401k contributions pre/post tax

[LearningMustachian72]

I have been putting 9% pretax and 3% post tax into my 401k with the thought being that I may be in a higher tax bracket at retirement.

For those of you that have reached FI, is this generally the case? I am wondering if this is the proper approach.

Other things to consider, my wife has a 457 we can withdraw from penalty free along with a 403b and a pension. My retirement savings are all in the 401k.

[ixtap]

Generally, people are in lower or similar tax brackets in retirement. But what is important is where you will likely fall. You can use some simple tools to get an idea for that.

[Turtle]

Depending on how much you accumulate over time, RMDs may eventually make the choice for you as far as which tax bracket you will be in.

I have mix of Roth and Traditional for my 401k, as well as having inherited a similarly sized but all traditional 401k when my spouse passed from cancer last year.  Our plans were based on joint tax rate; but those higher brackets kick in much sooner for me now.  I'm very thankful that I decided to have some of my contributions be Roth because it will give me increased flexibility post retirement, and decreases the amount of my RMDs.

All of my grandparents lived into their 80s, as did both of my parents, so even with the increased start age, I'm still planning as if I'll have a number of RMD years ahead of me.

[engineerjourney]

When you are saying Post Tax you mean Roth right?

I have 3 options in my 401k:
1) Before Tax (Traditional)
2) Roth
3) After Tax (only useful if you can do megabackdoor Roth)

Just wanted to make sure your 3% is Roth, which is a fine idea but check your actual tax bracket projections vs after tax which is definitely not as good as Before Tax or Roth.

[ender]

Most people pursuing FIRE will have significantly lower taxes in retirement than their working years pretty much by definition - unless they end up with absurdly more money than they expected.

[MDM]

I have been putting 9% pretax and 3% post tax into my 401k with the thought being that I may be in a higher tax bracket at retirement.

If you believe you will pay a higher tax rate to withdraw from your traditional account than the rate you would save by contributing, then you should be going 100% Roth.

That leads to the question of how sound is that belief?  Might be very, not at all, or somewhere in between....

[Must_ache]

I think it's good to have a combination of both, but with taxes at a dirt-cheap 12% right now I would probably tilt towards paying those taxes sooner than later and going all-out Roth.  We aren't all going to be in that tax bracket though, but if you are a big saver than can help.  22% isn't all that terrible either I don't think if you have money burning a hole in your pockets.

My own portfolio is about 1/3 Roth, and part of my FIRE plan in five years is to get government health insurance subsidies on the exchange, assuming things don't change drastically from their current state.  The subsidy is based on your taxable income.  If I can keep the taxable income for me and my wife around 30-40k I figure the insurance should be nearly free.  What better way to ensure my taxable income is low but to have plenty of Roth money available.  So if I want $70K to live on I can take $35K of each (Roth and non-Roth). 

If the 12% tax bracket remained that way in retirement, my $70K would be 100% from non-Roth as i can have taxable income up to about $90K before going to 22%.  Then if Uncle Sam were to increase the tax brackets, my mix would change accordingly.  People like the traditional 401k because it's easy when the taxes are deferred but I say pay those taxes now @ 12% if you can.       

[wageslave23]

I think it's good to have a combination of both, but with taxes at a dirt-cheap 12% right now I would probably tilt towards paying those taxes sooner than later and going all-out Roth.  We aren't all going to be in that tax bracket though, but if you are a big saver than can help.  22% isn't all that terrible either I don't think if you have money burning a hole in your pockets.

My own portfolio is about 1/3 Roth, and part of my FIRE plan in five years is to get government health insurance subsidies on the exchange, assuming things don't change drastically from their current state.  The subsidy is based on your taxable income.  If I can keep the taxable income for me and my wife around 30-40k I figure the insurance should be nearly free.  What better way to ensure my taxable income is low but to have plenty of Roth money available.  So if I want $70K to live on I can take $35K of each (Roth and non-Roth). 

If the 12% tax bracket remained that way in retirement, my $70K would be 100% from non-Roth as i can have taxable income up to about $90K before going to 22%.  Then if Uncle Sam were to increase the tax brackets, my mix would change accordingly.  People like the traditional 401k because it's easy when the taxes are deferred but I say pay those taxes now @ 12% if you can.     

Who said the OP was in the 12% bracket? If they are then yes, I would agree with Roth. If you are higher, then I would go with regular 401k.  You can have additional funds in normal taxable accounts after maxing 401ks

[LearningMustachian72]

Thanks for the replies everyone.

I hover between the 24% and 32% tax brackets depending on the year.

I plan to have somewhat high income when I FI as I’d like to travel often.

I put the 3% in the 401k Roth as even though I may have similar income in retirement, I anticipate tax rates to rise.  However I likely won’t need as much income as I currently have.

[wageslave23]

Thanks for the replies everyone.

I hover between the 24% and 32% tax brackets depending on the year.

I plan to have somewhat high income when I FI as I’d like to travel often.

I put the 3% in the 401k Roth as even though I may have similar income in retirement, I anticipate tax rates to rise.  However I likely won’t need as much income as I currently have.

If you are familiar with how the tax system works, you'll realize that it's very hard to be FIRE and go above the 12% tax bracket as it's constructed currently.  If you are married, you would need to pull >$100k out of taxable accounts each year. Most people with that kind of money have non retirement accounts they are pulling from that are return of basis and capital gains which are taxed at 0% if you have less than $100k in income.  The tax rates will change, maybe up, maybe down depending on what's politically optimal to get the most votes, but starting with a 12%+ cushion is pretty nice. I'd rather the bird in hand and keep the tax savings now and hope tax rates don't increase more than 12% to 25%+ for the 12% bracket.  I really can't think of a likely scenario where a FIRE person would not fall in the 12% or lower bracket as the tax code is currently constructed. Unless you are planning on fat FIRE at age 50+, but I don't consider that FIRE.

[patchyfacialhair]

Thanks for the replies everyone.

I hover between the 24% and 32% tax brackets depending on the year.

I plan to have somewhat high income when I FI as I’d like to travel often.

I put the 3% in the 401k Roth as even though I may have similar income in retirement, I anticipate tax rates to rise.  However I likely won’t need as much income as I currently have.

If you are familiar with how the tax system works, you'll realize that it's very hard to be FIRE and go above the 12% tax bracket as it's constructed currently.  If you are married, you would need to pull >$100k out of taxable accounts each year. Most people with that kind of money have non retirement accounts they are pulling from that are return of basis and capital gains which are taxed at 0% if you have less than $100k in income.  The tax rates will change, maybe up, maybe down depending on what's politically optimal to get the most votes, but starting with a 12%+ cushion is pretty nice. I'd rather the bird in hand and keep the tax savings now and hope tax rates don't increase more than 12% to 25%+ for the 12% bracket.  I really can't think of a likely scenario where a FIRE person would not fall in the 12% or lower bracket as the tax code is currently constructed. Unless you are planning on fat FIRE at age 50+, but I don't consider that FIRE.

Yeah I'm with you here. We are in the 24% bracket (hopefully 32% next year), and when you look at our actual spending, we'll retire with outrageously facepunchworthey spending within the 12% bracket. Even bumping it up to 22%, you get an additional 100K plus to play with in retirement. So for us it's a simple decision, max out the 401k traditional, and call it a day. By the time we retire, I project to have a significant amount in both tax advantaged retirement accounts as well as a regular brokerage account, and so the game at that point will hopefully be to balance withdrawing from each so as to minimize big RMD tax shocks later on.

[LearningMustachian72]

My wife and I are maxing out 3 retirement accounts, 401k, 403b and 457. We save a little outside of this in brokerage but not much, roughly $5k/year.

Although I likely won’t have as much expenses as I do now, I set my FI number to my current expenses times 25.

I plan to somewhat fat fire around 50.  It seems based on reading this that I should possibly go 100% the traditional route rather than the 75/25 split I am currently doing. Simply thought it may offer more flexibility down the road.

[Must_ache]

My wife has never "worked" so I guess I sometimes forget how easily dual-income earners could slide into the 22% and higher brackets.  I make $150K but I have the ability to defer $40K into a separate account and receive it in the future, and by the time I max out my 401k and HSA I'm well within the 12% tax bracket with room to spare.  My 401k contributions these days are mostly Roth and I am paying the tax because in my situation I don't see it getting lower than 12%. 

If the OP is maxing his 401k ($22,500) and only using 12% of his income to do so, he must be making on the order of $188K+.  In that case I would be inclined to do so tax-advantaged. 

I would be tempted to start saving more money outside my brokerage - I have $100K in my brokerage account if only because I don't have any more places to stash it.   

If you have that much money, do us all a favor and pay some tax.  :)

[Purple_Crayon]

My own portfolio is about 1/3 Roth, and part of my FIRE plan in five years is to get government health insurance subsidies on the exchange, assuming things don't change drastically from their current state.  The subsidy is based on your taxable income.  If I can keep the taxable income for me and my wife around 30-40k I figure the insurance should be nearly free.   

This is the factor that has largely changed my strategy in the last few years. I used to do everything 100% ROTH. But my state, being a medicare expansion state, basically forces me to have my income come in between 138% and 150% of the federal poverty line if I want the cheapest health insurance and don't want to be forced to choose Medicaid.

Because of the need to be able to "manufacture" income to fall exactly where I need to, I realized I would need to be able to convert some non-ROTH accounts to ROTH in order to get my reported "income" to above 138% of FPL to be eligible in my state.