'd be in the 15% bracket in retirement most likely.  If you're deferring income now at the 25% or higher marginal rates, then even if you pay a 10% penalty to access it you're not any worse off than you are now.  Certainly that's doable for the 5 years until you get a Roth ladder going.  I'm in the same position (though I'm older), and I figure my goal for the rest of my life is not to pay 25% federal tax on anything if I can avoid it. 

We have retirement in our Roth's and tax deferred money in my solo 401K, is that better?  I am going to start backdooring $5K into each  roth per year as well.  Just need to get my accounts in line with vanguard.  My tax bracket with state/fed/corporate/ssi/medicare/etc is 33% as of last year.  I write off much of my life, and saved $74,500 via the solo 401K last year which helps my tax bracket tremendously.  If I could convince the wife to move to Nevada or texas that would immediately drop to 23%.

Beyond all the info about how to access your retirement accounts early, I just don't see how you get from $300k to $1.5 million in nine years without having a good chunk of taxable savings. Even if you're both able to max out mega backdoor Roth accounts in your 401(k), you'll need some very good investment returns to make that work. Even if that does describe you, you'll have a good chunk of mega backdoor Roth principal to withdraw during the first few years of your retirement where you'll be converting your tax-deferred accounts to Roth.

I can save $74,500 via my solo 401K per year.  $52,000 for myself and $22,500 via my wife as my "employee" for total of $74,500, this time 10 years is $745,000, plus I have $300,000 already which gives my retirement savings money at the 10 year mark $1,045,000.  Seeing this grow to $1.5 million over the course of 10 years seems very doable.  Plus I will be saving an additional $90,000 of after tax money and either A) paying down my mortgage or B) investing in taxable equity accounts or C) investing in rental property, depending on how I feel.  I will likely start paying down the mortgage fairly aggressively so that come the 10 year mark, I'll be mortgage free and have my retirement accounts, plus taxable accounts, plus investment properties.  So I think I'd be in a good position at that point.  But everyone hear says to stuff my 401K so that's what I'm going to do!!!!!!!!!!!!!!!!!!

aschmidt2930

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While I agree with the posts above, I don't think your plan is crazy.

What if the loophole is closed?  I doubt it will happen for existing contributions, but it's not impossible.  You'll need to shift 60k per year from Traditional to Roth to pull off your spending, five years before you retire.  What will your tax rate look like with that included?  You pay normal income taxes on the conversion.  I'm pretty confident that number will still point you towards going tax deferred, but the difference could sway your opinion.

Common sense

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While I agree with the posts above, I don't think your plan is crazy.

What if the loophole is closed?  I doubt it will happen for existing contributions, but it's not impossible.  You'll need to shift 60k per year from Traditional to Roth to pull off your spending, five years before you retire.  What will your tax rate look like with that included?  You pay normal income taxes on the conversion.  I'm pretty confident that number will still point you towards going tax deferred, but the difference could sway your opinion.

I'm not sure I understand your question.  I think you're talking about the backdoor Roth, and yes that loophole could close at anytime and will effect my tax situation but not horribly so because my tax bracket is going to be very small.  Definitely something to think about though long term.  Plus I still need to talk to Vanguard to get that set up and this year is flying by!

forummm

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While I agree with the posts above, I don't think your plan is crazy.

What if the loophole is closed?  I doubt it will happen for existing contributions, but it's not impossible.  You'll need to shift 60k per year from Traditional to Roth to pull off your spending, five years before you retire.  What will your tax rate look like with that included?  You pay normal income taxes on the conversion.  I'm pretty confident that number will still point you towards going tax deferred, but the difference could sway your opinion.

If the "loophole" closes on the Roth conversions, the worst case is a hit of the 10% penalty. But in reality, you could use 72(t) SEPP to get to your money without penalty too. It may not be as much as you were looking for, so you can just pay the penalty on the rest.

But closing the "loophole" seems to be not in the Treasury's interest. Not sure why they would close it. It encourages more revenue to flow to the Treasury now vs maybe more money later. Congress is always looking at short term revenues.

dandarc

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While I agree with the posts above, I don't think your plan is crazy.

What if the loophole is closed?  I doubt it will happen for existing contributions, but it's not impossible.  You'll need to shift 60k per year from Traditional to Roth to pull off your spending, five years before you retire.  What will your tax rate look like with that included?  You pay normal income taxes on the conversion.  I'm pretty confident that number will still point you towards going tax deferred, but the difference could sway your opinion.

If the "loophole" closes on the Roth conversions, the worst case is a hit of the 10% penalty. But in reality, you could use 72(t) SEPP to get to your money without penalty too. It may not be as much as you were looking for, so you can just pay the penalty on the rest.

But closing the "loophole" seems to be not in the Treasury's interest. Not sure why they would close it. It encourages more revenue to flow to the Treasury now vs maybe more money later. Congress is always looking at short term revenues.
Exactly - both Roth conversions and SEPP withdrawals create taxable events.  Why would the Treasury want to change that?