FI met: continue 401k contributions vs. using investments to cover cashflow needs

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Topic Author
idc
Posts: 69
Joined: Fri Nov 27, 2020 12:50 am

FI met: continue 401k contributions vs. using investments to cover cashflow needs

Post by idc »

I just retired at 54, while DW continues to work. We are FI, but this situation presents an interesting question of cashflow. DW can continue to max out 401k or we can simply live off her income, no further 401k contributions.

We face three options for DW 401k contributions
a/ DW maxes out 401k aggressively, cover cashflow deficit by selling investments
b/ DW contributes to 401k just to the employer matching limit, less need for selling
c/ DW stops any contribution to 401k – in which case we would not have to sell any investments

In case we sell investments we have these options:
1/ sell appreciated taxable investments – basically all stock, with some tax implications
2/ take distribution out of my 401k, most of it non Roth, with options to sell bonds or stock since I can get distributions penalty free, as I am taking advantage of the rule of 55

Likely to be in the 24% tax bracket for 2022.

My instinct is to do b/ for 401k and 1/ for getting cash.

Obviously, things can get very specific, I am not interested in the minute optimizations, just curious if there are any rules of thumb here.

Thanks
Fired2020
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Joined: Sat Jan 23, 2021 4:12 pm

Re: FI met: continue 401k contributions vs. using investments to cover cashflow needs

Post by Fired2020 »

My situation was a little different than yours as I'm single. But when I hit 50 & became eligible for catch-up contributions I maxed-out my 401K every year until I retired in 2020 @ age 56. My salary didn't support such large contributions ($23K or $24K from what I remember) so I had to draw on investment income from taxable accounts periodically to pay bills & what not. I felt as though I wouldn't need to draw from tax-deferred accounts until at least age 70 & so I felt the benefit of 15+ years of tax deferment was the best choice for me; I still do. Also, you never know when you might leave your employer and the 401K window will close.
makeitcount
Posts: 103
Joined: Wed Aug 01, 2018 8:07 pm

Re: FI met: continue 401k contributions vs. using investments to cover cashflow needs

Post by makeitcount »

I would contribute to the 401k to the match and live on the remaining income from your wife's job. Sell from taxable for the remainder to take advantage of lower gap gains tax rate unless dividends from taxable cover the difference anyhow.
Topic Author
idc
Posts: 69
Joined: Fri Nov 27, 2020 12:50 am

Re: FI met: continue 401k contributions vs. using investments to cover cashflow needs

Post by idc »

makeitcount wrote: Fri Jan 14, 2022 1:44 pm I would contribute to the 401k to the match and live on the remaining income from your wife's job. Sell from taxable for the remainder to take advantage of lower gap gains tax rate unless dividends from taxable cover the difference anyhow.
Makes sense, thank you.
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grabiner
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Re: FI met: continue 401k contributions vs. using investments to cover cashflow needs

Post by grabiner »

I would suggest selling the taxable investments and maxing out the 401(k).

The reason is that the taxable accounts will be sold anyway, and the percentage lost to taxes will increase the longer you hold them, since you will pay dividend tax and expect the stock market to rise. The tax rate will not go down unless your retirement income is so low that you pay 0% tax on capital gains, and if you do, you would probably be better off using the available space to convert traditional to Roth accounts instead.

Meanwhile, you don't have this issue in the 401(k). If you contribute to the 401(k) now, and withdraw in the same tax bracket, you get the same return as if the account had been tax-free. If you withdraw or convert to Roth in a lower bracket (after you have both retired), you do even better.
Wiki David Grabiner
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