Are there any situations where you don’t max retirement opportunities?

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JBTX
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Are there any situations where you don’t max retirement opportunities?

Post by JBTX » Sat Jan 13, 2018 10:54 pm

This last year I had modest self employment earnings, and my DW worked full time. I’m over 50 and since early 20s have almost always maxed out retirement accounts opportunities between 401ks Roth IRAs etc. The result is 90+ % of our savings are in various retirement accounts. Roughly 55% traditonal and 45% Roth.

We are at a time where we are in a high period of spending, between remodel of house, high medical expenses for various reasons, two teenagers and college for oldest in 1.5 years. Also need to plan for special needs son who may need lifelong assistance. Will have to likely purchase 3 cars within the next 3-4 years.

Current savings is roughly 20x projected retirement spending. I’d say we both plan on working at least 5 more years. My wife has secure position at small business. My work has been variable and inconsistent over the past few years.

We have approx 1 to 1.5x annual expenses in bank savings and ibonds, which I’d say is our EF and additional liquidity fund.

Have about 75k in 529s and coverdells for older child. I have no idea what special needs younger teenager will need in adulthood.

About $160k 3.25 15 year mortgage on house valued at approx $300k.

Question is given I have self employed income I could put a decent chunk in my existing solo 401k( employee contribution is Roth , employer traditional ) but I’m leaning towards not doing that due to liquidity purposes. The money would at least partially come out of EF or additional liquidity fund.

The main reason for not contributing is desire to maintain ample liquidity given various factors described above. However, given market has been going up the additional contributions would go to mostly or totally bond investments to keep AA in balance. I figure I’m almost as good having ibonds in taxable accounts vs buying more bond funds in retirement accounts.

Any thoughts on any of this? Any flaws in my thinking. I hate to leave tax advantaged retirement opportunities on the table but the value of additional contributions seem pretty incremental vs investing in ibonds or paying off mortgage down the road ( will be close call if we have enough to itemize year to year with new tax bill) if liquidity increases.

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sergeant
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Re: Are there any situations where you don’t max retirement opportunities?

Post by sergeant » Sat Jan 13, 2018 11:01 pm

Your plan makes sense to me. You have maxed retirement accounts for the last 30 years. You seem to have plenty saved up. Taking a year off or not fully maxing your retirement accounts will have no meaningful difference when you retire. Sorry to hear about the high medical costs, enjoy the remodel.
Lincoln 3 EOW!

PFInterest
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Re: Are there any situations where you don’t max retirement opportunities?

Post by PFInterest » Sat Jan 13, 2018 11:02 pm

Life is full of choices.

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celia
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Re: Are there any situations where you don’t max retirement opportunities?

Post by celia » Sat Jan 13, 2018 11:22 pm

JBTX wrote:
Sat Jan 13, 2018 10:54 pm
...The result is 90+ % of our savings are in various retirement accounts...

...I hate to leave tax advantaged retirement opportunities on the table but the value of additional contributions seem pretty incremental vs investing in ibonds or paying off mortgage down the road ( will be close call if we have enough to itemize year to year with new tax bill) if liquidity increases.
You have already contributed a lot to retirement plans. The primary reason for saving in them instead of taxable accounts is to take advantage of a future (lower) tax bracket when you do withdrawals, assumedly after you retire. But your retirement tax bracket may NOT be lower than it is now, so why continue to contribute?

Your known upcoming expenses can vary quite a lot in price and that can be another reason to increase your taxable assets. And this doesn't take into account unexpected expenses that can come up.

I question why you need to buy 3 cars. Can't the young driver borrow your car while living at home and eventually find a way to buy his/her own car? All of our kids went away to college without a car and used public transportation there instead. In fact, many colleges don't allow all students to bring a car, since there is not enough parking space for all those cars.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

JBTX
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Re: Are there any situations where you don’t max retirement opportunities?

Post by JBTX » Sat Jan 13, 2018 11:35 pm

celia wrote:
Sat Jan 13, 2018 11:22 pm
JBTX wrote:
Sat Jan 13, 2018 10:54 pm
...The result is 90+ % of our savings are in various retirement accounts...

...I hate to leave tax advantaged retirement opportunities on the table but the value of additional contributions seem pretty incremental vs investing in ibonds or paying off mortgage down the road ( will be close call if we have enough to itemize year to year with new tax bill) if liquidity increases.
You have already contributed a lot to retirement plans. The primary reason for saving in them instead of taxable accounts is to take advantage of a future (lower) tax bracket when you do withdrawals, assumedly after you retire. But your retirement tax bracket may NOT be lower than it is now, so why continue to contribute?

Your known upcoming expenses can vary quite a lot in price and that can be another reason to increase your taxable assets. And this doesn't take into account unexpected expenses that can come up.

I question why you need to buy 3 cars. Can't the young driver borrow your car while living at home and eventually find a way to buy his/her own car? All of our kids went away to college without a car and used public transportation there instead. In fact, many colleges don't allow all students to bring a car, since there is not enough parking space for all those cars.
Thanks.

We live in suburban TX, and around here people drive everywhere. The 3 cars assume almost 17 year daughter will need one soon (doesn’t have license yet) and me and DW cars both have over 100k miles on them. We typically both buy low mileage used cars. If we are both working then both of us must have vehicles.

Not sure where daughter will go to college but likely will be local public institution. I think it would be difficult for her function without a car. She could Uber everywhere but that isn’t cheap either.

aristotelian
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Re: Are there any situations where you don’t max retirement opportunities?

Post by aristotelian » Sat Jan 13, 2018 11:52 pm

What is your tax bracket? The higher your bracket, the more valuable your retirement accounts.

Do you want/plan to retire early? If so, you are giving up a massive tax benefit by not contributing to the 401k because you will have a long window with low taxable income.

Can you give daughter a beater or make her partially pay for it? I got my moms old car when I went off to college, then I was on my own. Personally, I would not consider for a second buying a teenager a new car.

DrGoogle2017
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Re: Are there any situations where you don’t max retirement opportunities?

Post by DrGoogle2017 » Sun Jan 14, 2018 12:08 am

I always maxed out, the only time I didn’t is when my employer didn’t offer anything, so it’s defaulted to the traditional IRA every tax year.

JBTX
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Re: Are there any situations where you don’t max retirement opportunities?

Post by JBTX » Sun Jan 14, 2018 1:04 am

aristotelian wrote:
Sat Jan 13, 2018 11:52 pm
What is your tax bracket? The higher your bracket, the more valuable your retirement accounts.

Do you want/plan to retire early? If so, you are giving up a massive tax benefit by not contributing to the 401k because you will have a long window with low taxable income.



Can you give daughter a beater or make her partially pay for it? I got my moms old car when I went off to college, then I was on my own. Personally, I would not consider for a second buying a teenager a new car.
Historically we have been in the 25 or 28 percent bracket with no state income taxes.

We would not buy her a new car. Probably low mileage used, maybe like a used Camry. I’d like for the car to be safe. This is all dependent on her eventually getting her license which isn’t a given at this rate. I really don’t see her contributing a lot to a car but by the time she goes to college I would think it would be hard for her to operate without one if she goes to school locally.

Taking my wife’s car could be an option but that accelerates my wife getting another car. Over 3-4 years it would be a wash either way.

As to retirement I’m 54 and part of me would like to retire but my preference would be to work in some scaled back fashion for another 5 years or so. The big wildcard there is figuring out what our son may need long term. As to losing a big tax break right now we are at 25% and will be lower likely with new code. I don’t think we will be in a lower tax rate once we both start pulling social security.

aristotelian
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Re: Are there any situations where you don’t max retirement opportunities?

Post by aristotelian » Sun Jan 14, 2018 7:33 am

JBTX wrote:
Sun Jan 14, 2018 1:04 am

Historically we have been in the 25 or 28 percent bracket with no state income taxes.

We would not buy her a new car. Probably low mileage used, maybe like a used Camry. I’d like for the car to be safe. This is all dependent on her eventually getting her license which isn’t a given at this rate. I really don’t see her contributing a lot to a car but by the time she goes to college I would think it would be hard for her to operate without one if she goes to school locally.

Taking my wife’s car could be an option but that accelerates my wife getting another car. Over 3-4 years it would be a wash either way.

As to retirement I’m 54 and part of me would like to retire but my preference would be to work in some scaled back fashion for another 5 years or so. The big wildcard there is figuring out what our son may need long term. As to losing a big tax break right now we are at 25% and will be lower likely with new code. I don’t think we will be in a lower tax rate once we both start pulling social security.
OP, stop doing Roth for your Solo 401k. Especially if you already have a lot of Roth funds already. That will immediately increase your nominal contributions by 25% without any cost to your cash flow. "Worst" case scenario, you will be in your current tax bracket in retirement and it will be a wash. More likely you will be in a lower tax bracket at least until SS hits Traditional will be a big advantage. You may not be in a lower bracket after SS, but you will have ideally 10 years before you need to claim SS, so you will be able to pull all those funds out nearly tax free (and certainly lower than 22%). Any that you don't spend in those years you can convert to Roth for further savings on tax.

Have you read this thread on how it is possible to spend 100K annually and pay zero tax in retirement? This thread blew my mind and changed my whole approach to saving. Yours is different than mine but I still believe tax deferral has significant advantages to you if you plan correctly.

viewtopic.php?t=87471

Have you looked into an ABLE account for your son? I don't know much about them but folks have posted about them before. I would be most worried about the special needs child in your shoes. $70K is a very nice head start for your daughter. You can always help her pay off loans later if needed.

It's really up to you whether you prioritize liquidity and spending goals but you are almost certainly giving up tax benefits if you cut back.

Personally I drive every car to 200K so that is one obvious place I would cut back. Give daughter the oldest car as long as it's still running. Drive the other into the ground. Then you only need to buy one nice new-used for the wife. See this thread by Taylor. viewtopic.php?t=214509

JBTX
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Re: Are there any situations where you don’t max retirement opportunities?

Post by JBTX » Sun Jan 14, 2018 10:48 am

aristotelian wrote:
Sun Jan 14, 2018 7:33 am
JBTX wrote:
Sun Jan 14, 2018 1:04 am

Historically we have been in the 25 or 28 percent bracket with no state income taxes.

We would not buy her a new car. Probably low mileage used, maybe like a used Camry. I’d like for the car to be safe. This is all dependent on her eventually getting her license which isn’t a given at this rate. I really don’t see her contributing a lot to a car but by the time she goes to college I would think it would be hard for her to operate without one if she goes to school locally.

Taking my wife’s car could be an option but that accelerates my wife getting another car. Over 3-4 years it would be a wash either way.

As to retirement I’m 54 and part of me would like to retire but my preference would be to work in some scaled back fashion for another 5 years or so. The big wildcard there is figuring out what our son may need long term. As to losing a big tax break right now we are at 25% and will be lower likely with new code. I don’t think we will be in a lower tax rate once we both start pulling social security.
OP, stop doing Roth for your Solo 401k. Especially if you already have a lot of Roth funds already. That will immediately increase your nominal contributions by 25% without any cost to your cash flow. "Worst" case scenario, you will be in your current tax bracket in retirement and it will be a wash. More likely you will be in a lower tax bracket at least until SS hits Traditional will be a big advantage. You may not be in a lower bracket after SS, but you will have ideally 10 years before you need to claim SS, so you will be able to pull all those funds out nearly tax free (and certainly lower than 22%). Any that you don't spend in those years you can convert to Roth for further savings on tax.
Agree, we won't be doing a Roth 401k contribution this year, and probably won't do individual Roth contribution - we are usually right on the border of being able to do that anyway. So the question is how much, if anything, to put in employer contribution.

We have over $1 million in traditional as of right now, and that will hopefully grow more by the time I retire. If my wife works another 10 years, I'd be around 63 when she retires. So you are looking at somewhere between 5 - 10 years between dual retirement and taking out social security.

The challenge then gets back to the liquidity to pay those conversion taxes above zero percent. Also, if both of us aren't working, we will need to start drawing down retirement accounts to survive. So it is likely that much of the zero and lower brackets will be filled traditional withdrawals. Probably not a ton of room left to do large Roth conversions at lower rates.
Have you read this thread on how it is possible to spend 100K annually and pay zero tax in retirement? This thread blew my mind and changed my whole approach to saving. Yours is different than mine but I still believe tax deferral has significant advantages to you if you plan correctly.

viewtopic.php?t=87471
It is definitely food for thought, but as I said above, during those pre social security retirement years much of the lower tax brackets will be filled with traditional IRA income to fund living expenses. Our expenses are higher than many of the people I see posting in here. While I'd love to change that, I don't if we realistically will. That is a whole different discussion. To the extent there is any low tax rate room left for further Roth conversions, our liquidity comes into play. We won't have a lot of money sitting around to pay conversion tax bills, it would mostly have to come from retirement account withdrawals.
Have you looked into an ABLE account for your son? I don't know much about them but folks have posted about them before. I would be most worried about the special needs child in your shoes. $70K is a very nice head start for your daughter. You can always help her pay off loans later if needed.
Some posters here pointed out ABLE accounts, and they could be helpful. But they are limited. You can only really put $100k into them at max. I will probably wait until he gets closer to 18 and use it as a vehicle to help pay expenses and not lose benefit eligibility. Again, if we were to open one now and fund it you are getting into liquidity issues.
It's really up to you whether you prioritize liquidity and spending goals but you are almost certainly giving up tax benefits if you cut back.
There is no doubt you are giving up some tax benefits, but I'm not yet convinced it is as high as many assume in my situation. That is what I'm trying to work through.
Personally I drive every car to 200K so that is one obvious place I would cut back. Give daughter the oldest car as long as it's still running. Drive the other into the ground. Then you only need to buy one nice new-used for the wife. See this thread by Taylor. viewtopic.php?t=214509
We already drive them to about 180k to 200k. Beyond around 175k I find they start to be maintenance money holes. We put quite a bit of miles on cars.

Thanks for the replies! I appreciate the ideas.

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Epsilon Delta
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Re: Are there any situations where you don’t max retirement opportunities?

Post by Epsilon Delta » Sun Jan 14, 2018 1:14 pm

JBTX wrote:
Sun Jan 14, 2018 10:48 am
Agree, we won't be doing a Roth 401k contribution this year, and probably won't do individual Roth contribution - we are usually right on the border of being able to do that anyway. So the question is how much, if anything, to put in employer contribution.
If you're eligible for a direct Roth IRA contribution and you have any taxable cash available, little is lost by putting whatever you can in a MM in the Roth. The contribution can be withdrawn tax and penalty free at any time and in the meanwhile you get a few hundred dollars of tax free income. More if interest rates continue to rise. Some people won't do this for emotional reasons, but logically it's a free lunch, or at least a free snack.

If you are currently on the border of contributing to a Roth IRA the switching from a Roth to pre-tax 401(k) should make you solidly eligible.
JBTX wrote:
Sun Jan 14, 2018 10:48 am
The challenge then gets back to the liquidity to pay those conversion taxes above zero percent. Also, if both of us aren't working, we will need to start drawing down retirement accounts to survive. So it is likely that much of the zero and lower brackets will be filled traditional withdrawals. Probably not a ton of room left to do large Roth conversions at lower rates.
If there is no taxable money available there is no harm in using tax and penalty free withdrawals of Roth contributions and conversions to get the liquidity to pay for conversions. Once you're over 59.5 there is no harm in having the taxes withheld from a Roth conversion.

People who say you should always pay from outside funds, like people who say you should always max every tax free account, live in a world of infinite money, not the world where the dismal science is all about allocating scarce resources.

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Re: Are there any situations where you don’t max retirement opportunities?

Post by coachd50 » Sun Jan 14, 2018 1:32 pm

Same question...but different circumstances.

As I mentioned in another thread- viewtopic.php?f=1&t=230420&p=3584000#p3584000

I am a school teacher who will have a pension of about $3,100 - $3,800 a month. I am about 13-18 years from retirement. I also currently fund a Roth IRA to the max each year ($5,500). Its current balance is about $76,000. I also have a taxable brokerage account of about $79,000.

I don't trust the company my school system uses regarding 403b and 457 plans...(as i stated in the above thread...It took me 3-4 phone calls just to get any information on their investment options. All they want to do is sell an annuity. I was able to get some info on their 457 options, but still nothing on 403b after 2 months.)

What am I missing out on? I probably could contribute maybe $10-$12,000 to a tax advantaged account, BUT then I would not have that money available obviously. My current thought process is that I would like to get where the taxable account generated maybe an extra $5-$6,000 a year in income for me since my salary probably won't ever get higher than $65K (and that is including working summers, before school and after school).

hazlitt
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Re: Are there any situations where you don’t max retirement opportunities?

Post by hazlitt » Sun Jan 14, 2018 2:13 pm

In short, yes.

I think diversification matters in the form of assets; not just the funds you own. I try to spread considerable amounts over 401k, taxable account, cash savings, and paying down my mortgage. Two primary reasons: liquidity and future taxes. Both of these relate to my situation of owning a small business.

Liquidity - You can't (or at least shouldn't) touch your 401k money before a certain age (which you are under). The assets you keep in cash or in a taxable account can be accessed a lot easier if need be. Owning a business means your income can fluctuate significantly from year to year. You may live high on the hog one year and need to access some reserves the next. Same reason I make extra principal payments on my mortgage each month, but I would never consider writing a check to pay the whole thing off at once.

Future taxes - My business has been rather successful, so paying taxes now isn't that hard. It might be a lot harder later. So while I certainly take advantage of the 401k deduction (usually to the max), I also put money into taxable, even at the expense of money into 401k. One of the reasons is to intentionally pay taxes now to avoid owing them when it may hurt more to pay them.

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ram
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Re: Are there any situations where you don’t max retirement opportunities?

Post by ram » Sun Jan 14, 2018 9:15 pm

In our family of 4 drivers we have been able to get away with 3 cars, a moped and 4 bicycles. However I live in a rural area and distances here are modest.
Ram

JBTX
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Re: Are there any situations where you don’t max retirement opportunities?

Post by JBTX » Sun Jan 14, 2018 10:36 pm

I've been working on a spreadsheet much of the day mapping out income, withdrawals from retirement, etc, and it is pretty depressing. :(

Conclusions:

1. We are going to have to cut back on spending.
2. Even if we cut back from where we are, assumptions still show us draining our liquid cash by the time I turn 59.5 - due to cars and daughter college, at which point I assumed I retired, and I end up pretty much exhausting my traditional savings age 60-70 when I draw delayed SS. After that things start to stabilize as we live on social security and Roth. Assumed 3.0% real rate of growth for traditional and Roth.
3. This just assumed son lived at home with us at current levels of spending, but still need to work on how govt benefits impact the equation.

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Re: Are there any situations where you don’t max retirement opportunities?

Post by BogleMelon » Sun Jan 14, 2018 10:53 pm

JBTX wrote:
Sat Jan 13, 2018 10:54 pm

I figure I’m almost as good having ibonds in taxable accounts vs buying more bond funds in retirement accounts.
Just earmark these ibonds as "retirement taxable account that I won't touch unless retired" and you are good to go.

BTW, you can literally open a "custom" account as TD are calling it (AKA sub-account) while logged in your main account, and customize its name as "Retirement" or whatever you like, and move these bonds to it. Will take 5 minutes at most..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

veggivet
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Re: Are there any situations where you don’t max retirement opportunities?

Post by veggivet » Sun Jan 14, 2018 10:57 pm

I stopped maxing out when I realized I had seriously oversaved for retirement...

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