should we stop or reduce contributing to our 401k?

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brian2013
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should we stop or reduce contributing to our 401k?

Post by brian2013 »

I asked this question in another post but I think it got lost/buried in that discussion.

I am seeking to retire in about 4 years, at around age 54. To fund my "pre-retirement" years from 54 to 59 1/2, I will use my taxable brokerage account, as well as wife's salary, and part time work for me as needed.

My question: I need to grow my taxable savings to fund my "pre-retirement" years from age 54 to 59 1/2. I am thinking of reducing or eliminating my contributions to my solo 401k to zero, and wife's 401k contributions down to her employer match. The money would be "diverted" into taxable brokerage account. I expect this will increase my tax bill somewhat, but I'm not sure how much. Please give me your thoughts on whether I should forego the tax benefits of saving into my 401k, and divert those savings into taxable brokerage?


Our details:
Emergency funds: approximately 6 months expenses

Debt: mortgage- 3 years left on a 15 year on primary residence – interest rate 2.625; one car loan with a small balance remaining, interest rate under 2%

Tax Filing Status: Married Filing Jointly
Tax Rate: “Effective” tax rate in 2023 was 14% according to my tax return; State tax rate unclear but I live in the low tax state of -

State of Residence: SC

Age: me-49; spouse 47
Two kids, 11 and 14, college bound; they are both bright; scholarship for the oldest especially is quite possible.
Health Insurance: excellent health insurance through wife’s employment. The plan is for her to continue working during my early retirement, and we would remain on her health insurance.

Desired Asset allocation: 85% stocks / 15% bonds
Desired International allocation: ??

approximate size of our joint total portfolio: $1,700,000.00 retirement account assets (includes spouse) NOT including home equity
taxable brokerage account: $150,000
Real estate: primary residence, equity estimate $500k; 3 years left on the mortgage
Annual expenses estimate: $135k which includes our mortgage (approximately $20k/year P&I) and some nice vacations. We could cut back, especially on the vacations.
To cover annual expenses, factoring in my wife's part time income and a little part-time income from my "low-stress" early retirement job, I estimate I would need to draw $90k from taxable each year during early retirement years.

Current retirement assets
Current asset allocation approximate, overview:
Roughly 6% fixed income (treasuries, bonds, cash)
Roughly 94% equities
Note: I’m a little overweight on equities and intend to rebalance into desired AA of 85/15 soon.

-Equity breakdown: 91% total stock mkt; 8% int’l; 1% REIT
Asset breakdown:
Taxable: total $184k
$73k in VUSXX (vangrd treasury MM) this IS our emergency fund
$111k in VTSAX (vgrd total stock mkt indx)

His 401k: $598k
99% of this is VTSAX; less than 1% VBTLX (vgrd total bnd mkt indx)

His Roth IRA at Vanguard: $124k
108k VTSAX; $15,500 VBTLX

Her Roth IRA at Vgrd: $168,700
$146k VTIAX (vgrd total int’l)
$22,500 VGSLX (vgrd REIT fund)

Her 401k: $480k
$450K in VTSM vgrd total stock mkt institutional
$30k in old pension

529 plan: $146k (80k oldest/65k youngest)

Contributions

New annual Contributions
wife 401k – need to check; probably $10k per year
His solo 401k – maxing out the employee deferral ($23,000 in 2024) plus probably $20k employer contribution;
Taxable – made significant increase in taxable contributions in 2024, in preparation for early retirement, and to withdraw some profits/owner equity in my business; probably contributed $70k into taxable in 2024
529 - $200/month per child, will continue until college begins.
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BolderBoy
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Re: should we stop or reduce contributing to our 401k?

Post by BolderBoy »

brian2013 wrote: Mon Feb 03, 2025 10:06 am Tax Rate: “Effective” tax rate in 2023 was 14% according to my tax return;
The "effective" tax rate isn't useful. What is your federal marginal tax rate also referred to as your federal tax bracket.
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FreddyC
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Re: should we stop or reduce contributing to our 401k?

Post by FreddyC »

This is not an area I am an expert in, or even particularly knowledgeable, but I would commend you to research on the wiki, prior threads, and early retirement books Rule 72(t) which may allow for early access to 401(k) without penalty in certain situations.
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Re: should we stop or reduce contributing to our 401k?

Post by KlangFool »

brian2013 wrote: Mon Feb 03, 2025 10:06 am
My question: I need to grow my taxable savings to fund my "pre-retirement" years from age 54 to 59 1/2. I am thinking of reducing or eliminating my contributions to my solo 401k to zero, and wife's 401k contributions down to her employer match. The money would be "diverted" into taxable brokerage account. I expect this will increase my tax bill somewhat, but I'm not sure how much. Please give me your thoughts on whether I should forego the tax benefits of saving into my 401k, and divert those savings into taxable brokerage?

brian2013,

I do not understand how does this makes any sense to pay extra unnecessary taxes.

A) How much is your taxable account?

B) How much is your Roth contribution? You can get them out tax free and penalty free before 59 1/2 years old.

C) What is your marginal tax rate?

D) How much is your state income tax?

E) What is the total amount of (A) + (B)?

F) Your asset allocation is too aggressive. You should have at least 10 years of expense in fixed income/cash at retirement.

G) What is gap/amount between the 150K expense need and your other income?

H) Please check out the following URL.

https://www.madfientist.com/how-to-acce ... nds-early/

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steadyosmosis
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Re: should we stop or reduce contributing to our 401k?

Post by steadyosmosis »

KlangFool wrote: Mon Feb 03, 2025 11:33 am I do not understand how does this makes any sense to pay extra unnecessary taxes.
Agree.
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dogagility
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Re: should we stop or reduce contributing to our 401k?

Post by dogagility »

Think about waiting to retire until the calendar year in which you turn 55. If your 401k plan lets you take partial withdrawals at that time, then fund your retirement until age 59.5 in that way.
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waitforit
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Re: should we stop or reduce contributing to our 401k?

Post by waitforit »

You should have at least 10 years of expense in fixed income/cash at retirement.
Stated differently, you are recommending 40% bonds/cash.

10x expenses bonds/cash
15x expenses stocks
25x total (4% withdrawal rate)
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retiredjg
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Re: should we stop or reduce contributing to our 401k?

Post by retiredjg »

Consider retiring in the year during which you reach age 55....if your 401k plan allows partial distributions. This would mean you continue to contribute to traditional 401k.

Consider using Roth instead of traditional 401k for some or all of your contributions. The Roth 401k can be rolled into Roth IRA and contributions can be taken from Roth IRA without penalty. (If you consider this, more discussion should happen unless you are already well familiar with withdrawals from Roth IRA).
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BrooklynInvest
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Re: should we stop or reduce contributing to our 401k?

Post by BrooklynInvest »

I cut my 401k contributions once - when I was getting divorced and it was either that or not pay the mortgage and lose the house. There's no way I'd forego that tax saving under less arduous circumstances, especially for 4 years.

OP, if it were me I'd divert any extra cash to taxable (in a reasonable AA) and when your expenses multiple in taxable aligns with how long you have before surcharge-free withdrawals then you can kick it into retirement?

I didn't see where the kids college was covered but may have missed that.

Good luck!
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Re: should we stop or reduce contributing to our 401k?

Post by KlangFool »

waitforit wrote: Mon Feb 03, 2025 12:45 pm
You should have at least 10 years of expense in fixed income/cash at retirement.
Stated differently, you are recommending 40% bonds/cash.

10x expenses bonds/cash
15x expenses stocks
25x total (4% withdrawal rate)
Not necessary true. "It depends" on the person's portfolio size versus expense. It can be 30X, 40X, and so on.

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bonesly
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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

brian2013 wrote: Mon Feb 03, 2025 10:06 am To cover annual expenses, factoring in my wife's part time income and a little part-time income from my "low-stress" early retirement job, I estimate I would need to draw $90k from taxable each year during early retirement years.
...
My question: I need to grow my taxable savings to fund my "pre-retirement" years from age 54 to 59 1/2. I am thinking of reducing or eliminating my contributions to my solo 401k to zero, and wife's 401k contributions down to her employer match. The money would be "diverted" into taxable brokerage account. I expect this will increase my tax bill somewhat, but I'm not sure how much. Please give me your thoughts on whether I should forego the tax benefits of saving into my 401k, and divert those savings into taxable brokerage?
A bridge in Taxable isn't the only way to fund your $90K/yr expenses in early retirement. @FreddyC suggested IRS Rule 72t/SEPP to access your 401k prior to age 59.5 (if your 401k plan doesn't already allow partial withdrawals; mine did with no extra paperwork at all). @KlangFool suggested withdrawing your Roth IRA contributions which are accessible without penalty after the first ever Roth IRA is at least 5y old regardless of age (only earnings are restricted to 59.5; See this NerdWallet article).

If your effective tax rate is 14.0%, then that's an AGI of $205,000 which is a marginal tax-rate of 22%. If you halt 401k contributions your AGI will increase by $23,500 for you and $10,000 for her, so AGI of $238,500 which is an increase in taxes owed of $7,535. So if building the bridge in Taxable, be sure to try and quantify the added tax as part of the cost of building that bridge (and assess if can you still meet your current expenses/savings goals). I used Engaging Data: Tax Visualization for a quick-look at how your taxes would change, but you might want a more accurate prediction by using Tax Caster or some other mock tax return tool.

----------
If you decide to build a bridge in Taxable anyway, you need about $405K ($90K now is $101.2K four years from now if inflation is +3%/yr). You have $184K in Taxable (includes EF which you won't need to cover expenses once you have no risk of lay-off), so you need to get another $221K to get to $405K. The FutureValue function in Excel suggests you could get to $221K @ 3% interest with contributions to Taxable of about $52.8K/year, so certainly that could work. I'd probably swap $111K from VTSAX to a MMF in the 401k to match the dollar value of your stock in Taxable and perhaps set my overall target at to something less aggressive than 85/15 by the time I'm 55 (a 4-step glide slope from where you're at to 70/30 perhaps?) AA is based on your personal risk tolerance, but I probably would suggest more aggressive if you have a pension that covers mandatory expenses and less aggressive if you the vast majority of expenses have to come from your investment portfolio.

Image

I still think you should look into 72t/SEPP or taking Roth contributions (not earnings) rather than building a bridge in Taxable, you have to do what makes you feel most comfortable / makes sense for your goals/concerns.
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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

waitforit wrote: Mon Feb 03, 2025 12:45 pm 25x total (4% withdrawal rate)
The 4% rule is predicated on a 30y retirement phase (e.g., 65 to 95). If one retires early (at 55) but still has a life expectancy that's the same (95), then that's a 40y period... the 4% rule drops to 3.5% and the multiple increases to from 25 to 28.6.

The "4% Rule" does not apply for retirement at any age, it needs to be scaled up or down based on the difference from the 30y baseline withdrawal period.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
Zdex
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Re: should we stop or reduce contributing to our 401k?

Post by Zdex »

The worst thing you could do is to stop paying into tax-advantaged accounts. You would come out ahead even paying the 10% penalty under many analyses. Or you can do 72(t).

Read this and grasp the import, especially the “surprising conclusions,” before moving forward with your plan — which is a bad one.
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Re: should we stop or reduce contributing to our 401k?

Post by simplesimon »

OP, it may not be 100% optimal but behaviorally it makes sense because it is simple vs the suggestions made here about 72t SEPP or taking the penalty.

This is assuming you must absolutely retire at age 54. If you're willing to wait until age 55, then taking from a 401K that allows you to do that may be the next most simple option.

See this recent thread. viewtopic.php?t=448345
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Re: should we stop or reduce contributing to our 401k?

Post by KlangFool »

simplesimon wrote: Mon Feb 03, 2025 2:56 pm OP, it may not be 100% optimal but behaviorally it makes sense because it is simple vs the suggestions made here about 72t SEPP or taking the penalty.

This is assuming you must absolutely retire at age 54. If you're willing to wait until age 55, then taking from a 401K that allows you to do that may be the next most simple option.

See this recent thread. viewtopic.php?t=448345
simplesimon,

That will not be true if OP has enough money in the taxable account and Roth contribution to bridge the gap to 59 1/2 years.

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GoldStar
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Re: should we stop or reduce contributing to our 401k?

Post by GoldStar »

I am a big fan of 529 accounts since they saved me many thousands in taxes - but are you sure you aren't in danger of overfunding? I would consider redirecting that $200 a month to taxable. You could still mentally earmark it for college if your 80k+65K ends up not being enough. Congratulations for how this much put away.
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simplesimon
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Re: should we stop or reduce contributing to our 401k?

Post by simplesimon »

KlangFool wrote: Mon Feb 03, 2025 3:19 pm
simplesimon wrote: Mon Feb 03, 2025 2:56 pm OP, it may not be 100% optimal but behaviorally it makes sense because it is simple vs the suggestions made here about 72t SEPP or taking the penalty.

This is assuming you must absolutely retire at age 54. If you're willing to wait until age 55, then taking from a 401K that allows you to do that may be the next most simple option.

See this recent thread. viewtopic.php?t=448345
simplesimon,

That will not be true if OP has enough money in the taxable account and Roth contribution to bridge the gap to 59 1/2 years.

KlangFool
Right, OP needs to provide more detail but it looks like taxable account is low (relative to what their needs will be) at around $150k and if Roth contributions unknown.
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brian2013
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Re: should we stop or reduce contributing to our 401k?

Post by brian2013 »

Thanks everyone for the replies.

I should clarify, I'm self-employed. My 401k is an individual/solo 401k.

Someone asked if I could continue working until 55. Yes, if necessary and if life doesn't have other plans for me. But others on here have told me the rule of 55 is not available for an individual 401k. Based on my research, at best it seems unclear. It even looks perhaps like the individual 401k would have to be terminated and rolled over into a different account once I close my business.

The other options like SEPP seem complicated and perhaps a little risky, given the rules that have to be followed, but this may be an option. Does anyone know if SEPP works for an individual 401k?

I used to make substantial employer contributions into my individual 401k, in addition to maxing out my employee salary deferrals, but last year I put that money into taxable instead. What do you guys think of continuing that - maxing out my employee salary deferral each year, but not making employer contributions to the 401k anymore? Perhaps that's a good "middle path."

As far as withdrawing the contributions in my Roth IRA, due to the low contribution limits, I don't think that would last too long, but it could help if needed. I could maybe draw a year's worth of expenses there.

Goldstar thanks for your question about 529s. It's really hard to know if I'm overfunding or underfunding. I've run some calculators and my guess is I'm about on track, but I'll continue to monitor this and perhaps I can divert some of those savings into taxable at some point.

Bonesly thank you for your analysis, very helpful and persuasive. It suggests that not making 401k salary deferrals could not only increase my tax bill, but perhaps bump me into Roth IRA income limitations issues, either preventing me from making Roth contributions or reducing them. That's an additional reason not to do this.

Based on your feedback, where I'm currently landing is what I did in 2024: continue maxing out our salary deferrals into our 401ks, but not making employer contributions from my business into my 401k. Those funds would be diverted into taxable savings.

Let me summarize my follow up questions:

Does anyone know if SEPP works for an individual 401k?

What do you guys think of continuing my 2024 strategy - maxing out my employee salary deferral each year, but not making employer contributions to the 401k anymore, and diverting those savings into taxable? Perhaps that's a good "middle path."

thanks
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retiredjg
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Re: should we stop or reduce contributing to our 401k?

Post by retiredjg »

Don't know about the SEPP on an individual 401k.

I think your plan is a good one. At the worst, you'll have to SEPP an IRA for about 5 to 6 years. This is a little nuisance, but not impossible. Just be sure you separate that IRA from the others and don't touch it for any reason other than your SEPP withdrawals.
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Re: should we stop or reduce contributing to our 401k?

Post by KlangFool »

brian2013 wrote: Tue Feb 04, 2025 8:37 am Thanks everyone for the replies.
brian2013,

"Taxable: total $184k

His Roth IRA at Vanguard: $124k

Her Roth IRA at Vgrd: $168,700"

What is her income? What is the gap between her income and 135K of expense?

Between her income, Taxable account, and Roth IRA contribution that you can withdraw tax-free and penalty free before 59 1/2 years old, you may have enough now to cover the gap between 54 to 59 1/2 years old.

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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

brian2013 wrote: Tue Feb 04, 2025 8:37 am Does anyone know if SEPP works for an individual 401k?
You cannot keep your Solo 401k once you retire and no longer have self-employment income (see Solo401k.com: Can I Keep My Solo 401k if I No Longer Have Self-Employment Income?. Once you rollover your Solo 401k to a Trad IRA (e.g., at Van, Fido, Schwab, or brokerage of your choice), you'll be able to apply 72t/SEPP to that IRA. You can define this as a 5y period at which point you can change the SEPP or eliminate it (there doesn't seem to be a need to roll your 401k into a 5y bridge IRA and then another IRA with the balance of funds).

It may seem complicated but almost any multi-step process that you've never done can seem complicated until you: a) study it; and b) actually try to do it. Knowledge and experience typically dispel the appearance of complexity. Hire an hourly CPA (or CFP) to help you if you think that will bolster your confidence, but I think if you just read the IRS link provided earlier a few times you'll understand what needs to be done and it won't seem so bad (I think the IRS even had several example case studies). A customer service rep at your brokerage (more likely Fido or Schwab) might even help you setup the SEPP once you rollover assets to them (or if your Solo 401k is already with a brokerage you like then it could be even easier; they want to keep your business).
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retiredjg
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Re: should we stop or reduce contributing to our 401k?

Post by retiredjg »

bonesly wrote: Tue Feb 04, 2025 1:21 pm Once you rollover your Solo 401k to a Trad IRA (e.g., at Van, Fido, Schwab, or brokerage of your choice), you'll be able to apply 72t/SEPP to that IRA. You can define this as a 5y period at which point you can change the SEPP or eliminate it (there doesn't seem to be a need to roll your 401k into a 5y bridge IRA and then another IRA with the balance of funds).
As I understand it, the separate IRA which you are calling a "bridge IRA" is recommended in case one must withdraw more from the IRA than the SEPP agreement stipulates. I suppose that will usually be triggered by some kind of emergency or unexpected expenditure is best paid for by IRA funds. If you take out more or less than the SEPP agreement stipulates, you have "busted the SEPP" and that is considered a very bad thing.

I'm not speaking from experience here. I'm just reporting my understanding from what I have read from posters who generally are correct in what they post. I'm not certain it is correct, but I think it is.

If this is correct, there is no reason to take the extra risk of assuming you will never need to tap into the IRA during the time the SEPP is in place. The separate IRA is just a form of insurance except you don't pay anything for it.
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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

retiredjg wrote: Tue Feb 04, 2025 3:48 pm The separate IRA is just a form of insurance except you don't pay anything for it.
Fair point... you absolutely cannot take more/less than the SEPP payments over the period of your SEPP (5y in this case) or you will pay a penalty (perhaps retroactively to the start of the SEPP?).

However, if you have an emergency that's so bad you need to pull more from somewhere and you decide to tap a Trad IRA before age 59.5 and incur a 10% early withdrawal penalty, that means you already exhausted your EF, Taxable, and Roth contributions, which should be tapped first in an emergency (the Trad IRAs should be last until you reach age 59.5). While it's free insurance to separate the Solo 401k into a Trad IRA intended for SEPP and another Trad IRA that will have no SEPP applied, it kind of seems that the second non-SEPP IRA has little "insurance" value... what is it protecting against (you'll still pay a 10% penalty if you withdraw early, but maybe not a retroactive penalty, and hopefully you had better accounts to draw from in such a drastic emergency).
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Re: should we stop or reduce contributing to our 401k?

Post by retiredjg »

I don't disagree with anything you are saying. I'm saying there is no harm and no cost in separating the IRA you want to SEPP away from the rest of your IRA money...just in case.

A situation where your argument does not apply to....let's say a person starts a SEPP at age 57. They will not finish their SEPP until age 62....during which time they may have a desire to use their other IRA money which they can do without busting the SEPP if the IRAs are separate. The only way to do that would be to have separate IRAs.

This does not apply to this poster (or maybe it does for a few months), but it is something for others to keep in mind.

And there are people out there who have the vast majority of their money in a 401k. If they SEPP the whole 401k (or the whole rollover IRA), an unexpected expense that would bust the SEPP is not unlikely.

I'm not trying to argue and I think your plan could work out well for this one poster. But for others reading about this plan...there are pitfalls that can arise by not having a separate account from which SEPP withdrawals are made.
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Re: should we stop or reduce contributing to our 401k?

Post by sailaway »

retiredjg wrote: Tue Feb 04, 2025 4:19 pm I don't disagree with anything you are saying. I'm saying there is no harm and no cost in separating the IRA you want to SEPP away from the rest of your IRA money...just in case.

A situation where your argument does not apply to....let's say a person starts a SEPP at age 57. They will not finish their SEPP until age 62....during which time they may have a desire to use their other IRA money which they can do without busting the SEPP if the IRAs are separate. The only way to do that would be to have separate IRAs.

This does not apply to this poster (or maybe it does for a few months), but it is something for others to keep in mind.

And there are people out there who have the vast majority of their money in a 401k. If they SEPP the whole 401k (or the whole rollover IRA), an unexpected expense that would bust the SEPP is not unlikely.

I'm not trying to argue and I think your plan could work out well for this one poster. But for others reading about this plan...there are pitfalls that can arise by not having a separate account from which SEPP withdrawals are made.
There are also limited options for determining how much to withdraw. Designating a separate IRA for SEPP allows you to dial in.
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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

retiredjg wrote: Tue Feb 04, 2025 4:19 pm But for others reading about this plan...there are pitfalls that can arise by not having a separate account from which SEPP withdrawals are made.
I'm am certainly no expert on 72t/SEPP, but it sure looks like the amount you can withdraw (annually, quarterly, or monthly) is based on the balance of the singular account you plan to apply the 72t/SEPP to. That account balance drives how much you can withdraw annually via one of three allowed methods: RMD, Amortization, Annuitization, which are all based on a life-expectancy table. The IRS's example is a guy named Bob with $400K in "the" single Trad IRA account; using the RMD method he must draw exactly $11,050 in year-1 (which could be quarterly or monthly depending on what the financial custodian allows)... there's not much difference among the three methods when you look at the three examples under IRS FAQ: Question #7 and also BankRate's 72t Calculator.

My point is that if you split the IRA into SEPP and non-SEPP accounts, one needs to consider that it very much seems that the amount you can get out for the 5y period is reduced (e.g., for the fictional case of Bob, if his $400K was split into a SEPP of $100K and non-SEPP of $300K, then his annual draw in year-1 of the SEPP series using RMD is $3,378 which may not be adequate to cover expenses when split into 12 months compared to $11,050).

The IRS link also says: Each Series of Substantially Equal Periodic Payments (SoSEPP) is determined for one single account., which I thought was worth mentioning.
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Re: should we stop or reduce contributing to our 401k?

Post by steadyosmosis »

retiredjg wrote: Tue Feb 04, 2025 4:19 pm I don't disagree with anything you are saying. I'm saying there is no harm and no cost in separating the IRA you want to SEPP away from the rest of your IRA money...just in case.

A situation where your argument does not apply to....let's say a person starts a SEPP at age 57. They will not finish their SEPP until age 62....during which time they may have a desire to use their other IRA money which they can do without busting the SEPP if the IRAs are separate. The only way to do that would be to have separate IRAs.

This does not apply to this poster (or maybe it does for a few months), but it is something for others to keep in mind.

And there are people out there who have the vast majority of their money in a 401k. If they SEPP the whole 401k (or the whole rollover IRA), an unexpected expense that would bust the SEPP is not unlikely.

I'm not trying to argue and I think your plan could work out well for this one poster. But for others reading about this plan...there are pitfalls that can arise by not having a separate account from which SEPP withdrawals are made.
Agree.
If I ever do SEPP, I will 'slice-off' a portion of my large TIRA into a separate smaller TIRA, with which I will set up the SEPP to get me to age 59.5.
Credibility ... some posters have it.
ThankYouJack
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Re: should we stop or reduce contributing to our 401k?

Post by ThankYouJack »

brian2013 wrote: Tue Feb 04, 2025 8:37 am
What do you guys think of continuing my 2024 strategy - maxing out my employee salary deferral each year, but not making employer contributions to the 401k anymore, and diverting those savings into taxable? Perhaps that's a good "middle path."
I'll go against the grain and say that it could be worth it to go taxable (or Roth employee contribution if your plan allows).

One thing that hasn't been mentioned yet is the impact on the QBI deduction. Quick back of the napkin calculations for federal taxes:

Traditional Solo 401k Contribution of $40k

will save about $40,000 * 0.22 = $8,8000 but reduces your QBI by:
$40,000 * 0.2 * 0.22 = $1,760

So a tax savings of ~$7k this year

The equivalent would be to put ~$33k into taxable.

After 4 years @ (lets say) 4% Traditional grows to $46.7k and taxable to $38.6k

If you pay 22% at retirement on Traditional, you're left with $36.4k vs if you pay $0 in LTCG on the $38.6k in taxable.
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retiredjg
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Re: should we stop or reduce contributing to our 401k?

Post by retiredjg »

bonesly wrote: Tue Feb 04, 2025 10:20 pm
retiredjg wrote: Tue Feb 04, 2025 4:19 pm But for others reading about this plan...there are pitfalls that can arise by not having a separate account from which SEPP withdrawals are made.
I'm am certainly no expert on 72t/SEPP, but it sure looks like the amount you can withdraw (annually, quarterly, or monthly) is based on the balance of the singular account you plan to apply the 72t/SEPP to.
I'm not an expert in this stuff either. And I don't disagree with anything in your post. Since this is not really the original poster's question, let's just stop here. :happy
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brian2013
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Re: should we stop or reduce contributing to our 401k?

Post by brian2013 »

ThankYouJack wrote: Wed Feb 05, 2025 4:25 am
brian2013 wrote: Tue Feb 04, 2025 8:37 am
What do you guys think of continuing my 2024 strategy - maxing out my employee salary deferral each year, but not making employer contributions to the 401k anymore, and diverting those savings into taxable? Perhaps that's a good "middle path."
I'll go against the grain and say that it could be worth it to go taxable (or Roth employee contribution if your plan allows).

One thing that hasn't been mentioned yet is the impact on the QBI deduction. Quick back of the napkin calculations for federal taxes:

Traditional Solo 401k Contribution of $40k

will save about $40,000 * 0.22 = $8,8000 but reduces your QBI by:
$40,000 * 0.2 * 0.22 = $1,760

So a tax savings of ~$7k this year

The equivalent would be to put ~$33k into taxable.

After 4 years @ (lets say) 4% Traditional grows to $46.7k and taxable to $38.6k

If you pay 22% at retirement on Traditional, you're left with $36.4k vs if you pay $0 in LTCG on the $38.6k in taxable.
Interesting take, thanks for your reply. For the moment, I'm interpreting this as reinforcing my "split the baby" strategy of fully funding salary deferrals, but not making any employer contributions into the 401k. For several years I put around $40k-$50k in employer contributions into the 401k, which I'm now planning on diverting into taxable.

Taxes are not the only consideration of course. Taxable account brings flexibility to access the funds as needed. At this point in my career/life, I'm feeling like my tax-advantaged accounts are on track, and I want more of my wealth readily accessible, whether to fund "pre-retirement" or whatever else life throws at me.
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brian2013
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Re: should we stop or reduce contributing to our 401k?

Post by brian2013 »

retiredjg wrote: Wed Feb 05, 2025 8:14 am
bonesly wrote: Tue Feb 04, 2025 10:20 pm
I'm am certainly no expert on 72t/SEPP, but it sure looks like the amount you can withdraw (annually, quarterly, or monthly) is based on the balance of the singular account you plan to apply the 72t/SEPP to.
I'm not an expert in this stuff either. And I don't disagree with anything in your post. Since this is not really the original poster's question, let's just stop here. :happy
This was a useful discussion though, thank you. I'll probably revisit this thread over the next few years as I consider the SEPP option.
ThankYouJack
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Re: should we stop or reduce contributing to our 401k?

Post by ThankYouJack »

brian2013 wrote: Wed Feb 05, 2025 8:17 am
ThankYouJack wrote: Wed Feb 05, 2025 4:25 am

I'll go against the grain and say that it could be worth it to go taxable (or Roth employee contribution if your plan allows).

One thing that hasn't been mentioned yet is the impact on the QBI deduction. Quick back of the napkin calculations for federal taxes:

Traditional Solo 401k Contribution of $40k

will save about $40,000 * 0.22 = $8,8000 but reduces your QBI by:
$40,000 * 0.2 * 0.22 = $1,760

So a tax savings of ~$7k this year

The equivalent would be to put ~$33k into taxable.

After 4 years @ (lets say) 4% Traditional grows to $46.7k and taxable to $38.6k

If you pay 22% at retirement on Traditional, you're left with $36.4k vs if you pay $0 in LTCG on the $38.6k in taxable.
Interesting take, thanks for your reply. For the moment, I'm interpreting this as reinforcing my "split the baby" strategy of fully funding salary deferrals, but not making any employer contributions into the 401k. For several years I put around $40k-$50k in employer contributions into the 401k, which I'm now planning on diverting into taxable.

Taxes are not the only consideration of course. Taxable account brings flexibility to access the funds as needed. At this point in my career/life, I'm feeling like my tax-advantaged accounts are on track, and I want more of my wealth readily accessible, whether to fund "pre-retirement" or whatever else life throws at me.
If you keep funding your solo 401k, you may want to go with Roth if your plan allows. Then you would get a larger QBI deduction.
bonesly
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Re: should we stop or reduce contributing to our 401k?

Post by bonesly »

brian2013 wrote: Tue Feb 04, 2025 8:37 am not making 401k salary deferrals could not only increase my tax bill, but perhaps bump me into Roth IRA income limitations issues, either preventing me from making Roth contributions or reducing them
Just in support of @ThankYouJack's option towards making a Taxable bridge, you don't have an Trad IRAs with a non-zero balance, so even if your AGI exceed the Roth income contribution limits, you can still contribute the full $7K (or $8K after age 50) via the Backdoor Roth process, so don't let the bump in AGI eliminate the option to fund a bridge in Taxable by halting Trad 401k contributions.

Also as noted, as a self-employed person your tax situation is more complex than what Engaging Data's quick-look might suggest (e.g., Qualified Business Income isn't considered in that simple tool), so a more accurate estimate of tax impacts in a mock tax return like TaxCaster (or your preferred tax-prep software) is likely in order; or just pay your CPA to to do the "what if" scenarios.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
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