Author Topic: Too much in a 401k? A 'bucket' allocation question  (Read 1192 times)

andy85

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Too much in a 401k? A 'bucket' allocation question
« on: September 20, 2018, 08:30:42 AM »
I've been thinking about this more and more after doing some long-term projections. Is it possible to have too much in a traditional 401k?

For instances, is one of these scenarios better than the other:

Retire at 50 years old
$1,250,000 of available funds

Option 1:
$900,000 t401k
$150,000 rIRA
$150,000 taxable accounts
$50,000 cash

Option 2:
$500,000 t401k
$150,000 rIRA
$550,000 taxable accounts
$50,000 cash

Off the top of my head i would think some considerations would be: what tax bracket you fall into while working before and after t401k contributions, t401k to rIRA rollover tax implications in retirement for 20 years (when you hit 70)....but i know there are many more considerations/assumptions that would need to be made in order to determine which scenario would be more beneficial.

So what other factors would go into analyzing this situation in greater detail? Just looking for variables that I know i'm overlooking...not really looking for a clear cut answer, as i'm sure it depends on a number of things.

(ETA: also, i know you cant directly do t401k to rIRA conversion...and it must go to a tIRA first, etc etc)
« Last Edit: September 20, 2018, 08:51:19 AM by andy85 »

FIRE@50

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #1 on: September 20, 2018, 08:38:44 AM »
Wouldn't the 401k to Roth rollovers stop at age 59.5?

I plan to have almost all of my money in a 401k and do a SEPP if needed.

andy85

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #2 on: September 20, 2018, 08:50:46 AM »
Wouldn't the 401k to Roth rollovers stop at age 59.5?

I plan to have almost all of my money in a 401k and do a SEPP if needed.
I guess you have a point. I assume you mean by 59.5 it makes no difference if you are rolling the 401k money into a rIRA or just taking a distribution from the 401k...that they would both be taxed the same?


FIRE@50

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #3 on: September 20, 2018, 08:55:16 AM »
Yes, that was what I was thinking.

I'm interested in what your final decision winds up being though. Annual spending would also be a factor, right?

andy85

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #4 on: September 20, 2018, 09:00:24 AM »
Yes, i would think that would factor into it as well. for ease of conversation we could just say 4%, which would be 50k/year.

Also, another benefit of trying to roll the entire 401k balance into a rIRA would to be avoid the RMDs that kick in at 70.5. Having all that money moved to a roth would give more flexibility with regards to how much/often you withdraw and also some benefits in terms of estate planning, from what i know.

jacoavluha

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #5 on: September 20, 2018, 09:18:36 AM »
I've been thinking about this more and more after doing some long-term projections. Is it possible to have too much in a traditional 401k?

For instances, is one of these scenarios better than the other:

Retire at 50 years old
$1,250,000 of available funds

Option 1:
$900,000 t401k
$150,000 rIRA
$150,000 taxable accounts
$50,000 cash

Option 2:
$500,000 t401k
$150,000 rIRA
$550,000 taxable accounts
$50,000 cash

Off the top of my head i would think some considerations would be: what tax bracket you fall into while working before and after t401k contributions, t401k to rIRA rollover tax implications in retirement for 20 years (when you hit 70)....but i know there are many more considerations/assumptions that would need to be made in order to determine which scenario would be more beneficial.

So what other factors would go into analyzing this situation in greater detail? Just looking for variables that I know i'm overlooking...not really looking for a clear cut answer, as i'm sure it depends on a number of things.

(ETA: also, i know you cant directly do t401k to rIRA conversion...and it must go to a tIRA first, etc etc)

What is the basis in the taxable account at retirement in both scenarios? Matters a lot. You have to account for the deferred tax liability, in both scenarios, for all of the non-Roth assets

andy85

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #6 on: September 20, 2018, 09:34:49 AM »
What is the basis in the taxable account at retirement in both scenarios? Matters a lot. You have to account for the deferred tax liability, in both scenarios, for all of the non-Roth assets
Roughly:
$90k and $300k, respectively, in the taxable accounts for both scenarios.

EvenSteven

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Re: Too much in a 401k? A 'bucket' allocation question
« Reply #7 on: September 20, 2018, 09:57:38 AM »
One thing to make sure you account for in your analysis is the tax savings on the front end of a traditional contribution (and the taxes paid on the front end of a Roth).

Comparing 1.25M of Roth to 1.25M of traditional but only accounting for taxes being paid on withdrawal will end up favoring the Roth, but is not an apples to apples comparison. For example, if you are paying a 28% marginal tax rate at contribution, you should compare 0.9M Roth to 1.25M of traditional.