Is this worth it?

[lwhorton]

Hey y'all. I'm trying to figure out what the heck to do about my high tax bracket, if anything. I'll try to keep it as short as I can:

- Live in the US
- 30 years old (30-ish years until retirement)
- Approaching the point of "too much money in my 401k": ~450k saved = [450000 * 1.05^35] ~= 1.9M

This, I believe, is already far too much saved in my 401k given my expenses of ~45k per year. If I full-stop work at 60 and live to 9, I'll have about 80k per year of income. Oops.

I'm looking to re-allocate 401k savings into taxable accounts so I have a big pile of cash to get me from somewhere in my 30s, ideally, to 60. I probably should have started this sooner.

My problem is my tax bracket. It's nuts. I'm losing 40% of my income to taxes (24% federal income, 7.65% to FICA, 8.5% state). In order to reduce my pre-tax 401k savings to increase my post-tax savings, I feel like I'm throwing money away:

- reduce $19500 (max 401k contributions 2021) to safe-harbor match provided by employer (100% match up to 4% income = $6500)
- increases my taxable income by 13k
- i pay ~1100 more in state tax, and ~4400 more in federal taxes

Ultimately, I'm taking 13k out of retirement savings, paying 5500 in tax on that cash, just so I can save a measly 7500 extra in a taxable account.

Are there ways to further reduce my taxable income so I don't feel like I'm just throwing this money away? Better, more liquid (non retirement) tax-advantaged accounts? Help, I'm being taxed!

[dandarc]

Read the link below, then come back here if you still are concerned about bridging withdrawals to age 60. At a 40% marginal rate, I'd be favoring traditional even if I already had the $2 million you're projecting in the account right now.

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

[MustacheAndaHalf]

A company match of +50% is worth it, let alone +100% match..  You won't find an immediate return like that outside of a company retirement plan.  So if you're going to reduce your 401(k) contributions, you're right to keep the amount needed to get the full company match.

I assume you're contributing to a Traditional 401(k), where contributions are tax-deductible.  In high tax brackets, that's better than a Roth.  You can convert in your retirement years before age 65.

Does your 5% growth figure include inflation?  Since prices will probably double over the next 35 years, you're looking at less than a million dollars in today's buying power.  Your 401(k) might hold less money than you think.

If you have bond funds in a taxable account, you should look to switching those into a tax-exempt bond fund.  In your tax bracket, you'll probably get higher after-tax interest that way.

Do you contribute to an HSA?  Those are also tax deductible.  They're like an IRA that allows penalty-free withdrawals to pay medical bills.  Contributing to that could reduce your income (and tax) a bit further.

If you can predict which year you'll hit peak income, that's the best year to contribute to a Donor Advised Fund.  You get a tax deduction in the year it's funded.  You can send donations to charity, and hide the source (you don't have to provide your address or name if you don't want to).

[lwhorton]

Read the link below...

Perfect. This is the kind of strategy I once knew existed, but completely forgot about. It does seem insane to pay 40% tax. Thanks for the course correction. I'll keep reducing my taxable income as much as possible, then likely setup an ira ladder that keeps me around 10% income tax while avoiding FICA.

[lwhorton]

A company match of +50% is worth it, let alone +100% match..  You won't find an immediate return like that outside of a company retirement plan.  So if you're going to reduce your 401(k) contributions, you're right to keep the amount needed to get the full company match.

Yea it's a great match, I'm very fortunate.

Does your 5% growth figure include inflation?  Since prices will probably double over the next 35 years, you're looking at less than a million dollars in today's buying power.  Your 401(k) might hold less money than you think.

Yes that's an 8% growth with 3% inflation, which seems to be a pretty fair/accurate assumption over the last 85ish years. I fear we're about to enter into some high-inflation territory with all the pandemic money printing, but it will normalize.

If you have bond funds in a taxable account, you should look to switching those into a tax-exempt bond fund.  In your tax bracket, you'll probably get higher after-tax interest that way.

I just have 100% equities at the moment. vanguard total index, mostly, and some vanguard total international and various other indexes from my current 401k provider which doesn't offer vanguard.

Do you contribute to an HSA?  Those are also tax deductible.  They're like an IRA that allows penalty-free withdrawals to pay medical bills.  Contributing to that could reduce your income (and tax) a bit further.

Yes, the maximum every year, and I'm keeping those receipts ;).

If you can predict which year you'll hit peak income, that's the best year to contribute to a Donor Advised Fund.  You get a tax deduction in the year it's funded.  You can send donations to charity, and hide the source (you don't have to provide your address or name if you don't want to).

I haven't heard of this, but I'll look into it.

Thanks!

[MDM]

- Approaching the point of "too much money in my 401k": ~450k saved = [450000 * 1.05^35] ~= 1.9M

At a 5%/yr withdrawal rate with no other income, that amount would put you in the 12% bracket if MFJ and close to the 22%/24% divider if filing single.

I'm looking to re-allocate 401k savings into taxable accounts so I have a big pile of cash to get me from somewhere in my 30s, ideally, to 60. I probably should have started this sooner.

My problem is my tax bracket. It's nuts. I'm losing 40% of my income to taxes (24% federal income, 7.65% to FICA, 8.5% state). In order to reduce my pre-tax 401k savings to increase my post-tax savings, I feel like I'm throwing money away:

Ignore FICA - it is irrelevant to this decision because 401k contributions don't affect FICA.

If you don't want to do traditional, what about Roth 401k?