Retiring June 2023 - Accelerate 401k to get max?

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BogleKev
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Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

Looked around on BH and could not find this topic addressed.

Background:
  • 63 yrs old
  • Planning to retire at end of June 2023
  • Salary = $205K, plus a likely $30K bonus in April '23
  • I have historically contributed whatever gets me to the IRS max annual deferral limit by ~end of Nov/early Dec each year. So for 2022 I made sure to tweak contributions to be 11-13% to get me to $27K in Dec (basic + >50 catch-up = 20.5 + 6.5). Under by employer's plan I can adjust my % real-time paycheck to paycheck).
  • My company does a true-up on 401ks which I am told by my benefits department will even apply to me as a retiree in Dec 2023 even if I leave in June and have withdrawn my money from the Prudential plan by December (although I am awaiting a pointer to where that is in writing in the company policies).
  • I do know that as a retiree (considered a special class of separated employee) I will also get a partial bonus paid in April 2024 for my 6 months of 2023, but that's just a simple check. Not sure how a 401k true-up contribution would be dispersed to me. The true-up issue may actually just be an aside since the answer there will not make me change my retirement date at this point.
My question:
Since I am retiring at the midpoint of the year, should I increase my 401k contribution % beginning this January to make sure I hit the 2023 combined IRS max deferral limit of $30K (22.5 + 7.5)? I am guessing it should be based on salary of 205K/2 + 30K = 132K, so in order to hit 30K contribution it would mean bumping to ~20% for those 6 months that I'm still there in 2023.

If I bump up my contribution my wife and I can afford the resulting drop in net income during this period.

Any upside or downside to this? Thanks for any thoughts.
sailaway
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by sailaway »

Although we have a different matching program, we have accelerated 401k contributions every year since achieving lean FI to keep open the possibility of leaving mid year while still getting the maximum match. It does mean we are not investing equally throughout the year, but between bonuses, ESPP and RSUs that was never really a thing for us, anyway.

The one caveat is that you also have in place whatever cash reserves your require to feel comfortable upon retirement.
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BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

sailaway wrote: Wed Nov 23, 2022 6:00 pm Although we have a different matching program, we have accelerated 401k contributions every year since achieving lean FI to keep open the possibility of leaving mid year while still getting the maximum match. It does mean we are not investing equally throughout the year, but between bonuses, ESPP and RSUs that was never really a thing for us, anyway.
Thanks sailaway. Interesting, and it does make sense as a strategy even for years prior to retirement as you explain it, especially if leaving suddenly midyear is a possibility.
The one caveat is that you also have in place whatever cash reserves your require to feel comfortable upon retirement.
Yes we have just under 2 years of expected expenses in cash equivalent reserves, and we plan to augment that further from her and my salaries over the next 7 months to get to 2.5 years' worth. (My wife is retiring around same time as me).

Thanks again.
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Stinky
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by Stinky »

Presuming that you want to stuff away money in your 401k plan, I think it’s a fine idea to accelerate contributions to get the full amount in while you’re working.

In addition, it sounds like your income might dip to the level where you and your wife could make Roth (or maybe even traditional) IRA contributions next year. It sounds like you’ve been over the income thresholds in the past, but might be within the income limits for 2023. You could consider stuffing some more money away there if you chose. You wouldn’t need to make a decision on your 2023 contributions to those plans until April 2024.
Last edited by Stinky on Wed Nov 23, 2022 7:07 pm, edited 1 time in total.
Retired life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
SnowBog
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by SnowBog »

We aren't FI yet, and thus are a few years away from retirement - but I max out my 401k "early" every year.

For added context, my employer likes to play "musical chairs" around the middle of the year, so I've decided to get as much of their "free money" (match) as is possible - in the case I lose my chair some year. We switch to after-tax [aka Mega Backdoor Roth] after that for the remainder of the year.

Assuming I retire on my timeline, I plan to max out all tax-advantaged (at least the pre-tax ones) account "one more year" before retiring, if it doesn't mean staying around artificially longer than I'd otherwise stay. For me, our annual bonuses (and performance pay) are only paid if you complete the fiscal year with the organization, which happens several months into the calendar year. So, sticking around to get my "last" bonus would align with maxing out our tax-advantaged accounts.

I personally don't see a "downside" (other than the obvious - if you have to work a few extra months - like I might to make the timing work for my situation). If you are 55+, many 401k plans allow you to start withdrawals early (at 55) when you "retire" from your company. If you are < 55 (or your plan doesn't allow early withdrawals at 55), you'd want to make sure you have adequate non-401k assets, or a plan to access your 401k "early" if needed - which I'm assuming you have addressed.

Enjoy retirement!
niagara_guy
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by niagara_guy »

If you retire in June 23 you will probably be in a much lower tax bracket. Not suggesting you shouldn't max out your 401k for 2023, just pointing out the tax bracket. If you end up in a very low bracket for 2023 you could convert some money to Roth.

I would want the true-up in writing (maybe it's in the summary plan description).
lakpr
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by lakpr »

niagara_guy wrote: Wed Nov 23, 2022 7:11 pm If you retire in June 23 you will probably be in a much lower tax bracket. Not suggesting you shouldn't max out your 401k for 2023, just pointing out the tax bracket. If you end up in a very low bracket for 2023 you could convert some money to Roth.

I would want the true-up in writing (maybe it's in the summary plan description).
If the OP is going to be in a lower tax bracket, then maxing out the Roth 401(k) for 2023 makes sense. No conversion necessary (making Roth contributions has the same effect).

However with a salary of $205k annual, for 6 months it would be $103k (rounded a bit) + $30k bonus expected = $133k, puts this couple into the 22% tax bracket, not that much lower than the current 24% tax bracket.
JoeJohnson
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by JoeJohnson »

OP - are you saying the company does no match at all until December?

Overall, yes, it is beneficial to you to fill tax advantaged accounts. Traditional vs Roth is the big question here. Current and future tax brackets are important. ACA income limits, if you're going to use ACA health coverage, , lowering income might make you eligible for IRA limits, etc etc
Topic Author
BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

Stinky wrote: Wed Nov 23, 2022 6:57 pm
In addition, it sounds like your income might dip to the level where you and your wife could make Roth (or maybe even traditional) IRA contributions next year. It sounds like you’ve been over the income thresholds in the past, but might be within the income limits for 2023. You could consider stuffing some more money away there if you chose. You wouldn’t need to make a decision on your 2023 contributions to those plans until April 2024.
Excellent point. I had not considered the reduced income and the Roth impacts. My wife will still have her income as well, but it may still put us under the limit. Thanks!
Normchad
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by Normchad »

I’m strongly considering leaving mid year; but haven’t made up my mind.

I’ve already doubled the 401k withholding so that I’ll hit the max around July 1 just in case.

If I work longer, than I’ll miss out on some matching dollars.
Topic Author
BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

SnowBog wrote: Wed Nov 23, 2022 7:06 pm We aren't FI yet, and thus are a few years away from retirement - but I max out my 401k "early" every year.

For added context, my employer likes to play "musical chairs" around the middle of the year, so I've decided to get as much of their "free money" (match) as is possible - in the case I lose my chair some year.
Funny you mention that. There are strong rumors of a coming layoff early next year (with a decent package that would amount to 30 weeks pay for me with my seniority). I am hoping I can get on that list (after years of NOT wanting to be on such a list!) and have made it clear to my management that they can save two junior engineers' jobs if they put me on the list. But it seems low probability that my location and my team would get affected for reasons too complicated to go into here.
If you are 55+, many 401k plans allow you to start withdrawals early (at 55) when you "retire" from your company. If you are < 55 (or your plan doesn't allow early withdrawals at 55), you'd want to make sure you have adequate non-401k assets, or a plan to access your 401k "early" if needed - which I'm assuming you have addressed.
My company has no such allowance. And yes we do have a defined plan in place if things change and we need to tap the 401k proceeds.
Enjoy retirement!
Thank you, and you as well when the time comes for you!
Topic Author
BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

niagara_guy wrote: Wed Nov 23, 2022 7:11 pm If you retire in June 23 you will probably be in a much lower tax bracket. Not suggesting you shouldn't max out your 401k for 2023, just pointing out the tax bracket. If you end up in a very low bracket for 2023 you could convert some money to Roth.

I would want the true-up in writing (maybe it's in the summary plan description).
Great points -- thanks for adding in about the Roth as an alternative to the plan to fully fund the 401k. I wil run and compare the options on that over the coming days.
Topic Author
BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

lakpr wrote: Wed Nov 23, 2022 8:02 pm If the OP is going to be in a lower tax bracket, then maxing out the Roth 401(k) for 2023 makes sense. No conversion necessary (making Roth contributions has the same effect).

However with a salary of $205k annual, for 6 months it would be $103k (rounded a bit) + $30k bonus expected = $133k, puts this couple into the 22% tax bracket, not that much lower than the current 24% tax bracket.
Appreciate this analysis of the tax bracket changes. As per my responses above I am definitely going to run numbers on Roth 401k vs traditional 401k for the coming 2023 with the assumptions covered by you and others here. Thanks!
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BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

JoeJohnson wrote: Thu Nov 24, 2022 8:14 am OP - are you saying the company does no match at all until December?

Overall, yes, it is beneficial to you to fill tax advantaged accounts. Traditional vs Roth is the big question here. Current and future tax brackets are important. ACA income limits, if you're going to use ACA health coverage, , lowering income might make you eligible for IRA limits, etc etc
Thanks Joe. My company matches quarterly, and then does an additional true-up in December.
And we have no ACA considerations since my wife will retire as a federal employee so her medical still covers us into and thru retirement.
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BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

Normchad wrote: Thu Nov 24, 2022 11:32 am I’m strongly considering leaving mid year; but haven’t made up my mind.

I’ve already doubled the 401k withholding so that I’ll hit the max around July 1 just in case.

If I work longer, than I’ll miss out on some matching dollars.
Good luck, Norm.
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Stinky
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by Stinky »

BogleKev wrote: Thu Nov 24, 2022 11:42 am
niagara_guy wrote: Wed Nov 23, 2022 7:11 pm If you retire in June 23 you will probably be in a much lower tax bracket. Not suggesting you shouldn't max out your 401k for 2023, just pointing out the tax bracket. If you end up in a very low bracket for 2023 you could convert some money to Roth.

I would want the true-up in writing (maybe it's in the summary plan description).
Great points -- thanks for adding in about the Roth as an alternative to the plan to fully fund the 401k. I wil run and compare the options on that over the coming days.
You could also do the Roth in addition to the 401k.

If you have the cash to do it.
Retired life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Topic Author
BogleKev
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Re: Retiring June 2023 - Accelerate 401k to get max?

Post by BogleKev »

Stinky wrote: Thu Nov 24, 2022 12:02 pm
BogleKev wrote: Thu Nov 24, 2022 11:42 am
niagara_guy wrote: Wed Nov 23, 2022 7:11 pm If you retire in June 23 you will probably be in a much lower tax bracket. Not suggesting you shouldn't max out your 401k for 2023, just pointing out the tax bracket. If you end up in a very low bracket for 2023 you could convert some money to Roth.

I would want the true-up in writing (maybe it's in the summary plan description).
Great points -- thanks for adding in about the Roth as an alternative to the plan to fully fund the 401k. I wil run and compare the options on that over the coming days.
You could also do the Roth in addition to the 401k.

If you have the cash to do it.
:thumbsup
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