When, if ever, does it make sense to cease contributing the 401K max?

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njfastlife
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When, if ever, does it make sense to cease contributing the 401K max?

Post by njfastlife » Sat Jul 01, 2017 6:52 pm

for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.

seems to me, unless my salary increases relatively substantially, at some point i might need to bite the bullet and ratchet down the 401K contributions.

is this a worthy cause to do so?

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badbreath
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by badbreath » Sat Jul 01, 2017 7:43 pm

njfastlife

for instance, me being 30 years old and playing catch up in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.

seems to me, unless my salary increases relatively substantially, at some point i might need to bite the bullet and ratchet down the 401K contributions.

is this a worthy cause to do so?
Yes it is ok to pull back when there is a goil or reason. When my wife was pregnant with my first kid I pulled back to 10% to get the company match and saved up just in case. Good thing 5 weeks premature delivery 4lb baby that needed NICE (Neonatal Intensive Care) For two weeks. Second kid did the same routine lowered my 401k to match and saved. Normal delivery so I dropped the extra cash in a taxable.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

delamer
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by delamer » Sat Jul 01, 2017 8:25 pm

It is possible to bang the drum of "always max out your retirement accounts" too hard.

Especially as a young person, it is reasonable to cut back on retirement contributions to meet other important financial goals.

itstoomuch
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by itstoomuch » Sat Jul 01, 2017 9:19 pm

Yes.
Our son stopped 401k for 2-3 years prior home purchase and 1 year after purchase. Seattle where home prices +12%/a for last 6 years. He needed to accumulate the down payment faster than increases in home pricing.

Other times: Just prior to retirement. Just prior to College. Both where TLH and Dividend/LTCG investing maybe more advantageous than a tax deferral.
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by flossmoor » Sun Jul 02, 2017 7:02 am

If you are for example in the 15% bracket now but expect to be in the 33% bracket (or higher, who knows) in retirement, it might make sense to pay the taxes now and be done with it.

digit8
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by digit8 » Sun Jul 02, 2017 11:44 am

Sounds like it doesn't apply in your case, but there are plenty of employers whose 401k options are sufficiently terrible to make taxable investing a better option. There are still a sadly large variety of outfits sticking with high-cost, low performing options because corporate cut a deal, or because they just don't care enough to bother.
I remember reading about a group of dentists whose 401k only offered employees a chance to invest in land deals the dentists were invested in- a case where I probably would have eaten the matching minimum, forget about maxing out!
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Big Dog » Sun Jul 02, 2017 11:46 am

If you are for example in the 15% bracket now but expect to be in the 33% bracket (or higher, who knows) in retirement, it might make sense to pay the taxes now and be done with it.
Our 401k has a Roth option, so we encourage the 15 per centers to go that way, since it is still eligible for the company match.

runner540
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by runner540 » Sun Jul 02, 2017 3:09 pm

digit8 wrote:Sounds like it doesn't apply in your case, but there are plenty of employers whose 401k options are sufficiently terrible to make taxable investing a better option. There are still a sadly large variety of outfits sticking with high-cost, low performing options because corporate cut a deal, or because they just don't care enough to bother.
I remember reading about a group of dentists whose 401k only offered employees a chance to invest in land deals the dentists were invested in- a case where I probably would have eaten the matching minimum, forget about maxing out!
Yikes, that doesn't sound like it would meet ERISA requirements, but what do I know?
For the OP, even if fund options aren't great, the tax savings overwhelm almost any expense ratio.

TravelforFun
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by TravelforFun » Sun Jul 02, 2017 3:29 pm

runner540 wrote:
digit8 wrote:Sounds like it doesn't apply in your case, but there are plenty of employers whose 401k options are sufficiently terrible to make taxable investing a better option. There are still a sadly large variety of outfits sticking with high-cost, low performing options because corporate cut a deal, or because they just don't care enough to bother.
I remember reading about a group of dentists whose 401k only offered employees a chance to invest in land deals the dentists were invested in- a case where I probably would have eaten the matching minimum, forget about maxing out!
Yikes, that doesn't sound like it would meet ERISA requirements, but what do I know?
For the OP, even if fund options aren't great, the tax savings overwhelm almost any expense ratio.
To me the only time you should max out your 401K contribution is when you're at the peak of your career and pay high marginal tax rate. Contribute to get the maximum 401K match then look at Roth IRA and taxable. Roth because gains are tax-free and taxable because long-term gains are typically taxed at 15% or less.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by grabiner » Sun Jul 02, 2017 3:43 pm

digit8 wrote:Sounds like it doesn't apply in your case, but there are plenty of employers whose 401k options are sufficiently terrible to make taxable investing a better option. There are still a sadly large variety of outfits sticking with high-cost, low performing options because corporate cut a deal, or because they just don't care enough to bother.
This is a rare situation. For a high-expense investment to be a bad deal, you must be forced to pay the high expenses for a long time; if you leave your employer, you can roll the high-cost 401(k) into a low-cost IRA, keeping the tax deferral and getting rid of the high expenses. It does happen, particularly to teachers who may intend to spend 30 years in the same school system and thus the same high-cost 403(b).

It is common for investing in an IRA to be better than investing in a 401(k). You should still max out both if possible, but if you can't afford to max out both and you have a high-cost 401(k), you should contribute enough to the 401(k) to get the full employer match, then contribute to an IRA in preference to putting anything else in the 401(k).

But the OP hit on the most important reason: you should contribute less to the 401(k) if you have a better use for the money, such as a home downpayment, college fund, or some other reason to be spending money before you retire.
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by grabiner » Sun Jul 02, 2017 3:49 pm

TravelforFun wrote:To me the only time you should max out your 401K contribution is when you're at the peak of your career and pay high marginal tax rate. Contribute to get the maximum 401K match then look at Roth IRA and taxable. Roth because gains are tax-free and taxable because long-term gains are typically taxed at 15% or less.
If you are in a low tax bracket, a 401(k) is still better than a taxable account for money you won't need until retirement, unless the costs eat up any tax savings. (Roth may be better; consider a Roth 401(k) if your employer offers one.) If you are in the 15% bracket, will retire in the 15% bracket, will never go above the 15% bracket, pay no state tax, and have a stock investment which pays only qualified dividends, a taxable account breaks even with a 401(k) at the same cost level. If you pay state tax, or are in a higher tax bracket for some years, or have non-qualified dividends, or hold a bond fund, there is a tax cost to the taxable account which can be avoided in the 401(k).
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TravelforFun
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by TravelforFun » Sun Jul 02, 2017 4:07 pm

grabiner wrote:
TravelforFun wrote:To me the only time you should max out your 401K contribution is when you're at the peak of your career and pay high marginal tax rate. Contribute to get the maximum 401K match then look at Roth IRA and taxable. Roth because gains are tax-free and taxable because long-term gains are typically taxed at 15% or less.
If you are in a low tax bracket, a 401(k) is still better than a taxable account for money you won't need until retirement, unless the costs eat up any tax savings. (Roth may be better; consider a Roth 401(k) if your employer offers one.) If you are in the 15% bracket, will retire in the 15% bracket, will never go above the 15% bracket, pay no state tax, and have a stock investment which pays only qualified dividends, a taxable account breaks even with a 401(k) at the same cost level. If you pay state tax, or are in a higher tax bracket for some years, or have non-qualified dividends, or hold a bond fund, there is a tax cost to the taxable account which can be avoided in the 401(k).
A lot of folks are in higher tax brackets in retirement than when they were working because of investments, RMD, no deductions, etc. and therefore, deferring taxes by maxing out 401k or IRAs when you're young and in low tax brackets is not a very good idea.

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grabiner
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by grabiner » Sun Jul 02, 2017 4:25 pm

TravelforFun wrote:A lot of folks are in higher tax brackets in retirement than when they were working because of investments, RMD, no deductions, etc. and therefore, deferring taxes by maxing out 401k or IRAs when you're young and in low tax brackets is not a very good idea.
While Roth accounts are better than traditional accounts in this situation, it rarely works out to make a taxable account better than a 401(k). If you are in the 15% bracket now, and retire in the 25% bracket, you will lose 12% of your investment to taxes if you use a 401(k). But if you use a taxable account, you will lose 15% of your capital gain when you sell, plus any lost growth on dividends which were taxed in years you were in a 25% bracket. If you stay in the 15% bracket for most of your career, and harvest capital gains up to the top of that bracket, the taxable account comes out ahead, but this isn't a common situation.

If the reason you are in a higher tax bracket at retirement is the phase-in of Social Security taxation, the taxable account looks slightly more attractive but it is still unlikely to come out ahead. In the 15% tax bracket and the Social Security phase-in, your marginal tax rate on ordinary income is 27.75%, but your marginal tax rate on qualified dividends and long-term capital gains is 12.75%; they aren't taxed but they count towards making Social Security taxable. Thus, if you never pay any tax on your dividends, the taxable account may just barely come out ahead.
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Taylor Larimore
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Taylor Larimore » Sun Jul 02, 2017 5:01 pm

njfastlife wrote:for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.

seems to me, unless my salary increases relatively substantially, at some point i might need to bite the bullet and ratchet down the 401K contributions.

is this a worthy cause to do so?
njfastlife:

In my opinion, considering that your goal is a down payment on a house, you should probably invest in this order:

1. Invest in your 401k up to the company match. You can borrow from the 401k for the down-payment.

2. Invest in your Roth IRA up to the max. You can withdraw all contributions any time without tax or penalty for the house down-payment. If you change your mind about the house, you will be well on your way towards a retirement fund.

3. Invest in your 401k up to the maximum.

4. Invest in a taxable account using a conservative fund. If you are in a 25% or lower tax bracket consider Vanguard Total Bond Market. If in a higher income tax bracket use a tax-exempt bond fund like Vanguard Tax-Exempt Intermediate-Term Bond Fund.

Your funds depend on how soon you need the money. A suggestion:

1 year or less: Short-term bond funds, CDs, or cash.
1-3 years: Total Bond Market or similar conservative securities
5-10 years: A mix of stocks and bonds.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Thesaints
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Thesaints » Sun Jul 02, 2017 5:07 pm

VBMFX has a duration longer than 6 years. It is not suited for anybody having a time horizon substantially shorter.

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Taylor Larimore
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Taylor Larimore » Sun Jul 02, 2017 5:23 pm

Thesaints wrote:VBMFX has a duration longer than 6 years. It is not suited for anybody having a time horizon substantially shorter.
Thesaints:

VBMFX (Vanguard Total Bond Market) worst annual loss since its 1986 inception was -2.66% (it gained +16% in 1995). Sometimes the potential for higher return is worth the additional (small) risk.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Thesaints » Sun Jul 02, 2017 5:27 pm

Taylor Larimore wrote:
Thesaints wrote:VBMFX has a duration longer than 6 years. It is not suited for anybody having a time horizon substantially shorter.
Thesaints:

VBMFX (Vanguard Total Bond Market) worst annual loss since its 1986 inception was -2.66% (it gained +16% in 1995). Sometimes the potential for higher return is worth the additional (small) risk.

Best wishes.
Taylor
Taylor: if I need my cash 1-3 years from now, would you advise me to buy a 6-year bond ?

Speaking of potential gains and risk, since 1926 the US stock markat has had 85 different 5-year rolling periods. Of those only 4 (if I remember correctly) have had a negative return. Whereas on average they have returned more than 50%.
If I need my money 5 years from now, is investing 100% on the S&P closer to "conservative", or to "reckless" ?

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Taylor Larimore » Sun Jul 02, 2017 6:52 pm

Taylor: if I need my cash 1-3 years from now, would you advise me to buy a 6-year bond ?
Thesaints:

No. But I think a high-quality, low-cost, diversified bond fund like Total Bond Market Index Fund would probably be worth the risk for most investors--especially if they have other assets.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Thesaints » Sun Jul 02, 2017 6:58 pm

Taylor Larimore wrote: -especially if they have other assets.
Makes me think such an approach may not be too conservative, after all.

To be honest, I wouldn't advise a treasury note with 6 years maturity, certainly higher quality and safer than any bond fund with 6+ year duration, if one needs those funds within 3 years.
If one needs only half the capital, then I'm with you, although I'd begin to consider stocks in such a scenario.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Taylor Larimore » Sun Jul 02, 2017 7:01 pm

Thesaints wrote:
Taylor Larimore wrote: -especially if they have other assets.
Makes me think such an approach may not be too conservative, after all.

To be honest, I wouldn't advise a treasury note with 6 years maturity, certainly higher quality and safer than any bond fund with 6+ year duration, if one needs those funds within 3 years.
If one needs only half the capital, then I'm with you, although I'd begin to consider stocks in such a scenario.
Thesaints:

There is more than one road to Dublin.

Best wishes.
Taylor
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by an_asker » Sun Jul 02, 2017 7:07 pm

Taylor Larimore wrote:
njfastlife wrote:for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.

seems to me, unless my salary increases relatively substantially, at some point i might need to bite the bullet and ratchet down the 401K contributions.

is this a worthy cause to do so?
njfastlife:

In my opinion, considering that your goal is a down payment on a house, you should probably invest in this order:

1. Invest in your 401k up to the company match. You can borrow from the 401k for the down-payment.

2. Invest in your Roth IRA up to the max. You can withdraw all contributions any time without tax or penalty for the house down-payment. If you change your mind about the house, you will be well on your way towards a retirement fund.

3. Invest in your 401k up to the maximum.

4. Invest in a taxable account using a conservative fund. If you are in a 25% or lower tax bracket consider Vanguard Total Bond Market. If in a higher income tax bracket use a tax-exempt bond fund like Vanguard Tax-Exempt Intermediate-Term Bond Fund.

Your funds depend on how soon you need the money. A suggestion:

1 year or less: Short-term bond funds, CDs, or cash.
1-3 years: Total Bond Market or similar conservative securities
5-10 years: A mix of stocks and bonds.

Best wishes
Taylor
I would not suggest looking at a 401(k) loan as a fall-back option, unless your job is super secure. The 401(k) loan will come due upon termination, which would lead to complications.

Not all bogleheads (I hope) have been able to salt away the 401(k) max for the duration of their working lives. Over the last month, I have been researching my own contributions and noticed that I have hit the max only a third of my working life thus far (much worse than what I'd have thought a month ago!). Like I noted on another thread, there were reasons why I was unable to hit the max (not enough salary, job change are a couple of reasons). Obviously, I don't have as much put away as I could've, but I've not fared too bad in terms of the overall picture either.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Thesaints » Sun Jul 02, 2017 7:31 pm

Taylor Larimore wrote:
Thesaints wrote:
Taylor Larimore wrote: -especially if they have other assets.
Makes me think such an approach may not be too conservative, after all.

To be honest, I wouldn't advise a treasury note with 6 years maturity, certainly higher quality and safer than any bond fund with 6+ year duration, if one needs those funds within 3 years.
If one needs only half the capital, then I'm with you, although I'd begin to consider stocks in such a scenario.
Thesaints:

There is more than one road to Dublin.

Best wishes.
Taylor
I agree and the investor task is to choose (hopefully optimally) amongst those roads.

Bungo
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Bungo » Sun Jul 02, 2017 7:51 pm

njfastlife wrote:for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.
I did the same thing for a few years and for the same reason. I reduced my contributions to the minimum necessary to receive the full employer match. No regrets.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Earl Lemongrab » Tue Jul 04, 2017 12:20 pm

an_asker wrote:I would not suggest looking at a 401(k) loan as a fall-back option, unless your job is super secure. The 401(k) loan will come due upon termination, which would lead to complications.
While common, there is no requirement for this and some plans do not do that.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by NorCalDad » Tue Jul 04, 2017 2:40 pm

njfastlife wrote:for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.
We reduced 401k contributions for 2-3 years before buying our current house with $100k down payment. No regrets. We live in a great neighborhood and have seen tremendous appreciation in the past few years, though you can't count on the latter. We maxed out 401k/Roth after we bought the house and plan to continue doing so.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by dharrythomas » Tue Jul 04, 2017 2:42 pm

an_asker wrote: Not all bogleheads (I hope) have been able to salt away the 401(k) max for the duration of their working lives. Over the last month, I have been researching my own contributions and noticed that I have hit the max only a third of my working life thus far (much worse than what I'd have thought a month ago!). Like I noted on another thread, there were reasons why I was unable to hit the max (not enough salary, job change are a couple of reasons). Obviously, I don't have as much put away as I could've, but I've not fared too bad in terms of the overall picture either.
If it makes you feel any better, I've never maxed out my 401(K) or TSP account. There were years when we were raising 2 girls and had a house payment where it was all I could do to put away 5% (to get the match) and max out our Roth IRAs (at a lower contribution level than now) and a little in taxable to serve as an emergency fund. That's with me working a job that brought in the median family income, my wife working a job without a retirement plan, an Arny Reserve paycheck, and drawing a periodic separation payment from the 1990s military drawdown.

No everyone here makes 4 times the median wage and contrary to the impression you might draw of this board, the worth of a person is not measured by the size of their portfolio but by their contribution to others. (So I have a great deal of respect for Taylor Lattimore and the contributions he made to this board and while serving as a Paratrooper during WWII. He is a true Gentleman.) Most of us just do the best we can, complicated by the fact that we're imperfect, life is hard, and the future is uncertain. :shock:

Good luck.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by deltaneutral83 » Tue Jul 04, 2017 3:00 pm

grabiner wrote:
TravelforFun wrote:A lot of folks are in higher tax brackets in retirement than when they were working because of investments, RMD, no deductions, etc. and therefore, deferring taxes by maxing out 401k or IRAs when you're young and in low tax brackets is not a very good idea.
While Roth accounts are better than traditional accounts in this situation, it rarely works out to make a taxable account better than a 401(k).
Travelforfun, It would be a very tight space where a taxable account would be favorable over 401k (after the match + roth). A current 15% marginal tax bracket with no state income tax while anticipating a heftier tax rate in retirement that did have state income tax still probably wouldn't do it. By default, are there a ton of people out there in the 15% tax bracket that can contribute up to the match and max out a Roth and then be in a position to have available funds left over to examine this? It would be a truly rare situation to have this work out.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by TravelforFun » Tue Jul 04, 2017 4:43 pm

deltaneutral83 wrote:
grabiner wrote:
TravelforFun wrote:A lot of folks are in higher tax brackets in retirement than when they were working because of investments, RMD, no deductions, etc. and therefore, deferring taxes by maxing out 401k or IRAs when you're young and in low tax brackets is not a very good idea.
While Roth accounts are better than traditional accounts in this situation, it rarely works out to make a taxable account better than a 401(k).
Travelforfun, It would be a very tight space where a taxable account would be favorable over 401k (after the match + roth). A current 15% marginal tax bracket with no state income tax while anticipating a heftier tax rate in retirement that did have state income tax still probably wouldn't do it. By default, are there a ton of people out there in the 15% tax bracket that can contribute up to the match and max out a Roth and then be in a position to have available funds left over to examine this? It would be a truly rare situation to have this work out.
Couple filing jointly and having a taxable income of up to $75,900 are in 15% bracket. Above that income, marginal rates range from 25% to 39.6%. Your 401K and IRA money will be taxed at your marginal rates when you withdraw or are forced to withdraw in retirement, but the long term capital gains in your taxable account is mostly taxed at 15%. This is why I think it's better to save in taxable when you're in the 15% bracket after you have contributed to your 401K to get the match, and Roth.

njfastlife
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by njfastlife » Wed Jul 12, 2017 9:07 am

Taylor Larimore wrote:
njfastlife wrote:for instance, me being 30 years old and playing catchup in my 401K (currently have $60K between 401K and ROTH IRA) but wanting to start saving for a house downpayment.

seems to me, unless my salary increases relatively substantially, at some point i might need to bite the bullet and ratchet down the 401K contributions.

is this a worthy cause to do so?
njfastlife:

In my opinion, considering that your goal is a down payment on a house, you should probably invest in this order:

1. Invest in your 401k up to the company match. You can borrow from the 401k for the down-payment.

2. Invest in your Roth IRA up to the max. You can withdraw all contributions any time without tax or penalty for the house down-payment. If you change your mind about the house, you will be well on your way towards a retirement fund.

3. Invest in your 401k up to the maximum.

4. Invest in a taxable account using a conservative fund. If you are in a 25% or lower tax bracket consider Vanguard Total Bond Market. If in a higher income tax bracket use a tax-exempt bond fund like Vanguard Tax-Exempt Intermediate-Term Bond Fund.

Your funds depend on how soon you need the money. A suggestion:

1 year or less: Short-term bond funds, CDs, or cash.
1-3 years: Total Bond Market or similar conservative securities
5-10 years: A mix of stocks and bonds.

Best wishes
Taylor
THANK YOU

wrongfunds
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by wrongfunds » Wed Jul 12, 2017 12:06 pm

Couple filing jointly and having a taxable income of up to $75,900 are in 15% bracket. Above that income, marginal rates range from 25% to 39.6%. Your 401K and IRA money will be taxed at your marginal rates when you withdraw or are forced to withdraw in retirement, but the long term capital gains in your taxable account is mostly taxed at 15%. This is why I think it's better to save in taxable when you're in the 15% bracket after you have contributed to your 401K to get the match, and Roth.
I do not think I agree with you. The taxable account will have to pay taxes every year depending upon the investment chosen for that account. If not maximized your 401K during working years, is there a real "risk" of having 401K in retirement that will "force" you in to 25% tax bracket? Doesn't your total retirement income has to be higher than $76K to get in to next bracket?

I am having hard time how somebody who is in lower tax bracket during his earning period AND does not put maximum in 401K but still ends up with too many millions in 401K and "forced" in to higher bracket during the retirement.

If your retirement kitty is $5M, you did not get there by being in 15% tax bracket during your working career. I think these are made up situations with no real life validity.

Bottom line:- If you can afford, it always makes sense to put your marginal savings dollar in to tax deferred than in taxable.

lomarica01
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by lomarica01 » Thu Jul 13, 2017 10:56 am

Yes it is ok to not max out all your retirement plans. Work out how much it will grow to when you are 55 years old and you might be surprised how much will be in your accounts even if you do not max out your plans.
I found having a balanced approach with paying off a house early, saving for college and putting $ in retirement plans can work out very well
good luck

TravelforFun
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by TravelforFun » Thu Jul 13, 2017 11:06 am

wrongfunds wrote:
Couple filing jointly and having a taxable income of up to $75,900 are in 15% bracket. Above that income, marginal rates range from 25% to 39.6%. Your 401K and IRA money will be taxed at your marginal rates when you withdraw or are forced to withdraw in retirement, but the long term capital gains in your taxable account is mostly taxed at 15%. This is why I think it's better to save in taxable when you're in the 15% bracket after you have contributed to your 401K to get the match, and Roth.
I am having hard time how somebody who is in lower tax bracket during his earning period AND does not put maximum in 401K but still ends up with too many millions in 401K and "forced" in to higher bracket during the retirement.

If your retirement kitty is $5M, you did not get there by being in 15% tax bracket during your working career. I think these are made up situations with no real life validity.
It's not uncommon for those who have dividends, royalty, rental income, SS, and RMD to be in higher tax bracket when they're retired than when they were working.

wrongfunds
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by wrongfunds » Thu Jul 13, 2017 11:15 am

Even if that were the case, does it mean they should have rather given up the tax advantage space earlier in their earning years just in case the RMD after 70 puts them in the higher bracket? I think the answer is resounding no.

TravelforFun
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by TravelforFun » Sun Jul 16, 2017 10:13 pm

wrongfunds wrote:Even if that were the case, does it mean they should have rather given up the tax advantage space earlier in their earning years just in case the RMD after 70 puts them in the higher bracket? I think the answer is resounding no.
Didn't mean to carry on this conversation but check out this timely article which points out it's not always best to max out your 401K:

http://www.cnbc.com/2017/07/14/if-you-l ... oo&ref=yfp

miamivice
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by miamivice » Sun Jul 16, 2017 10:25 pm

There's no requirement that a person must max out retirements accounts every year to have a happy retirement.

I think one should try to project forward what their retirement expenditures will be (should be...want them to be) and then figure out what they need to save today to be able to retire with that amount in the future.

In my case, I have never maxed out our retirement options. We have far more space than I have funds to put into them. Yet, I am making adequate progress towards a very healthy retirement, and do not see a need to max out retirement accounts.

wrongfunds
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by wrongfunds » Mon Jul 17, 2017 8:14 am

"Taxes are the most expensive thing in retirement," said Hays. "Think about it, you pay 30 percent or so every time you want to access your money.
Is this really true? Doesn't it depend upon the size of the withdrawal and your other income? I am thinking that it is being treated as if it is part of continuation of the salary and thus expected to pay taxes on it.

A stupid question:- Is the tax treatment of (funded by after tax dollars) traditional non-deductible IRA when taking distribution different than Roth which is also funded by after tax dollars?

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by JimmyD » Mon Jul 17, 2017 8:28 am

We've been steadfastly maxing out retirement accounts for years now.

That said, with our son now being 3 years old and becoming slightly less needy, I'm very seriously considering temporarily lowering my contributions significantly in order to afford an expensive road bike.

I can justify it because I have devoted the last three years of my life at 100% capacity to give him everything he needs and we are on track to a comfortable retirement. It's time for dad to have a little fun and free time. Not to mention get some exercise.

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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by nanoanalyzer » Mon Jul 17, 2017 7:50 pm

wrongfunds wrote:
I am having hard time how somebody who is in lower tax bracket during his earning period AND does not put maximum in 401K but still ends up with too many millions in 401K and "forced" in to higher bracket during the retirement.

If your retirement kitty is $5M, you did not get there by being in 15% tax bracket during your working career. I think these are made up situations with no real life validity.
Let's say a dual-fed couple (both age 28) puts in $20K combined to hit taxable income of $76K. That's not even close to maxing out ($36K+$6K HSA). AGI would be around $100K, gross around $120K. At age 58 when they become eligible to retire, they would hit around $1.5-2M combined depending on return. (http://www.bankrate.com/calculators/ret ... lator.aspx, 16.6% contribution on 120K income with 1.9% raises (which would also increase contributions to stay in 15%) and 5% ROR) Consider also that this couple may have put even more into IRAs to get closer to the $5M mark.

Now, by retirement, this dual fed couple has probably reached or neared the salary cap (currently around $154K). Figuring in 2017 money, they would receive a pension of about 90K total, of which around 70-80% would be taxable. Add in the FERS supplement (58-62) or SS (after 62 or 70). RMD at 70 would easily force them into the 25% bracket. 58-70 is prime time for Roth conversions up to the 15% limit.

Just providing a real-life scenario that I have personally mapped out in several spreadsheets to make decisions about targeting the 15% bracket line, which happens to be how it makes sense to me to not contribute to the max of two traditional 401ks. Roth 401k to the max begins to make sense at some point after debts are paid and college is saved for.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel

Nate79
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by Nate79 » Mon Jul 17, 2017 8:01 pm

nanoanalyzer wrote:
wrongfunds wrote:
I am having hard time how somebody who is in lower tax bracket during his earning period AND does not put maximum in 401K but still ends up with too many millions in 401K and "forced" in to higher bracket during the retirement.

If your retirement kitty is $5M, you did not get there by being in 15% tax bracket during your working career. I think these are made up situations with no real life validity.
Let's say a dual-fed couple (both age 28) puts in $20K combined to hit taxable income of $76K. That's not even close to maxing out ($36K+$6K HSA). AGI would be around $100K, gross around $120K. At age 58 when they become eligible to retire, they would hit around $1.5-2M combined depending on return. (http://www.bankrate.com/calculators/ret ... lator.aspx, 16.6% contribution on 120K income with 1.9% raises (which would also increase contributions to stay in 15%) and 5% ROR) Consider also that this couple may have put even more into IRAs to get closer to the $5M mark.

Now, by retirement, this dual fed couple has probably reached or neared the salary cap (currently around $154K). Figuring in 2017 money, they would receive a pension of about 90K total, of which around 70-80% would be taxable. Add in the FERS supplement (58-62) or SS (after 62 or 70). RMD at 70 would easily force them into the 25% bracket. 58-70 is prime time for Roth conversions up to the 15% limit.

Just providing a real-life scenario that I have personally mapped out in several spreadsheets to make decisions about targeting the 15% bracket line, which happens to be how it makes sense to me to not contribute to the max of two traditional 401ks. Roth 401k to the max begins to make sense at some point after debts are paid and college is saved for.
It's not obvious if the figures you are quoting are real or nominal. Did you correct the tax brackets for inflation?

nanoanalyzer
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by nanoanalyzer » Mon Jul 17, 2017 8:04 pm

Nate79 wrote:
It's not obvious if the figures you are quoting are real or nominal. Did you correct the tax brackets for inflation?
Everything in 2017 money, including the projected ROR.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel

ryman554
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Re: When, if ever, does it make sense to cease contributing the 401K max?

Post by ryman554 » Tue Jul 18, 2017 12:22 am

wrongfunds wrote:
"Taxes are the most expensive thing in retirement," said Hays. "Think about it, you pay 30 percent or so every time you want to access your money.
Is this really true? Doesn't it depend upon the size of the withdrawal and your other income? I am thinking that it is being treated as if it is part of continuation of the salary and thus expected to pay taxes on it.

A stupid question:- Is the tax treatment of (funded by after tax dollars) traditional non-deductible IRA when taking distribution different than Roth which is also funded by after tax dollars?
Yes.

You are never taxed on Roth $$ (assuming 59.5+)
You are always taxed on tIRA $$, even if you contributed post-tax $$, as long as your IRA grew.

Reason: while you are not taxed on your tIRA basis -- the total amount of post-tax $$ you put into the account -- withdrawals of pre-tax or earnings growth $$ raise you AGI dollar for dollar -- you are taxed at your marginal rate. What's more -- quite unlike a ROTH where there are byzantine rules for withdrawal of funds, all withdrawals from a tIRA come out pro rata: whatever percentage of money is basis as of Dec 31 of the tax year is the percentage of money you get to withdraw tax free. Unless the account is entirely basis (which means you have zero or negative growth), you will be taxed on something. And it's not at the nice capital gains rate -- it's your marginal rate.

Plus it's a pain to keep track of.

So, don't contribute after tax to an ira unless you have a plan to get it over to a roth quickly.

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