mamarachel wrote:^^ Very interesting thoughts. What I fail to see is how you end up ahead if you contribute more than you can technically afford, then withdraw it with a 10% penalty + marginal rate. Unless you are not receiving the full match with what you can afford, the account return will not cover your losses would it?
Maybe it would and I'm not doing the math right.
28% FIT + 10% penalty is > 28% FIT for not contributing it for example. If you can over-contribute to buy down for credits you are otherwise phased out of ... "maybe". But there is a whole lot of risk in that scenario and risk = money to me.
Can you explain how this would work for a more "normal" plan with only a 3% or 4% match?
Firstly, I can second the comments above by Epsilon Delta about getting around the penalty.
Secondly, I can tell you that many people matter-of-factly don't want to save for retirement - their reasons vary (some don't plan to live that long, some expect an inheritance, some are being taken care of by others, etc). People in this group can still put 3% into the 401(k), receive the 3% match, and then withdraw this later. It's their money. If we assume equal marginal tax rates, they gain 100% and lose 10%.
Point being, their individual withdrawals have nothing to do with anything and are useless in aggregate, reflecting nothing about Gen X, other than these employer matching funds have gotten popular and are forcing people to save "for retirement".
A lower cap like 3% seems like it should be affordable - or if one can afford 2% why not 3% - it's hard to think of someone deliberately oversaving by 1-3% and needing to borrow the equivalent money elsewhere. Now when you talk about a plan that goes to 20-30%, there is all the more room for strategy. Of all the people with 401(k) plans, how many carry credit card debt or car loans? I'd say many - these people are oversaving and many are benefiting from it.
The obvious potential backfire of oversaving would be if the matching money doesn't vest immediately, and you lose your job before it does. Or if the investment returns are negative. You essentially are betting on your own longevity at your company.
There are always individual circumstances too - you could plan to save money in your 401k and quit in December with money fully vested after 5 years. Then take a year off living off the 401k and receiving no income aside from the 401k withdrawals. You've lowered your effective rate, banked the matching funds, paid the 10%, invested in a tax shelter, etc.