401K contribution sequence

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KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

401K contribution sequence

Post by KlangFool »

Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
Last edited by KlangFool on Wed Jul 21, 2021 7:11 am, edited 1 time in total.
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pasadena
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Re: 401K contribution sequence

Post by pasadena »

It really depends on your situation.

I front-load pre-tax, then mega backdoor. Last year I maxed-out PT in May, Mega backdoor in October (with my big bonus). This year I maxed-out the first mid-March, and the second mid-July.

Reasons:

1) When my employer has layoffs (not that often, but still, they happen), they tend to happen around June/July. I want to max everything out as close to that as possible, so I don't lose out on a pretty good plan. Opens options if I leave - I can take some time off, for example, and there's a fair chance that my next employer's wouldn't have a better plan (notably the full mega backdoor and no HCE limitations. The match doesn't amount to *that* much in terms of % of my gross salary, but it's still pretty good).

2) Pre-tax first, because of the match (50% of contributions, per paycheck so no need for true-up)

3) I can live on other income sources during that time - namely vesting RSU and ESPP. I don't need to dip into savings just to replenish them later.

4) I'll admit that I enjoyed the challenge and that it did a lot of good in forcing me to stay within budget and pay attention to my spending.

Note that doing this means that I backload my brokerage account. I don't mind, but this certainly diminishes the supposed advantage of front-loading retirement.

So - what are your plans? I know you just got this job, but you're also FI. Are you 100% sure that you want to stay? Have you contributed to retirement accounts at all this year? What's your expected tax bracket this year?

Can you max out both by December?
loggerboots
Posts: 43
Joined: Mon Dec 07, 2020 5:31 pm

Re: 401K contribution sequence

Post by loggerboots »

Depends on if you can afford to max both or not. I think getting the match into the account is priority so do that as fast as you can (for obvious reasons, e.g., time in market, protect against unexpected job loss, etc). I don't think it matters if you're matched on ROTH or TRAD 401k - match will always go to pretax. Someone will correct me if I'm wrong. I haven't actually taken a match on my roth 401k source; I do MBDR exclusively for roth source.

I'm doing an even-ish split this year (between trad and MDBR) as I wasn't sure if could actually live on the take home pay resulting from 20% pre and 20% post tax deduction (and 15% ESPP and 2% HSA). As it turns out, I can, and it's good training for living frugally. This is my first year post-divorce and I'm finding my living expenses are much lower than I had become accustomed to when I couldn't be as selfish as I can now, haha.

Make sure you max out ESPP if you have it as well. Don't leave any free money on the table. But you know all this, you're the one usually giving the advice :)

Next year, I intend to max out my retirement much more aggressively, probably favoring 401k and after tax (MBDR) after that. Since I expect to be in lower tax bracket when I retire, I favor 401k over MBDR.

I'll use cash from bonus and ESPP to smooth out any shortfalls while maxing out retirement contributions. My $0.02.

Excellent problem to have. Throwing it all into the fire down the home stretch... Good luck to you!
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: 401K contribution sequence

Post by placeholder »

Since there's a hard limit on pretax it makes sense to do that first then go with after tax which is how I did it at megacorp where they made it easy by automatically switching from pretax to after tax when the limit was hit.
pasadena
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Re: 401K contribution sequence

Post by pasadena »

Adding that if you do after tax first, you'll have to be super careful not to go over $29k and eat into your pre-tax bucket, unless your employer caps it automatically?
babystep
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Re: 401K contribution sequence

Post by babystep »

KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool
C) Set. Forget. Keep it Simple.

One could optimize with A or B by deferring the taxes to a bit later in time or front-loading instead of DCA. I don't think it makes a real difference in big picture.
okwriter
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Re: 401K contribution sequence

Post by okwriter »

(B) would be better in the rare event you switch jobs, since the after-tax limit is per employer (link).
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: 401K contribution sequence

Post by babystep »

okwriter wrote: Wed Jul 21, 2021 1:12 am (B) would be better in the rare event you switch jobs, since the after-tax limit is per employer (link).
Good point. Would this still allow employee to receive the matching contributions from current employer if they only contribute to after-tax-401k and then leave? Plan dependent or employer matching contribution apply to after-tax-401k also?
okwriter
Posts: 214
Joined: Mon Apr 12, 2021 2:00 pm

Re: 401K contribution sequence

Post by okwriter »

babystep wrote: Wed Jul 21, 2021 1:37 am
okwriter wrote: Wed Jul 21, 2021 1:12 am (B) would be better in the rare event you switch jobs, since the after-tax limit is per employer (link).
Good point. Would this still allow employee to receive the matching contributions from current employer if they only contribute to after-tax-401k and then leave? Plan dependent or employer matching contribution apply to after-tax-401k also?
Very plan-dependent. OP said their employer matches all contributions, but I don't think this is very common. (Mine doesn't match after-tax.)
Topic Author
KlangFool
Posts: 21574
Joined: Sat Oct 11, 2008 12:35 pm

Re: 401K contribution sequence

Post by KlangFool »

pasadena wrote: Wed Jul 21, 2021 12:08 am Adding that if you do after tax first, you'll have to be super careful not to go over $29k and eat into your pre-tax bucket, unless your employer caps it automatically?
It caps it automatically.

KlangFool
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Topic Author
KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

pasadena wrote: Tue Jul 20, 2021 11:01 pm It really depends on your situation.

I front-load pre-tax, then mega backdoor. Last year I maxed-out PT in May, Mega backdoor in October (with my big bonus). This year I maxed-out the first mid-March, and the second mid-July.

Reasons:

1) When my employer has layoffs (not that often, but still, they happen), they tend to happen around June/July. I want to max everything out as close to that as possible, so I don't lose out on a pretty good plan. Opens options if I leave - I can take some time off, for example, and there's a fair chance that my next employer's wouldn't have a better plan (notably the full mega backdoor and no HCE limitations. The match doesn't amount to *that* much in terms of % of my gross salary, but it's still pretty good).

2) Pre-tax first, because of the match (50% of contributions, per paycheck so no need for true-up)

3) I can live on other income sources during that time - namely vesting RSU and ESPP. I don't need to dip into savings just to replenish them later.

4) I'll admit that I enjoyed the challenge and that it did a lot of good in forcing me to stay within budget and pay attention to my spending.

Note that doing this means that I backload my brokerage account. I don't mind, but this certainly diminishes the supposed advantage of front-loading retirement.

So - what are your plans? I know you just got this job, but you're also FI. Are you 100% sure that you want to stay? Have you contributed to retirement accounts at all this year? What's your expected tax bracket this year?

Can you max out both by December?
I can't max this year. 50% Of gross income this year is less than the max limit.

KlangFool
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Topic Author
KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

loggerboots wrote: Tue Jul 20, 2021 11:54 pm Depends on if you can afford to max both or not. I think getting the match into the account is priority so do that as fast as you can (for obvious reasons, e.g., time in market, protect against unexpected job loss, etc). I don't think it matters if you're matched on ROTH or TRAD 401k - match will always go to pretax. Someone will correct me if I'm wrong. I haven't actually taken a match on my roth 401k source; I do MBDR exclusively for roth source.

I'm doing an even-ish split this year (between trad and MDBR) as I wasn't sure if could actually live on the take home pay resulting from 20% pre and 20% post tax deduction (and 15% ESPP and 2% HSA). As it turns out, I can, and it's good training for living frugally. This is my first year post-divorce and I'm finding my living expenses are much lower than I had become accustomed to when I couldn't be as selfish as I can now, haha.

Make sure you max out ESPP if you have it as well. Don't leave any free money on the table. But you know all this, you're the one usually giving the advice :)

Next year, I intend to max out my retirement much more aggressively, probably favoring 401k and after tax (MBDR) after that. Since I expect to be in lower tax bracket when I retire, I favor 401k over MBDR.

I'll use cash from bonus and ESPP to smooth out any shortfalls while maxing out retirement contributions. My $0.02.

Excellent problem to have. Throwing it all into the fire down the home stretch... Good luck to you!
I don't need my salary. I am Financially Independent. And, I have 400K to 500K in my taxable account. So, I can max everything.

No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
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Topic Author
KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

placeholder wrote: Wed Jul 21, 2021 12:02 am Since there's a hard limit on pretax it makes sense to do that first then go with after tax which is how I did it at megacorp where they made it easy by automatically switching from pretax to after tax when the limit was hit.
That makes sense.

KlangFool
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TJat
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Re: 401K contribution sequence

Post by TJat »

Does your employer have a sequence of sources that the match applies to and/or the ability to rollover individual sources for the mega back door? It’s preferable for the match to only apply to the traditional contributions and to be able to solely roll over the after tax unmatched source.

Plans all vary so the above terms may be off.
Topic Author
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: 401K contribution sequence

Post by KlangFool »

TJat wrote: Wed Jul 21, 2021 8:09 am Does your employer have a sequence of sources that the match applies to and/or the ability to rollover individual sources for the mega back door? It’s preferable for the match to only apply to the traditional contributions and to be able to solely roll over the after tax unmatched source.

Plans all vary so the above terms may be off.
TJat,

1) The employer match 100% up to 6% of the gross pay regardless of After-tax, Pre-tax, or Roth.

2) The after-tax 401K can do automatic in-service Roth conversion to Roth 401K.

KlangFool
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pasadena
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Re: 401K contribution sequence

Post by pasadena »

KlangFool wrote: Wed Jul 21, 2021 7:13 am
I can't max this year. 50% Of gross income this year is less than the max limit.

KlangFool
Then I'd do pre-tax, since with the tax savings you can save more money in there faster. I'm assuming that you will be in a higher bracket than you will be when you stop working again - but you have enough cash that you can probably manage your taxes in retirement easily enough.
latestartearner
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Re: 401K contribution sequence

Post by latestartearner »

KlangFool, I really appreciate your perspective and wisdom shared across this board. Congrats on the new job!

Something to consider for 2021 only is to forgo the pre-tax option and contribute only as much as you can to Roth 401k + After-Tax (with Roth Conversion). The reasoning is that as long as you are working with this job, you'll be in the lowest tax bracket annually given that you're only working for < 50% of the year, until the year you leave the company. When thinking through your expected tax brackets now vs. later, keep in mind that federal income tax rates are expected to rise again in 2027(-ish?).

This year, I maxed out both my pre-tax 401K + after-tax 401k by end of June through a combination of biweekly paychecks and performance bonus. I didn't take a paycheck for a few months and lived off of my RSUs/savings/tax refund to help meet that goal. I am still fairly new to the path of FI and this idea only came to me in March (https://www.latestartearner.com/post/ag ... nt-savings), but had I planned things better I could have maxed out sooner than June.

Next year, I'll be married (saving about $30k annually in taxes) and plan to max out my Roth 401k + after-tax 401k with no contributions towards pre-tax.
H-Town
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Re: 401K contribution sequence

Post by H-Town »

KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
Check the 6% employer match policy to make sure there's no gotcha. But generally I'd go with: C) Spread the contribution evenly across all pay checks.

It'll give you more options to manage monthly cashflows. Also it's also helpful to buy the dips. Let's say if the market crashes like it did in March 2021, you can accelerate your 401k & after-tax contributions.
bradpevans
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Re: 401K contribution sequence

Post by bradpevans »

H-Town wrote: Wed Jul 21, 2021 9:42 am
KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
Check the 6% employer match policy to make sure there's no gotcha. But generally I'd go with: C) Spread the contribution evenly across all pay checks.

It'll give you more options to manage monthly cashflows. Also it's also helpful to buy the dips. Let's say if the market crashes like it did in March 2021, you can accelerate your 401k & after-tax contributions.
My plan sounds essentially identical ... but my employer matches "per paycheck".
Any pay period where I fail to contribute enough % to get the full match: free money lost forever

Some front end Roth on the perspective that longer tax free growth there
with marginally shorter tax-deffered growth in traditional

Additionally, you may wish to look into "what happens if you (next year) go
over the 64.5K yearly limit. This happened to me b/c of a company "in lieu of pension" deposit
made in 2021 applies to 2020 yearly limit.

The "extra" funds went into a Supplemental Savings Plan..

A great problem for you to chew on :)
Longdog
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Re: 401K contribution sequence

Post by Longdog »

I would make sure I contributed enough to get the full match (which is probably only on the traditional 401k) at every paycheck, and then front load, to the extent possible, the after-tax contributions using up the remaining available in each paycheck. When that maxes out, I'd increase the traditional contributions. This is to get as much into Roth space as quickly as possible in the year, to maximize the chance of growth within the Roth.

Can you do in-service rollovers to Roth IRA with every paycheck (even if manual), rather than automatic per paycheck in-service conversions to Roth 401k? If so, I think that might give you more flexibility, with regard to isolating equities in Roth space. In my Fidelity administered 401k, there is no way to allocate funds differently by source, so can't isolate fixed income to pre-tax and equities to Roth.
Steve
wetgear
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Re: 401K contribution sequence

Post by wetgear »

KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
Does your company plan offer a true-up at year end? Some do and some don't. If it doesn't then option C is your best bet, otherwise you could be leaving some of the employer 6% matching on the table by not having something for them to match every paycheck. Even better might be option D which is to front load just enough early in the year so that you can still contribute a small amount to each paycheck for the remainder of the year to get full matching. Something like 50% Jan & Feb, 6% Mar-Dec.
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anon_investor
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Re: 401K contribution sequence

Post by anon_investor »

KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
wetgear
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Re: 401K contribution sequence

Post by wetgear »

anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
+1 Same thing I was trying to say but in clearer language :sharebeer
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KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

wetgear wrote: Wed Jul 21, 2021 11:28 am
KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
Does your company plan offer a true-up at year end? Some do and some don't. If it doesn't then option C is your best bet, otherwise you could be leaving some of the employer 6% matching on the table by not having something for them to match every paycheck. Even better might be option D which is to front load just enough early in the year so that you can still contribute a small amount to each paycheck for the remainder of the year to get full matching. Something like 50% Jan & Feb, 6% Mar-Dec.
Not true up. Option (D) sound very interesting.

KlangFool
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KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
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anon_investor
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Re: 401K contribution sequence

Post by anon_investor »

KlangFool wrote: Wed Jul 21, 2021 2:00 pm
anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
Yes, I have the same exact limitation. What I do is try to front load as much as possible (regular 401k first then after-tax), but I make sure I have enough left over to space out the payments throughout the year to capture the entire match. Will you get a bonus, if so, is your bonus also factored into your 401k contributions? Mine is, so I usually do a calculation to make sure I do not front load too much before my bonus hits (it comes in March annually) to ensure I am able to capture the entire 401k match. But I have to be careful because my bonus size is variable.
Soon2BXProgrammer
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Re: 401K contribution sequence

Post by Soon2BXProgrammer »

KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
There is a 4th choice, Roth and aftertax or 100% aftertax, but i'm assuming those arent interesting to you based on your marginal rates. However, if you think RMD's will be an issue, these could be a good option.

Setting that aside, I would do A) because if something happens and you leave employment, you could always do a Roth conversion if you wanted to recognize more income.
Chartered Financial Consultant (ChFC®), Retirement Income Certified Professional (RICP®) -- I am not your advisor.
Topic Author
KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

anon_investor wrote: Wed Jul 21, 2021 2:55 pm
KlangFool wrote: Wed Jul 21, 2021 2:00 pm
anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
Yes, I have the same exact limitation. What I do is try to front load as much as possible (regular 401k first then after-tax), but I make sure I have enough left over to space out the payments throughout the year to capture the entire match. Will you get a bonus, if so, is your bonus also factored into your 401k contributions? Mine is, so I usually do a calculation to make sure I do not front load too much before my bonus hits (it comes in March annually) to ensure I am able to capture the entire 401k match. But I have to be careful because my bonus size is variable.
Good point about bonus.

It is not a problem in my case because I can specify precisely the percentage contribution of bonus.


KlangFool
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KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

Soon2BXProgrammer wrote: Wed Jul 21, 2021 2:58 pm
KlangFool wrote: Tue Jul 20, 2021 10:48 pm Folks,

In this 401K plan, I can contribute up to the max of 64.5K per year minus 6% employer match per pay check. Let's make it simple and assume that it is 55K. The 6% match is to 100% of employee 401K contribution. The employee contribution can be consist of pre-tax/Trad 401K Roth 401K, and after-tax 401K.

So, 26K -> pre-tax/Trad 401K. 29K -> After tax-401K with automatic in-service Roth conversion to Roth 401K. And, with every paycheck, I can contribute up to 50% of my gross pay. And, 50% of my gross pay is much bigger than 55K per year.

So, essentially, I have 3 choices:

A) Front load the Trad 401K up to 26K max and then contribute to after-tax 401K later

B) Front load the after-tax 401K to 29K max and then contribute to the Trad 401K

C) Spread the contribution evenly across all pay checks.

What would you choose? And, what is your thinking behind that choice?

KlangFool

P.S.: I have 400K to 500K in my taxable account. So, I don't need the money.
There is a 4th choice, Roth and aftertax or 100% aftertax, but i'm assuming those arent interesting to you based on your marginal rates. However, if you think RMD's will be an issue, these could be a good option.

Setting that aside, I would do A) because if something happens and you leave employment, you could always do a Roth conversion if you wanted to recognize more income.
RMD is not a problem. I would rather spend my money than working longer.

KlangFool
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loggerboots
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Re: 401K contribution sequence

Post by loggerboots »

KlangFool wrote: Wed Jul 21, 2021 7:18 am
No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
How can you lose money on ESPP if you just sell right away? Just sell same day for instant gain of discounted price. Maybe there's something I don't understand here so enlighten me (apologies for being OT)!
Topic Author
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: 401K contribution sequence

Post by KlangFool »

loggerboots wrote: Wed Jul 21, 2021 4:00 pm
KlangFool wrote: Wed Jul 21, 2021 7:18 am
No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
How can you lose money on ESPP if you just sell right away? Just sell same day for instant gain of discounted price. Maybe there's something I don't understand here so enlighten me (apologies for being OT)!
loggerboots,

A) What is the actual price of the ESPP? Min price when you buy? Average of the min price of the beginning of the period and end of the period?

B) What is the discount? 15%? 20%?

C) What is the gap between when you buy versus when you sell? 1 day? 3 days?

The devil is in the details. They are plenty of folks losing their money in ESPP during the Telecom bust and DotCom bust.

KlangFool
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pasadena
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Location: PNW

Re: 401K contribution sequence

Post by pasadena »

loggerboots wrote: Wed Jul 21, 2021 4:00 pm
KlangFool wrote: Wed Jul 21, 2021 7:18 am
No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
How can you lose money on ESPP if you just sell right away? Just sell same day for instant gain of discounted price. Maybe there's something I don't understand here so enlighten me (apologies for being OT)!
Depends on the plan. Some plans won't let you sell before X months. If you can sell immediately, there is virtually no way to lose money unless you sell during a crash bigger than your discount.
Last edited by pasadena on Wed Jul 21, 2021 5:14 pm, edited 1 time in total.
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anon_investor
Posts: 7585
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Re: 401K contribution sequence

Post by anon_investor »

KlangFool wrote: Wed Jul 21, 2021 3:26 pm
anon_investor wrote: Wed Jul 21, 2021 2:55 pm
KlangFool wrote: Wed Jul 21, 2021 2:00 pm
anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
Yes, I have the same exact limitation. What I do is try to front load as much as possible (regular 401k first then after-tax), but I make sure I have enough left over to space out the payments throughout the year to capture the entire match. Will you get a bonus, if so, is your bonus also factored into your 401k contributions? Mine is, so I usually do a calculation to make sure I do not front load too much before my bonus hits (it comes in March annually) to ensure I am able to capture the entire 401k match. But I have to be careful because my bonus size is variable.
Good point about bonus.

It is not a problem in my case because I can specify precisely the percentage contribution of bonus.


KlangFool
So they let you have a different contribution % for your bonus versus your regular pay check? That is interesting, our bonus and normal paychecks all use the same contribution %.
sailaway
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Re: 401K contribution sequence

Post by sailaway »

anon_investor wrote: Wed Jul 21, 2021 5:14 pm
KlangFool wrote: Wed Jul 21, 2021 3:26 pm
anon_investor wrote: Wed Jul 21, 2021 2:55 pm
KlangFool wrote: Wed Jul 21, 2021 2:00 pm
anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
Yes, I have the same exact limitation. What I do is try to front load as much as possible (regular 401k first then after-tax), but I make sure I have enough left over to space out the payments throughout the year to capture the entire match. Will you get a bonus, if so, is your bonus also factored into your 401k contributions? Mine is, so I usually do a calculation to make sure I do not front load too much before my bonus hits (it comes in March annually) to ensure I am able to capture the entire 401k match. But I have to be careful because my bonus size is variable.
Good point about bonus.

It is not a problem in my case because I can specify precisely the percentage contribution of bonus.


KlangFool
So they let you have a different contribution % for your bonus versus your regular pay check? That is interesting, our bonus and normal paychecks all use the same contribution %.
Our bonus checks have a lower % limit than regular paychecks and must be specially designated each year.
Topic Author
KlangFool
Posts: 21574
Joined: Sat Oct 11, 2008 12:35 pm

Re: 401K contribution sequence

Post by KlangFool »

anon_investor wrote: Wed Jul 21, 2021 5:14 pm
KlangFool wrote: Wed Jul 21, 2021 3:26 pm
anon_investor wrote: Wed Jul 21, 2021 2:55 pm
KlangFool wrote: Wed Jul 21, 2021 2:00 pm
anon_investor wrote: Wed Jul 21, 2021 11:50 am KlangFool,

For my 401k, I have to contribute a certain % each pay check in order to get the full match, otherwise I lose the match for that pay period since we have no true up. If you have no such limitation, I would max out the pre-tax first then the after-tax as soon as possible and do that in as few pay checks as possible. Then for the later pay checks you can just invest any surplus into your taxable account.
anon_investor,

I have this limitation. So, I have to leave 6% for each pay check.

KlangFool
Yes, I have the same exact limitation. What I do is try to front load as much as possible (regular 401k first then after-tax), but I make sure I have enough left over to space out the payments throughout the year to capture the entire match. Will you get a bonus, if so, is your bonus also factored into your 401k contributions? Mine is, so I usually do a calculation to make sure I do not front load too much before my bonus hits (it comes in March annually) to ensure I am able to capture the entire 401k match. But I have to be careful because my bonus size is variable.
Good point about bonus.

It is not a problem in my case because I can specify precisely the percentage contribution of bonus.


KlangFool
So they let you have a different contribution % for your bonus versus your regular pay check? That is interesting, our bonus and normal paychecks all use the same contribution %.
In fact, it is ridiculously overly complex. You can specify percent up to 14 to 20 (I cannot remember) combinations of source versus destination in 3 destination groups: After-tax, Trad 401K, Roth 401K. Regular pay versus bonus versus sales commission and so on. But, they all sum up to 50% limit.

KlangFool
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Topic Author
KlangFool
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Re: 401K contribution sequence

Post by KlangFool »

pasadena wrote: Wed Jul 21, 2021 5:14 pm
loggerboots wrote: Wed Jul 21, 2021 4:00 pm
KlangFool wrote: Wed Jul 21, 2021 7:18 am
No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
How can you lose money on ESPP if you just sell right away? Just sell same day for instant gain of discounted price. Maybe there's something I don't understand here so enlighten me (apologies for being OT)!
Depends on the plan. Some plans won't let you sell before X months. If you can sell immediately, there is virtually no way to lose money unless you sell during a crash bigger than your discount.
Except when the discount is not based on the price that you bought. Some system use an average of the min price of the beginning and ending period. Detail matters.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
pasadena
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Location: PNW

Re: 401K contribution sequence

Post by pasadena »

KlangFool wrote: Wed Jul 21, 2021 5:23 pm
pasadena wrote: Wed Jul 21, 2021 5:14 pm
loggerboots wrote: Wed Jul 21, 2021 4:00 pm
KlangFool wrote: Wed Jul 21, 2021 7:18 am
No. I am not doing ESPP. I had lost enough money and I learned my lesson.

KlangFool
How can you lose money on ESPP if you just sell right away? Just sell same day for instant gain of discounted price. Maybe there's something I don't understand here so enlighten me (apologies for being OT)!
Depends on the plan. Some plans won't let you sell before X months. If you can sell immediately, there is virtually no way to lose money unless you sell during a crash bigger than your discount.
Except when the discount is not based on the price that you bought. Some system use an average of the min price of the beginning and ending period. Detail matters.

KlangFool
True, there's many flavors. ESPP does require taking a good look at the rules and understanding them before signing up.

Mine is comparatively very very simple. You buy at a fixed discount from the price on the day you get the shares, and you can sell immediately. The stock would have to fall more than the discount in the 2 days it takes for the shares to settle. The risk isn't 0, but it's not big enough not to participate. There's also the opportunity cost of the money they hold for up to 3 months each cycle.
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