To minmax, or not to minmax

[Independent George]

I'm working on my 2020 budget, and am debating whether or not to max out my 401k contributions next year. I already max out my Roth IRA and HSA, and have budgeted a $15k contribution to my 401k, leaving a $6k cash surplus for the year.

The math is clear - at a marginal tax rate of 26.95% (22% Fed + 4.95% IL), maxing out the 401k contribution nets me an additional $1.2k in 2020, plus the accumulated gains. In practical terms, though, I have a lot of trouble with having an operating margin of just $225 per month. The paradox of it is that while I am actually disciplined enough to stay within budget, it's exactly that fiscal obsession which is screaming to me that I need a bigger buffer.

Am I crazy for wanting more cash in hand, even if it means paying additional taxes?

Age: 42, no children
Gross Income: $89k
Cash: $25k (~7 months expenses)
Taxable Brokerage: $31k
Roth IRA: $144k ($85k contribution)
401k: $226k

[rkhusky]

Why not start with the full 401k contribution and then if something comes up mid-year, dial the contributions back?

[gr7070]

In your tax bracket I'd be maxing the 401k over the Roth IRA anyway, and then contribute in 2021 anything you can to your IRA.

That might also leave you with a bigger buffer, depending upon how you were planning your Roth contributions.

The tax deferred account should be a better option for you over the Roth.

And, yes, you are crazy for wanting more than the $56k you have ready access to. That's more than plenty.

[ralph124cf]

The question of tax deferred vs ROTH contributions depends on successful forecasting (guessing) the future of tax rates and future income. Can you reasonably expect to be earning significantly higher income in the future (up a tax bracket or two)? If so, ROTH would be best for now, switching to tax deferred when your earnings are higher. Current law says tax rates will snap back up by 2025. My advice is to use ROTH now with historically low current tax rates, then switch to tax deferred when rates snap back up.

Ralph

[MotoTrojan]

In your tax bracket I'd be maxing the 401k over the Roth IRA anyway, and then contribute in 2021 anything you can to your IRA.

That might also leave you with a bigger buffer, depending upon how you were planning your Roth contributions.

The tax deferred account should be a better option for you over the Roth.

And, yes, you are crazy for wanting more than the $56k you have ready access to. That's more than plenty.

+1. You could leave your Roth contributions in a low-risk holding (bond or money market) enabling a withdrawal as-needed, or just defer contributing to it until April 2020 and let it ride in taxable.

[anoop]

The paradox of it is that while I am actually disciplined enough to stay within budget, it's exactly that fiscal obsession which is screaming to me that I need a bigger buffer.

Why do you need a buffer when you already have enough cash on hand for any emergencies?

[Independent George]

In your tax bracket I'd be maxing the 401k over the Roth IRA anyway, and then contribute in 2021 anything you can to your IRA.

That might also leave you with a bigger buffer, depending upon how you were planning your Roth contributions.

The tax deferred account should be a better option for you over the Roth.

And, yes, you are crazy for wanting more than the $56k you have ready access to. That's more than plenty.

This makes sense. I usually lump sum my Roth in January. I've actually got 6k sitting in Vanguard money market right now, waiting for the new year, so I suppose I actually have 31k in cash right now. My mental accounting just treats it as if it were already in the Roth.

Why do you need a buffer when you already have enough cash on hand for any emergencies?

Because I'm a perma-bear convinced that we're just minutes away from another financial meltdown. Well, no, not really, but I do often wonder if my 6 month emergency cash should really be 12 months.

[anoop]

In your tax bracket I'd be maxing the 401k over the Roth IRA anyway, and then contribute in 2021 anything you can to your IRA.

That might also leave you with a bigger buffer, depending upon how you were planning your Roth contributions.

The tax deferred account should be a better option for you over the Roth.

And, yes, you are crazy for wanting more than the $56k you have ready access to. That's more than plenty.

This makes sense. I usually lump sum my Roth in January. I've actually got 6k sitting in Vanguard money market right now, waiting for the new year, so I suppose I actually have 31k in cash right now. My mental accounting just treats it as if it were already in the Roth.

Why do you need a buffer when you already have enough cash on hand for any emergencies?

Because I'm a perma-bear convinced that we're just minutes away from another financial meltdown. Well, no, not really, but I do often wonder if my 6 month emergency cash should really be 12 months.

In general I would try to max as many tax advantaged accounts as possible to the max because there is no option to go back and make up for lost contributions later.

However if you are that concerned about your emergency cash then there’s nothing wrong with beefing up that part before contributing more towards retirement accounts.

Of course in a bind, you can always withdraw your contributions from the Roth IRA tax and penalty free. So hopefully that should put you at rest somewhat, as long as you invest that portion conservatively so that it’s accessible if you need it.

[gr7070]

we're just minutes away from another financial meltdown. Well, no, not really, but I do often wonder if my 6 month emergency cash should really be 12 months.

You have 7 months in cash and another 9 months in taxable accounts. Plus plenty more in accessible Roth IRA.

Reality check, you're good.
As Aaron Rodgers would say, R E L A X.