Author Topic: Max out 401k contributions right before ER?  (Read 1821 times)

stwicky

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Max out 401k contributions right before ER?
« on: June 12, 2017, 04:52:42 AM »
Hello everyone.

I am planning to ER at the end of the first of 2018.  My 401k plan allows me to contribute up to 50% of my pay into the plan each pay period along with a 9% match.

I currently contribute 13% along with the company match.  This allows me to peg out the plan over a 12 month period.

I am considering a strategy wherein I would up my contribution to 50% for each month of the first quarter of 2018, making my exit on April 1, 2018.  I am wondering about the benefits of maxing out this contribution for these three months.

Will that reduce my taxable income for the year?  Does it benefit me to take full advantage of the 401k before leaving?

Thoughts?

« Last Edit: June 12, 2017, 04:55:37 AM by stwicky »

Aggie1999

  • Bristles
  • ***
  • Posts: 330
Re: Max out 401k contributions right before ER?
« Reply #1 on: June 12, 2017, 09:44:59 AM »
Since you will only have a salary for 3 months you need to figure out what your taxable income will be for 2018 after taking into account deductions, exemptions, etc. Also factor in the amount you can put in a standard IRA to lower your taxes. After all that if you would still have taxable income then you should put that amount in in the standard 401k. Any remaining put in the Roth 401k. Regardless of your taxes make sure you are putting enough in the tIRA/rIRA to get the full 9% company match for the 3 months.

Aggie1999

  • Bristles
  • ***
  • Posts: 330
Re: Max out 401k contributions right before ER?
« Reply #2 on: June 12, 2017, 09:49:58 AM »
Also, make sure if you up the 401k to 50% salary you don't max out the 401k before your exit date. Your 401k plan may stop the company contributions if you hit to 401k max. You will need to read your 401k plan documentation to see the rules.

fattest_foot

  • Pencil Stache
  • ****
  • Posts: 545
Re: Max out 401k contributions right before ER?
« Reply #3 on: June 12, 2017, 09:50:59 AM »
Yeah, I'd say the matching should be priority.

Depending on how much cash you have on hand, you should make sure you have whatever amount you had planned on (e.g if you want 6 or 12 months of cash on hand, keep that separate and don't invest it).

From there you can figure out how much you'll be drawing from investment accounts, what taxable basis they have, and how much earned income from the 3 months of employment you'll have. Adjust your contributions with that knowledge to figure out if it's worthwhile to try reducing your taxable income.

It's a hard question to answer without knowing all the numbers, but also there's a lot of personal preference involved as well.

CryingInThePool

  • 5 O'Clock Shadow
  • *
  • Posts: 89
  • Location: West Coast
  • FIRE Target - - 2018 or whenever the mood strikes
Re: Max out 401k contributions right before ER?
« Reply #4 on: June 12, 2017, 11:06:55 AM »
A couple of years ago I started front loading my 401k  (contribute Jan-June). 
There are risk and advantages but it really does depend on the fine print of your plan and company match. 

My thinking since I've been in OMY mode for a while is that I don't want not having funded the 401k to be a consideration in leaving should my job start to suck.    So maybe it's a form of psychological FU Money but I consider it a flexible benefit of being FI.

MDM

  • Walrus Stache
  • *******
  • Posts: 8254
Re: Max out 401k contributions right before ER?
« Reply #5 on: June 12, 2017, 04:14:36 PM »
I am considering a strategy wherein I would up my contribution to 50% for each month of the first quarter of 2018, making my exit on April 1, 2018.  I am wondering about the benefits of maxing out this contribution for these three months.

Will that reduce my taxable income for the year?
Yes.  Why would it not?

Quote
Does it benefit me to take full advantage of the 401k before leaving?
Probably.  You should estimate the marginal tax saving rate you would be getting.  The most accurate way would be using whatever method you use for your actual tax return.  The case study spreadsheet might give a good enough answer.

PhrugalPhan

  • Stubble
  • **
  • Posts: 128
  • Age: 55
  • Location: No. VA
Re: Max out 401k contributions right before ER?
« Reply #6 on: June 12, 2017, 08:37:54 PM »
A couple of years ago I started front loading my 401k  (contribute Jan-June). 
There are risk and advantages but it really does depend on the fine print of your plan and company match.
I've been doing that since 2007.  Since I have no match (but a pension) there is no downside for me.  Its helped to boost my returns most years.  I'll finish my contributions the end of July this year.

WYOGO

  • Stubble
  • **
  • Posts: 153
  • Location: Salt Lake City
  • Great Basin
Re: Max out 401k contributions right before ER?
« Reply #7 on: June 12, 2017, 08:47:40 PM »
Some great points so far. As I approach my own personal RE deadline, I will

1) Work through July of the year enabling maxing of all tax advantaged accounts including generally ineligible, with respect to deductibility, tIRA contributions,
2) Recieve full prior fiscal year bonus payouts,
3) Recieve full prior year portable pension credits, interest and funding,
4) Fully fund post tax Roth IRA rollover enabled 401K,
5) Ensure all vacation accruals have been fully utilized

My specific 401K plan ensures a "true up" with respect to matching, irrespective of service separation, end of each fiscal year for the maximum allowed match should the contribution minimum be met. Obviously, this requires the funds to still be a part of and subject to the plan rules. This would happen about a year later in my case. Funds are not required to be rolled out of the plan after separation from service though nominal fees begin to be assessed the account starting the first full year after separation..

This should result in some significant tax savings as a result and a nice boost into a future absent from W2 wages.
« Last Edit: June 12, 2017, 08:58:59 PM by WYOGO »

MandyM

  • Pencil Stache
  • ****
  • Posts: 544
  • Location: Lexington, KY
Re: Max out 401k contributions right before ER?
« Reply #8 on: June 13, 2017, 06:34:23 AM »
A couple of years ago I started front loading my 401k  (contribute Jan-June). 
There are risk and advantages but it really does depend on the fine print of your plan and company match.
I've been doing that since 2007.  Since I have no match (but a pension) there is no downside for me.  Its helped to boost my returns most years.  I'll finish my contributions the end of July this year.

I've been doing this for a few years as well. My company doesn't match, it contributes ~8% of my salary every Sept, regardless of my contributions. I make it a game of sorts to see how little I can live on while I max.