Why max the 401k

[CmFtns]

This is something I have been wondering as I see many people on this forum maxing out their retirement accounts. I thought I would share my scenario and see if people can explain to me why I should allocate any more than my company match.

I plan on working around 7-8 years if all goes well.
Right now I'm paid 62k a year as a software engineer with a full company match up to 6%.
Lets assume I never get a raise and we have 5% returns on the market.

So I do the match so 12% $7440 goes into 401k and the rest I take in my paycheck and invest into vanguard indexes. If i quit at the end of my 8th year working I will have around 86k in my 401k which will grow to 430k by the time i can use it at 65.

That's much more money that I would need at age 65 right? Especially since I design my after tax accounts to last from age 30-infinity anyway. So by 65 the 401k will be a huge boost of money to the already huge amount of money that will already last me forever. So why would I delay my taxable vanguard accounts growth by throwing a ton more money into my 401k. Every penny I put into old age retirement accounts delays the growth on the account I actually need to retire  and last me from age 30-65.

[Jeremy E.]

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

[frugalnacho]

Because you can pay less taxes by maxing your 401k out.  You can also access money in your 401k before age 59 1/2 by using the roth pipeline.  If the plan you laid out will work and get up to normal retirement age, and then you have access to your 401k and it's too much money, then that means you worked for too long.  If you max your 401k and utilize the roth pipeline, then you will be able to stop working sooner than your current plan.

[sol]

You have this exactly backwards.

1.  Every dollar you don't put into your 401k is a dollar that gets taxed at your marginal tax rate.  You're literally giving away extra money to the government by refusing the tax breaks they offer you.

2.  Your 401k is NOT off limits to you until retirement age.  There are at least three different possible ways to access that money early, maybe more depending on the specifics of your plan.  I suggest you do a little more reading here to learn about them.  Basically everyone here is adopting one of these methods for early 401k access.

[CmFtns]

thanks guy I'll read up on these methods

[brooklynguy]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

[forummm]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I feel like it's more a daily or semi-weekly occurrence.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k. The mods should put up a sticky thread at the top of this section titled "How to get money out of your 401k before age 65". That ought to do it.

[Jeremy E.]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I feel like it's more a daily or semi-weekly occurrence.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k. The mods should put up a sticky thread at the top of this section titled "How to get money out of your 401k before age 65". That ought to do it.

probably before age 59 1/2

[brooklynguy]

I feel like it's more a daily or semi-weekly occurrence.

So I guess we need to award the prize more often.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k.

Yeah, and that's why the punishment I dispensed for asking the question was the relative wrist-slap of making the OP the butt of a light-hearted joke instead of one of the harsher sentences I've laid down in the past for more serious offenses, like violating the cardinal rule against failing to read a thread before posting in it :)

But seriously, I get that it's easier to ask a question than to get your bearings in this (now overwhelmingly large) forum, so a sticky on this specific question probably would be a good idea.

[Ditchmonkey]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

There probably isn't one topic that hasn't been covered extensively somewhere on the Internet. What is the point of having discussions at all by your reasoning?

[frugalnacho]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

There probably isn't one topic that hasn't been covered extensively somewhere on the Internet. What is the point of having discussions at all by your reasoning?

https://www.google.com/search?q=What+is+the+point+of+having+discussions+site%3Aforum.mrmoneymustache.com&ie=utf-8&oe=utf-8

[forummm]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I feel like it's more a daily or semi-weekly occurrence.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k. The mods should put up a sticky thread at the top of this section titled "How to get money out of your 401k before age 65". That ought to do it.

probably before age 59 1/2

...and I win the award for biggest goof on this thread since noon MMM time.

[brooklynguy]

There probably isn't one topic that hasn't been covered extensively somewhere on the Internet. What is the point of having discussions at all by your reasoning?

If you read what I wrote, you will see that my reasoning is precisely that discussions are worth having even though they've been covered extensively before (because they result in the continuation and refinement of the earlier discussions and lead to the advancement of the knowledge-base, which is the reason cited in my posts, but not the only reason).

[RangerOne]

With regards to the IRA to Roth IRA conversion pipeline, does it require your money to be in a traditional IRA before converting to the Roth? Or can you move money from the 401k to the Roth IRA the same way?

I suppose either way it is not a huge deal because usually upon retirement you get the option to convert your entire employer 401k into a traditional IRA.

[seattlecyclone]

With regards to the IRA to Roth IRA conversion pipeline, does it require your money to be in a traditional IRA before converting to the Roth? Or can you move money from the 401k to the Roth IRA the same way?

There is no requirement to move your 401(k) to a traditional IRA before starting the pipeline. Roth conversions are handled the same way whether they come from a 401(k) or an IRA. If your 401(k) has better funds than you can get as an individual investor, you might as well leave your money there until it's time to convert.

[sol]

There is no requirement to move your 401(k) to a traditional IRA before starting the pipeline.

Unless you're a federal employee, in which case your options for converting from the TSP are significantly restricted and a trad IRA intermediary makes everything way easier.

[seattlecyclone]

With regards to the IRA to Roth IRA conversion pipeline, does it require your money to be in a traditional IRA before converting to the Roth? Or can you move money from the 401k to the Roth IRA the same way?

There is no requirement to move your 401(k) to a traditional IRA before starting the pipeline. Roth conversions are handled the same way whether they come from a 401(k) or an IRA. If your 401(k) has better funds than you can get as an individual investor, you might as well leave your money there until it's time to convert.

Unless you're a federal employee, in which case your options for converting from the TSp are significantly restricted and a trad IRA intermediary makes everything way easier.

Fair enough. I doubt the federal government is the only employer that has structured its plan in such a way that partial rollovers each year after you leave employment are disallowed. As long as your plan allows it, the law doesn't care whether the money was ever in an IRA.

[CmFtns]

thanks guys I know I should have searched first and I did a little bit but guess I didn't pick out this topic in the flood of threads about other 401k topics. This forum's size is very intimidating.

Reading up on this it does make sense to me now and I've run some numbers in excel it would be seem to be about 40k in difference over 8 years accounting for all the taxes and rules if nothing changes... the only thing I worry about in this scenario is the rules on IRA rollovers and penalties changing sometime down the road and being stuck with a taxable account to small to live on.

Using 401k=>Roth pipeline basically assumes that the rules on transferring funds from 401k=>TradIRA and TradIRA=>RothIRA stay favorable. I would hate to be stuck with 2/3 of my live on forever funds stuck til 59.5 and have to go back to work.

[sol]

Even in that very unlikely worst case scenario, the funds aren't stuck because you can always withdraw and take the 10 percent penalty.  If you're saving more than 10 percent on the taxes you still come out ahead, no Roth trickery required.

[steevven1]

Even in that very unlikely worst case scenario, the funds aren't stuck because you can always withdraw and take the 10 percent penalty.  If you're saving more than 10 percent on the taxes you still come out ahead, no Roth trickery required.

I'm pretty sure it's a 10% penalty PLUS current income tax rate. I guess you're suggesting that if the difference between your post- and pre-retirement tax rates is greater than 10%, THEN you win without any Roth trickery. Just wanted to clarify.

[Jeremy E.]

I assume you will always be able to roll over to an IRA, and if IRA>Roth IRA gets messed with, you could still take SEPP (Substantially Equal Periodic Payments), that's my backup plan.

[arebelspy]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I feel like it's more a daily or semi-weekly occurrence.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k. The mods should put up a sticky thread at the top of this section titled "How to get money out of your 401k before age 65". That ought to do it.

Someone create a thread with the first post devoted to explaining the answer to this question (not just a single link, but a paragraph or two description and a few links to the best articles--my favorite is MadFIentist's guest post on Jim Collin's blog), and I'll sticky it.

[forummm]

Congratulations, comfyfutons, you win the prize for being this week's inadvertent contributor to the advancement of the financial independence and early retirement blogosphere and knowledge-base by failing to use the search function!  :)

The responses above are good, but see here for the best answer to your question currently available on the internet:

https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

I feel like it's more a daily or semi-weekly occurrence.

And to be fair, it's hard to know to search for Roth Pipeline when you think you're talking about a 401k. The mods should put up a sticky thread at the top of this section titled "How to get money out of your 401k before age 65". That ought to do it.

Someone create a thread with the first post devoted to explaining the answer to this question (not just a single link, but a paragraph or two description and a few links to the best articles--my favorite is MadFIentist's guest post on Jim Collin's blog), and I'll sticky it.

OK, I started it. It was quick and dirty, but I know the rest of you will pile on with your wonderful improvements. I'll keep it updated with your great suggestions to made the original post better and better. We can add many more links to MMM threads and other great descriptions from other sites. If someone else wants to write better language, I can just paste it in word-for-word.

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/