New Trend? Contribute only up to your match on 401k?

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Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
Unless your child is in a low tax bracket temporarily, 95% of the time it probably makes sense to make all contributions pre-tax until all pretax options are maxed.
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willthrill81
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Re: New Trend? Contribute only up to your match on 401k?

Post by willthrill81 »

MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
It's a reasonable strategy, but it could certainly be tweaked. If they have an HSA, that should very likely be maxed out before the Roth IRA due to the triple-tax advantaged vs. the Roth's double-tax advantage.

But even with that tweak, it's certainly possible that good planning can lead to a better outcome, in this case, greater after-tax wealth. Most retirees are in a lower tax bracket in retirement than when they were working, in which case tax-deferred contributions are superior. So maxing out the 401k before contributing to the Roth IRA would be preferable for such people.

IMHO, unless you have a good reason not to, the default should be to contribute to tax-deferred accounts first.

As such, I would recommend the following order:

1. Take 401(k) to get max match.
2. Max out HSA.
3. Max out 401(k).
4. Max out Roth IRA.
5. Taxable.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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MrBobcat
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Re: New Trend? Contribute only up to your match on 401k?

Post by MrBobcat »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:12 pm
MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
Unless your child is in a low tax bracket temporarily, 95% of the time it probably makes sense to make all contributions pre-tax until all pretax options are maxed.
No 2 of them have crossed into the 22% bracket.
Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

MrBobcat wrote: Thu Nov 19, 2020 1:01 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:12 pm
MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
Unless your child is in a low tax bracket temporarily, 95% of the time it probably makes sense to make all contributions pre-tax until all pretax options are maxed.
No 2 of them have crossed into the 22% bracket.
I'm a fan that in the 0/10/12% marginal rates (note: this isn't entirely true with retirement savers credit and some other credits so you need to know the exact marginal rate, and not the actual bracket), of preferring Roth. (either in a 401k or IRA).. This is assuming one is a professional and expects to be in the 20%s+ for part of their career.

In general, in the 20%s it makes sense to do pretax, (unless the child is expecting to be in the 30% for all of their career, think doctor in residency)
H-Town
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Re: New Trend? Contribute only up to your match on 401k?

Post by H-Town »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 11:21 am
H-Town wrote: Thu Nov 19, 2020 11:19 am
Soon2BXProgrammer wrote: Thu Nov 19, 2020 10:58 am I have started to limit my pre-tax contributions (by prioritizing Roth 401k) now that my expected tax bracket for the rest of my life is equal to my current tax bracket.
Life events happen. The chance of those events happen are more probable than you might think.
I'm not sure what you mean?
Possible scenarios:

1) Job loss: those who are earning a big paycheck know that their job security is not great. Generally, the higher the comp, the higher chance you will get replaced, in situations not your own doing.

2) Divorce: If it's two-household income streams, you'll lose one income stream.

3) Kid, family: one or both of you decide to stay home and raise kids. There goes your high income.

4) Terminal sickness of family member: god forbid, but it can happen. Parents walk away from high paying jobs to spend time with their family.

5) If you're single now and are in high-tax bracket, what if you meet someone down the road and get married? Your tax bracket will change.

6) You find yourself a job that pay so well that you jump to highest bracket. So there goes your statement that your expected tax bracket for the rest of your life is equal to your current tax bracket.

And so on...

The point is: future is unknown. Don't believe those who say in absolute terms about the future. Those life events would impact your portfolio in a greater scale than some common mistakes that investors make during their lifetime.
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MrBobcat
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Re: New Trend? Contribute only up to your match on 401k?

Post by MrBobcat »

willthrill81 wrote: Thu Nov 19, 2020 12:15 pm
MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
It's a reasonable strategy, but it could certainly be tweaked. If they have an HSA, that should very likely be maxed out before the Roth IRA due to the triple-tax advantaged vs. the Roth's double-tax advantage.

But even with that tweak, it's certainly possible that good planning can lead to a better outcome, in this case, greater after-tax wealth. Most retirees are in a lower tax bracket in retirement than when they were working, in which case tax-deferred contributions are superior. So maxing out the 401k before contributing to the Roth IRA would be preferable for such people.

IMHO, unless you have a good reason not to, the default should be to contribute to tax-deferred accounts first.

As such, I would recommend the following order:

1. Take 401(k) to get max match.
2. Max out HSA.
3. Max out 401(k).
4. Max out Roth IRA.
5. Taxable.
As far as a good reason, not sure I have one other than my bias not to have everything in the same "tax basket". It would be easier if one could know what the tax brackets will be when they retire in 30ish+ years.
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MrBobcat
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Re: New Trend? Contribute only up to your match on 401k?

Post by MrBobcat »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:10 pm
MrBobcat wrote: Thu Nov 19, 2020 1:01 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:12 pm
MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
Unless your child is in a low tax bracket temporarily, 95% of the time it probably makes sense to make all contributions pre-tax until all pretax options are maxed.
No 2 of them have crossed into the 22% bracket.
I'm a fan that in the 0/10/12% marginal rates (note: this isn't entirely true with retirement savers credit and some other credits so you need to know the exact marginal rate, and not the actual bracket), of preferring Roth. (either in a 401k or IRA).. This is assuming one is a professional and expects to be in the 20%s+ for part of their career.

In general, in the 20%s it makes sense to do pretax, (unless the child is expecting to be in the 30% for all of their career, think doctor in residency)
No, unlikely they will get above the 20%s, they'll have very good incomes being engineers but unless they opt to go into management (neither has any interest in that now) probably no.

I'll have to talk to them to see what their thoughts are on maxing the 401(k)s, one is moot though as he's pretty close to maxing the first 3.
Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

MrBobcat wrote: Thu Nov 19, 2020 1:24 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:10 pm
MrBobcat wrote: Thu Nov 19, 2020 1:01 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 12:12 pm
MrBobcat wrote: Thu Nov 19, 2020 12:08 pm I've told my children to prioritize savings as follows:

1. Take 401(k) to get max match.
2. Fund Roth fully.
3. Finish maxing 401(k) and HSA if they have one.
4. Taxable account.

2 of the 3 kids are in step 3 and are increasing 401(k) contributions as raises come. My oldest is in step one (she doesn't make as much as her brothers) The one's in step 3 are currently 28 & 29 and have fully funded their Roth's since they started working.

Is there anything seriously wrong with this strategy?
Unless your child is in a low tax bracket temporarily, 95% of the time it probably makes sense to make all contributions pre-tax until all pretax options are maxed.
No 2 of them have crossed into the 22% bracket.
I'm a fan that in the 0/10/12% marginal rates (note: this isn't entirely true with retirement savers credit and some other credits so you need to know the exact marginal rate, and not the actual bracket), of preferring Roth. (either in a 401k or IRA).. This is assuming one is a professional and expects to be in the 20%s+ for part of their career.

In general, in the 20%s it makes sense to do pretax, (unless the child is expecting to be in the 30% for all of their career, think doctor in residency)
No, unlikely they will get above the 20%s, they'll have very good incomes being engineers but unless they opt to go into management (neither has any interest in that now) probably no.

I'll have to talk to them to see what their thoughts are on maxing the 401(k)s, one is moot though as he's pretty close to maxing the first 3.
if in their 20s% and unlikely to go to 30s, then pretax for whatever pretax options they can muster.
tigers174
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Re: New Trend? Contribute only up to your match on 401k?

Post by tigers174 »

willthrill81 wrote: Thu Nov 19, 2020 12:15 pm It's a reasonable strategy, but it could certainly be tweaked. If they have an HSA, that should very likely be maxed out before the Roth IRA due to the triple-tax advantaged vs. the Roth's double-tax advantage.

But even with that tweak, it's certainly possible that good planning can lead to a better outcome, in this case, greater after-tax wealth. Most retirees are in a lower tax bracket in retirement than when they were working, in which case tax-deferred contributions are superior. So maxing out the 401k before contributing to the Roth IRA would be preferable for such people.

IMHO, unless you have a good reason not to, the default should be to contribute to tax-deferred accounts first.

As such, I would recommend the following order:

1. Take 401(k) to get max match.
2. Max out HSA.
3. Max out 401(k).
4. Max out Roth IRA.
5. Taxable.
After 4 should it be mega backdoor roth or taxable? I'm currently splitting a couple percent to each.
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teen persuasion
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Re: New Trend? Contribute only up to your match on 401k?

Post by teen persuasion »

Watty wrote: Thu Nov 19, 2020 11:48 am
HawkeyePierce wrote: Wed Nov 18, 2020 6:25 pm The only times I've seen a serious recommendation to only contribute up to the match are the following scenarios:

1) You're deep in debt and not yet ready to start investing. You should still try to get the match as that instant return likely dwarfs the interest on your debt.

2) Your 401k has very high fees *and* you are not maxing out your retirement accounts. In this case, it can make sense to contribute enough to get the match, then send the rest to an IRA.
Another possible case.

3) Your income is low enough that you will owe no income taxes. With the child tax credit a lot more people qualify for this than you might think. In this case after getting the employer match a Roth would be a better choice than a taxable account though.
You have to look at the marginal tax rate, not just tax owed or tax bracket. If you are eligible for CTC and income is low enough to owe no taxes, you are likely also eligible for EITC. The 16 or 21% phaseout rate based on w2 wages and AGI increases the marginal rate above the tax bracket, and more so if there's an analogous state credit (NY matches at 30%, that's like an additional 6.3% in the marginal rate if in 21% phaseout, or 27.3%).

Since EITC is fully refundable, and $1400 of the $2k CTC (under age 17) is refundable, you can do better than zero tax, you could be eligible for thousands in refunds. Those refunds can be used to fund Roth IRAs, increasing total savings (or possibly increasing another nonrefundable credit, the Retirement Saver's credit, to offset any tax owed, releasing more refundable credits - say, if you put $2k in a Roth IRA for a SAHM).

Rough example from our situation: $75k gross income, $7k HSA, gives $68k AGI, $43k taxable income, $4775 federal tax. AOTC $2500, CTC (<17) $2k, CTC (>17) $500, EITC $0, RSC $0. We get a refund of $225, whether we save in taxable or in Roth 401k and/or IRA.

Same situation, but we save in traditional 401k and SIMPLE IRA, total of $32k. Now $36k AGI, $11k taxable income, $1103 federal tax. Nonrefundable credits: $1500 AOTC, $600 CTC (<17), $500 CTC (>17), RSC (doesn't matter, we've exhausted any tax). Refundable credits: $1k AOTC, $1400 CTC (<17), $3468 EITC. Total refund: $5868 federal.
Also: 30% of EITC = $ 1040, 33% of first $1k CTC = $330, $200 college credit. Total state refundable credits: $1570.

Total credits using pre-tax contributions: $7438
Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

tigers174 wrote: Thu Nov 19, 2020 1:41 pm
willthrill81 wrote: Thu Nov 19, 2020 12:15 pm It's a reasonable strategy, but it could certainly be tweaked. If they have an HSA, that should very likely be maxed out before the Roth IRA due to the triple-tax advantaged vs. the Roth's double-tax advantage.

But even with that tweak, it's certainly possible that good planning can lead to a better outcome, in this case, greater after-tax wealth. Most retirees are in a lower tax bracket in retirement than when they were working, in which case tax-deferred contributions are superior. So maxing out the 401k before contributing to the Roth IRA would be preferable for such people.

IMHO, unless you have a good reason not to, the default should be to contribute to tax-deferred accounts first.

As such, I would recommend the following order:

1. Take 401(k) to get max match.
2. Max out HSA.
3. Max out 401(k).
4. Max out Roth IRA.
5. Taxable.
After 4 should it be mega backdoor roth or taxable? I'm currently splitting a couple percent to each.
I personally prioritized MBR before taxable. the aftertax contributions to the MBR (the part that has no gains) have no penalty for withdrawal (subject to ordering rules, which could have penalties)
tigers174
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Re: New Trend? Contribute only up to your match on 401k?

Post by tigers174 »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:45 pm
tigers174 wrote: Thu Nov 19, 2020 1:41 pm After 4 should it be mega backdoor roth or taxable? I'm currently splitting a couple percent to each.
I personally prioritized MBR before taxable. the aftertax contributions to the MBR (the part that has no gains) have no penalty for withdrawal (subject to ordering rules, which could have penalties)
I guess I should clarify on mine, I can't roll over to an IRA in my plan so it's stuck in the 401k until I leave. Any difference there?
Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

tigers174 wrote: Thu Nov 19, 2020 1:47 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:45 pm
tigers174 wrote: Thu Nov 19, 2020 1:41 pm After 4 should it be mega backdoor roth or taxable? I'm currently splitting a couple percent to each.
I personally prioritized MBR before taxable. the aftertax contributions to the MBR (the part that has no gains) have no penalty for withdrawal (subject to ordering rules, which could have penalties)
I guess I should clarify on mine, I can't roll over to an IRA in my plan so it's stuck in the 401k until I leave. Any difference there?
Is it stuck as aftertax? Or does your plan allow you to do an in-plan Roth conversion of the aftertax money?

If it is stuck as aftertax, and you think you might stay for any substantial amount of time, then its a challenge to decide what is better, but i'd lean towards taxable.

If you can convert it to Roth in the plan, then that is good enough.
tigers174
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Re: New Trend? Contribute only up to your match on 401k?

Post by tigers174 »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:55 pm Is it stuck as aftertax? Or does your plan allow you to do an in-plan Roth conversion of the aftertax money?

If it is stuck as aftertax, and you think you might stay for any substantial amount of time, then its a challenge to decide what is better, but i'd lean towards taxable.

If you can convert it to Roth in the plan, then that is good enough.
Automatic conversion from after tax to Roth 401k, but no rollover to an IRA while under the plan. Thanks for the input.
Last edited by tigers174 on Thu Nov 19, 2020 2:00 pm, edited 1 time in total.
Soon2BXProgrammer
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

tigers174 wrote: Thu Nov 19, 2020 1:56 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:55 pm Is it stuck as aftertax? Or does your plan allow you to do an in-plan Roth conversion of the aftertax money?

If it is stuck as aftertax, and you think you might stay for any substantial amount of time, then its a challenge to decide what is better, but i'd lean towards taxable.

If you can convert it to Roth in the plan, then that is good enough.
Yes, automatic conversion from after tax to Roth 401k, but no rollover to an IRA while under the plan. Thanks for the input.
as long as your fund options are reasonable in the 401k, that is fine.
tigers174
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Re: New Trend? Contribute only up to your match on 401k?

Post by tigers174 »

Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:57 pm
tigers174 wrote: Thu Nov 19, 2020 1:56 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:55 pm Is it stuck as aftertax? Or does your plan allow you to do an in-plan Roth conversion of the aftertax money?

If it is stuck as aftertax, and you think you might stay for any substantial amount of time, then its a challenge to decide what is better, but i'd lean towards taxable.

If you can convert it to Roth in the plan, then that is good enough.
Yes, automatic conversion from after tax to Roth 401k, but no rollover to an IRA while under the plan. Thanks for the input.
as long as your fund options are reasonable in the 401k, that is fine.
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willthrill81
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Re: New Trend? Contribute only up to your match on 401k?

Post by willthrill81 »

tigers174 wrote: Thu Nov 19, 2020 1:41 pm
willthrill81 wrote: Thu Nov 19, 2020 12:15 pm It's a reasonable strategy, but it could certainly be tweaked. If they have an HSA, that should very likely be maxed out before the Roth IRA due to the triple-tax advantaged vs. the Roth's double-tax advantage.

But even with that tweak, it's certainly possible that good planning can lead to a better outcome, in this case, greater after-tax wealth. Most retirees are in a lower tax bracket in retirement than when they were working, in which case tax-deferred contributions are superior. So maxing out the 401k before contributing to the Roth IRA would be preferable for such people.

IMHO, unless you have a good reason not to, the default should be to contribute to tax-deferred accounts first.

As such, I would recommend the following order:

1. Take 401(k) to get max match.
2. Max out HSA.
3. Max out 401(k).
4. Max out Roth IRA.
5. Taxable.
After 4 should it be mega backdoor roth or taxable? I'm currently splitting a couple percent to each.
Mega backdoor Roth will always beat taxable, TMK, so that would be #4. Relatively few have access to that though.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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House Blend
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Re: New Trend? Contribute only up to your match on 401k?

Post by House Blend »

willthrill81 wrote: Thu Nov 19, 2020 10:52 am To be honest, I'm surprised at how many posters voluntarily give up tax-advantaged space in order to invest in taxable (and I'm not including 529 accounts). It's probably not more than a handful, but it should be zero.
Small, but not zero.

Not all investments are for retirement. For example, saving up for a house down payment. You can avoid the 10% penalty if you are using IRA withdrawals to buy a house with IRA money, but AFAIK not with 401(k) money.
(And even in the IRA case, the amount is limited to $10K.)
(Or you can tap Roth IRA contributions.)

To be clear, this is why one might give up 401(k) space beyond the match, not a reason to give up (Roth) IRA space.
willthrill81 wrote: Thu Nov 19, 2020 11:17 am
Mike Scott wrote: Thu Nov 19, 2020 11:10 am There are tax/financial circumstances in which a taxable brokerage is almost the same as unlimited Roth space.
That's true, but I've not seen any situation where taxable would beat Roth. The best case scenario is that it comes out even. As such, it doesn't make sense to forego Roth space in favor of taxable.
1. Tax loss harvesting could save you up to 12% of $3000 every year.

2. For the income ranges we are talking about, the after tax returns of an international stock index fund are generally going to be higher in taxable than they are in a Roth IRA. (This requires no more than $300/$600 in foreign taxes paid, so this particular free lunch is not all-you-can-eat.)

That said, I do think these circumstances are too fragile to rely on, and would never put taxable above a Roth IRA in an investment priority list.
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willthrill81
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Re: New Trend? Contribute only up to your match on 401k?

Post by willthrill81 »

House Blend wrote: Fri Nov 20, 2020 11:42 am
willthrill81 wrote: Thu Nov 19, 2020 10:52 am To be honest, I'm surprised at how many posters voluntarily give up tax-advantaged space in order to invest in taxable (and I'm not including 529 accounts). It's probably not more than a handful, but it should be zero.
Small, but not zero.

Not all investments are for retirement. For example, saving up for a house down payment. You can avoid the 10% penalty if you are using IRA withdrawals to buy a house with IRA money, but AFAIK not with 401(k) money.
(And even in the IRA case, the amount is limited to $10K.)
(Or you can tap Roth IRA contributions.)

To be clear, this is why one might give up 401(k) space beyond the match, not a reason to give up (Roth) IRA space.
In my mind, saving up for a down payment, a vehicle, etc. is distinct from investing, which is the context here. I wouldn't consider home or auto payments to be investing, so avoiding those in whole or part by saving up in advance instead doesn't qualify as investing either.
House Blend wrote: Fri Nov 20, 2020 11:42 am
willthrill81 wrote: Thu Nov 19, 2020 11:17 am
Mike Scott wrote: Thu Nov 19, 2020 11:10 am There are tax/financial circumstances in which a taxable brokerage is almost the same as unlimited Roth space.
That's true, but I've not seen any situation where taxable would beat Roth. The best case scenario is that it comes out even. As such, it doesn't make sense to forego Roth space in favor of taxable.
1. Tax loss harvesting could save you up to 12% of $3000 every year.

2. For the income ranges we are talking about, the after tax returns of an international stock index fund are generally going to be higher in taxable than they are in a Roth IRA. (This requires no more than $300/$600 in foreign taxes paid, so this particular free lunch is not all-you-can-eat.)

That said, I do think these circumstances are too fragile to rely on, and would never put taxable above a Roth IRA in an investment priority list.
TMK, the only way that taxable would beat Roth over the long-term is if your investments lose value, though the international stock issue you mention could do it very slightly in a very specific situation that's not generalizable enough to be meaningful, IMHO.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
prioritarian
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Re: New Trend? Contribute only up to your match on 401k?

Post by prioritarian »

Firemenot wrote: Wed Nov 18, 2020 6:36 pm The thing that irks me about most of the FIRE blogs (but not all — there are exceptions) is one of the two is usually true: (i) spouse works so they’re really a stay at home parent or (ii) they’re actually financing, or trying to finance, much of their living expenses off a new blogger career.
It's weird how someone who has created a financial business with employees that they run (as an incorporated officer) can still describe themselves a "early retired".
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House Blend
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Re: New Trend? Contribute only up to your match on 401k?

Post by House Blend »

willthrill81 wrote: Fri Nov 20, 2020 11:54 am In my mind, saving up for a down payment, a vehicle, etc. is distinct from investing, which is the context here. I wouldn't consider home or auto payments to be investing, so avoiding those in whole or part by saving up in advance instead doesn't qualify as investing either.
If you insist on limiting the scope to investing for retirement, I can agree with you that one should not forgo tax-advantaged retirement accounts in favor of taxable accounts.
TMK, the only way that taxable would beat Roth over the long-term is if your investments lose value, though the international stock issue you mention could do it very slightly in a very specific situation that's not generalizable enough to be meaningful, IMHO.
1. In this context, we are assuming the investor (always) pays zero tax on LT cap gains and qualified dividends, and nonzero tax on other forms of income.

With that in place, all that is required for taxable investing plus tax loss harvesting to beat Roth investing is volatility. (And no short term capital gains or non-qualified dividends.) Actually not even that. All you need is one moment in time where you own shares that are worth less than what you paid for them. Doesn't matter if the investment does well in the long run.

2. I never said this was "meaningful". In fact I added that it doesn't change the fact that Roth investing should have a higher priority than taxable investing. You were the one who said you've never seen a situation where taxable beats Roth. I thought you would be interested in seeing the two examples I provided where it does, but it appears that I was wrong.
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willthrill81
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Re: New Trend? Contribute only up to your match on 401k?

Post by willthrill81 »

House Blend wrote: Fri Nov 20, 2020 4:15 pm
willthrill81 wrote: Fri Nov 20, 2020 11:54 amTMK, the only way that taxable would beat Roth over the long-term is if your investments lose value, though the international stock issue you mention could do it very slightly in a very specific situation that's not generalizable enough to be meaningful, IMHO.
1. In this context, we are assuming the investor (always) pays zero tax on LT cap gains and qualified dividends, and nonzero tax on other forms of income.

With that in place, all that is required for taxable investing plus tax loss harvesting to beat Roth investing is volatility. (And no short term capital gains or non-qualified dividends.) Actually not even that. All you need is one moment in time where you own shares that are worth less than what you paid for them. Doesn't matter if the investment does well in the long run.

2. I never said this was "meaningful". In fact I added that it doesn't change the fact that Roth investing should have a higher priority than taxable investing. You were the one who said you've never seen a situation where taxable beats Roth. I thought you would be interested in seeing the two examples I provided where it does, but it appears that I was wrong.
I do see your point, but we both agree that it's not 'meaningful' to most investors. Thanks. :beer
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Re: New Trend? Contribute only up to your match on 401k?

Post by gquogue »

Will play a bit of devils advocate here on this entire topic. To me, if one is planning on a traditional 40 year work career, buying a house, and saving for retirement along the way, the traditional 401k max process is rational. But I would think there are many who value the options that non retirement account liquidity can provide. Perhaps there is a desire to start a small business, or make another investment, own a second home, or whatever other example may apply. Probably many would respond to this that this is not rational until first maxing everything out etc. But that is not how things always go. You can be saving at a reasonably high rate in retirement accounts, yet choose not to max out all retirement accounts and desire the liquidity of taxable and options it provides. I also value not having all of my tax eggs in one restricted basket even if it is not perfectly rational per se. And I'm not talking emergency fund. Just my opinion.
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anon_investor
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Re: New Trend? Contribute only up to your match on 401k?

Post by anon_investor »

tigers174 wrote: Thu Nov 19, 2020 2:01 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:57 pm
tigers174 wrote: Thu Nov 19, 2020 1:56 pm
Soon2BXProgrammer wrote: Thu Nov 19, 2020 1:55 pm Is it stuck as aftertax? Or does your plan allow you to do an in-plan Roth conversion of the aftertax money?

If it is stuck as aftertax, and you think you might stay for any substantial amount of time, then its a challenge to decide what is better, but i'd lean towards taxable.

If you can convert it to Roth in the plan, then that is good enough.
Yes, automatic conversion from after tax to Roth 401k, but no rollover to an IRA while under the plan. Thanks for the input.
as long as your fund options are reasonable in the 401k, that is fine.
It has Brokeragelink so the world is my oyster
Since you get automatic in-plan roth conversions I would prioritize MBR over taxable. Taxable has tax drag from dividends, future capital gains when you need to withdraw and harder to rebalance without tax considerations.

At least for me, the added benefit is funds in my 401k have a lower expense ratio than my Roth IRA.
Valueinvestor2
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Re: New Trend? Contribute only up to your match on 401k?

Post by Valueinvestor2 »

PhillyPhan wrote: Wed Nov 18, 2020 4:14 pm There seems to be a pattern of articles emerging around the strategy of only contributing to the match max within your 401k.
The general idea for this is that your additional funds can be allocated to a taxable account (after you fully fund your roth) which is more easier to access if you decide to retire before 60.5.

I always thought that reducing one's AGI and putting your pre-tax dollars to work would yield the best outcome over time.

Maybe I am missing something or just not planning on drawing down funds in my 40s or hopefully 50s?

I say this as someone who has a taxable account and also with an open mind that if I should view this in another manner I am open to it.

Thoughts?
I have been considering this for my situation. Let’s say you are 35 and have 25 more years until 59.5, you have 500k in 401k, and you compound at 7%. In this scenario you will have 2.7m at 59.5 so using the 4% you will have access to $108k per year. This ignores the 6% annual contributions for next 25 years and any additional compounding that occurs in taxable accounts.

Bogleheads always talk about winning the game. The above scenario for me is winning the game.

So why would I continue to keep my funds locked up with government rules when I can pay more taxes upfront but have flexibility with my money? My money wants to live in America not North Korea.
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Re: New Trend? Contribute only up to your match on 401k?

Post by willthrill81 »

gquogue wrote: Sat Nov 21, 2020 9:18 am Will play a bit of devils advocate here on this entire topic. To me, if one is planning on a traditional 40 year work career, buying a house, and saving for retirement along the way, the traditional 401k max process is rational. But I would think there are many who value the options that non retirement account liquidity can provide. Perhaps there is a desire to start a small business, or make another investment, own a second home, or whatever other example may apply. Probably many would respond to this that this is not rational until first maxing everything out etc. But that is not how things always go. You can be saving at a reasonably high rate in retirement accounts, yet choose not to max out all retirement accounts and desire the liquidity of taxable and options it provides. I also value not having all of my tax eggs in one restricted basket even if it is not perfectly rational per se. And I'm not talking emergency fund. Just my opinion.
You certainly aren't alone in your perspective (or at least the one you're mentioning here). Joshua Sheets of the Radical Personal Finance podcast has shared that viewpoint for quite a while.

I think that there are many here, including me, who would affirm that foregoing tax-advantaged space, such as a 401k (at least after you get the employer match), in order to use those funds to build your own business or buy profitable rental properties is perfectly rational. It's certainly less rational to forego that space to increase one's consumption (i.e. buying a second home, per your example).

That said, 401k plans are not as restrictive as many take them to be. Yes, there is a 10% penalty for withdrawing funds before 59.5 (that can possibly being avoided with options like the SEPP 72(t) option, the Roth conversion ladder, and the '55 rule'), but it's already been demonstrated (in the Mad Fientist link above) that paying that penalty can, at least in some situations, still be mathematically superior to foregoing 401k contributions in lieu of taxable. Many appear to have a knee-jerk reaction that the 10% penalty automatically makes taxable better, but that's simply not the case.

Further, one of the big benefits of 401k and other employer-sponsored retirement/savings plans is that they are automatic. We know that investor/consumer behavior is probably the single biggest factor in opposition to building wealth, and making wealth building automatic goes a long way toward reducing its power.
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JackoC
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Re: New Trend? Contribute only up to your match on 401k?

Post by JackoC »

Watty wrote: Thu Nov 19, 2020 11:48 am
HawkeyePierce wrote: Wed Nov 18, 2020 6:25 pm The only times I've seen a serious recommendation to only contribute up to the match are the following scenarios:

1) You're deep in debt and not yet ready to start investing. You should still try to get the match as that instant return likely dwarfs the interest on your debt.

2) Your 401k has very high fees *and* you are not maxing out your retirement accounts. In this case, it can make sense to contribute enough to get the match, then send the rest to an IRA.
Another possible case.

3) Your income is low enough that you will owe no income taxes. With the child tax credit a lot more people qualify for this than you might think. In this case after getting the employer match a Roth would be a better choice than a taxable account though.
Yes in general not maxing tax deferred contributions is a relatively lower income conversation, including 'FIRE' plans to live on a shoestring in a very early retirement, for those to whom that has any appeal (zero, to me).

If you make a high income taxed at high marginal rate, the tax advantage of max contributions is too much pass up, especially with the greater likelihood in that case of a lower tax rate after age 59.5, which is where trad IRA/401k numbers look really good. And you may be accustomed to a living standard which can't be entirely funded even after 59.5 just by tax deferred contributions anyway. You might be saving much more in taxable accounts than the relatively modest max in tax deferred, and this whole topic will seem ridiculous.

Without specifying which of a relatively narrow range of circumstances one is in where under-contributing to tax deferred makes sense...it doesn't.
TechBogler
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Re: New Trend? Contribute only up to your match on 401k?

Post by TechBogler »

A question for high income earners - When Does it NOT make sense to Contribute into 401K?

For reference, I'm an 25 year old working in Silicon Valley and last year I made $450,000 through my job + other investment income from dividends/sale of stock/high yield savings. Since I graduated, I never contributed to a 401k as my Company automatically puts a certain % of my salary into its plan without me needing to contribute. I always set aside $5-6k for the Roth IRA conversion each year because I've felt that I want to get rid of any tax burden in my future and just pay whatever taxes are as they stand right now.

A big part of why I've done Roth conversion that is that with the way the world is and the large social unrest that grows every year, it seems more than likely that high income earners will face increased taxes the farther you go out (in this case, 50 years out). Perhaps some people on this forum don't view things in this lens, but I'd say I'm the type of person that may be inclined to make the outright bet that when I'm 65, my tax bracket if I were to still be a high-income individual will be much more than my current tax bracket and things like capital gains tax advantage may be entirely gone.

With that said, I'm trying figure out at what point does it not make sense to contribute into a 401K if you are a current top-tax bracket income earner?

My company already contributes the match without me needing to contribute so that isn't a factor. What other factors really make the math not compelling to contribute? As we all know, putting pre-tax dollars into a tax-deferred account or post-tax dollars into a tax-free account both end up with the same amount if the tax rate is the same. I know sometimes people hate the choices in 401k accounts though mine has enough Vanguard options to keep my happy for a 20k allocation (I can just make that account my S&P/NASDAQ/fixed income investment account).

I was trying to piece together the double taxation issue as well: I earn $450k and I put $20k (rounding 19.5k) into a 401K. My effective all in taxes are ~42% today so I get to save the federal + state piece of taxes (almost 48% between 35% federal + ~12-13% state on that last 20k of income) but then when I withdraw money, it will be taxed at the capital gains rate of that year (again, likely more than 23.8% it is today for high income earners is my belief 50 years from now). I enjoy the flexibility of investing money in my traditional brokerage account where I then pay ~48% today and another 23.8% on just the capital appreciation leg of it. Does this imply I should never worry about the "increase in tax rates when I turn 65" because for the double taxation of 48% + 23.8% on gains leg of my brokerage to equal the 401k withdrawal tax rate, I would need to be facing something along the lines of ~60% tax rate on withdrawal?

The simple math is 20k put into 401k that grows 6% (hypothetical) for 40 years = 206k, which at a 64% withdrawal tax rate = $74k. The same 20k I earned that I put into my regular brokerage account is $10.4k after 48% taxes which grows to 107k at 6%. Assuming the current capital gains rate of 23.8%, it puts me at 74k (but that may go way up too, commensurately with the scenario where the 401k withdrawal rate tax is also going to 64%?).

It seems to me that based on the above that you should ALWAYS invest in 401K up until 20k as a high-income earner, unless you are specifically interested in using that 20k for another asset class or managing your liquidity away from the usual crap investments available in 401k plans. Is this the correct thinking?
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Re: New Trend? Contribute only up to your match on 401k?

Post by Soon2BXProgrammer »

TechBogler wrote: Sat Nov 21, 2020 1:39 pm A question for high income earners - When Does it NOT make sense to Contribute into 401K?

For reference, I'm an 25 year old working in Silicon Valley and last year I made $450,000 through my job + other investment income from dividends/sale of stock/high yield savings. Since I graduated, I never contributed to a 401k as my Company automatically puts a certain % of my salary into its plan without me needing to contribute. I always set aside $5-6k for the Roth IRA conversion each year because I've felt that I want to get rid of any tax burden in my future and just pay whatever taxes are as they stand right now.

A big part of why I've done Roth conversion that is that with the way the world is and the large social unrest that grows every year, it seems more than likely that high income earners will face increased taxes the farther you go out (in this case, 50 years out). Perhaps some people on this forum don't view things in this lens, but I'd say I'm the type of person that may be inclined to make the outright bet that when I'm 65, my tax bracket if I were to still be a high-income individual will be much more than my current tax bracket and things like capital gains tax advantage may be entirely gone.

With that said, I'm trying figure out at what point does it not make sense to contribute into a 401K if you are a current top-tax bracket income earner?

My company already contributes the match without me needing to contribute so that isn't a factor. What other factors really make the math not compelling to contribute? As we all know, putting pre-tax dollars into a tax-deferred account or post-tax dollars into a tax-free account both end up with the same amount if the tax rate is the same. I know sometimes people hate the choices in 401k accounts though mine has enough Vanguard options to keep my happy for a 20k allocation (I can just make that account my S&P/NASDAQ/fixed income investment account).

I was trying to piece together the double taxation issue as well: I earn $450k and I put $20k (rounding 19.5k) into a 401K. My effective all in taxes are ~42% today so I get to save the federal + state piece of taxes (almost 48% between 35% federal + ~12-13% state on that last 20k of income) but then when I withdraw money, it will be taxed at the capital gains rate of that year (again, likely more than 23.8% it is today for high income earners is my belief 50 years from now). I enjoy the flexibility of investing money in my traditional brokerage account where I then pay ~48% today and another 23.8% on just the capital appreciation leg of it. Does this imply I should never worry about the "increase in tax rates when I turn 65" because for the double taxation of 48% + 23.8% on gains leg of my brokerage to equal the 401k withdrawal tax rate, I would need to be facing something along the lines of ~60% tax rate on withdrawal?

The simple math is 20k put into 401k that grows 6% (hypothetical) for 40 years = 206k, which at a 64% withdrawal tax rate = $74k. The same 20k I earned that I put into my regular brokerage account is $10.4k after 48% taxes which grows to 107k at 6%. Assuming the current capital gains rate of 23.8%, it puts me at 74k (but that may go way up too, commensurately with the scenario where the 401k withdrawal rate tax is also going to 64%?).

It seems to me that based on the above that you should ALWAYS invest in 401K up until 20k as a high-income earner, unless you are specifically interested in using that 20k for another asset class or managing your liquidity away from the usual crap investments available in 401k plans. Is this the correct thinking?
Here is some framework you could start to build an analysis around.
https://www.gocurrycracker.com/is-your-401k-too-big/
https://www.gocurrycracker.com/is-your- ... ig-part-2/
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teen persuasion
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Re: New Trend? Contribute only up to your match on 401k?

Post by teen persuasion »

TechBogler wrote: Sat Nov 21, 2020 1:39 pm ...I was trying to piece together the double taxation issue as well: I earn $450k and I put $20k (rounding 19.5k) into a 401K. My effective all in taxes are ~42% today so I get to save the federal + state piece of taxes (almost 48% between 35% federal + ~12-13% state on that last 20k of income) but then when I withdraw money, it will be taxed at the capital gains rate of that year (again, likely more than 23.8% it is today for high income earners is my belief 50 years from now).
Withdrawals from traditional 401k or IRA accounts are taxed as ordinary income, not capital gains.

But the contents of the account grow without tax drag until withdrawn, unlike taxable accounts.
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