Saving Advice Forums  

Go Back   Saving Advice Forums > Financial Chit Chat > Investing & Banking

Investing & Banking Stocks, bonds, banking interest rates, CDs and all other investment vehicles you want to talk about.

Like Tree14Likes

Reply
 
LinkBack Thread Tools
  #1 (permalink)  
Old 05-17-2017, 06:44 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Question Case against maxing 401k (pre-tax)

Hi all,

I'm 26 and currently maxing my employer 401k (18k + 4.5% match of salary so give or take +8k).

I recently talked to an investing consultant and they recommended that I decrease the amount I put into my 401k and put it in other taxable accounts. The reasoning behind it was that if I stuck to this model when I do have to start pulling money from the 401k at the required age of 70. If the 401k was let's say 5 million that means I would be required to withdraw 100k+ per year (and then get taxed at a high tax bracket). Eliminating the theory behind being in a lower tax bracket when I'm retired and paying less taxes when pulling from your 401k.

The thought was to start putting more into other accounts because then I would only be taxed a long term capital gain rates vs. regular income rates of the pre-tax 401k when in retirement

Any thoughts here?
Reply With Quote
  #2 (permalink)  
Old 05-17-2017, 06:47 PM
$ Saving College Sophomore
 
Join Date: May 2015
Forum Posts: 855
Default

The investing consultant will make more money off of you if you are actively putting money in a taxable account. Assuming that you would use this person for your investments and they get AUM plus fund fees. .

Otherwise I like to have several buckets of investments - 401k, Roth and taxable.
Reply With Quote
  #3 (permalink)  
Old 05-17-2017, 06:49 PM
disneysteve's Avatar
Super Moderator
 
Join Date: Jun 2006
Location: New Jersey
Forum Posts: 26,583
Default

Do you qualify to fund a Roth?
__________________
Steve

* Despite the high cost of living, it remains very popular.
* Why should I pay for my daughter's education when she already knows everything?
* There are no shortcuts to anywhere worth going.
Reply With Quote
  #4 (permalink)  
Old 05-17-2017, 06:51 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

Fair point, that might be what they were trying to push me towards.

I cannot directly deposit into a Roth IRA, but I did take advantage of the backdoor IRA (traditional IRA and immediately convert to roth at $5,500). That's my only tax free account (the rest is pre-tax 401k, vanguard, robinhood, pre-tax HSA)
Reply With Quote
  #5 (permalink)  
Old 05-17-2017, 06:52 PM
bjl584's Avatar
Administrator
 
Join Date: Sep 2006
Location: Pittsburgh, PA
Forum Posts: 5,747
Default

I recently watched a video where a guy was totally against retirement accounts. Basically, the idea was that 401k plans are a scam designed to keep the middle class in the middle. It locks your money away for decades and prevents you from being able to have access to capital to make investments today. His argument was that rich people don't have 401k plans. They are rich today not 40 years from now, and they have much more control over their money than the middle class does. Some would call this view point extreme. The point is, I don't totally max out my 401k. I do like having access to my money in the present should an opportunity arises. It's your call how to approach. I'd say, at least contribute to the match. You can switch to taxable accounts after that if you want.
__________________
Brian
Reply With Quote
  #6 (permalink)  
Old 05-17-2017, 06:52 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

Big picture:

95k 401k (pretax)
60k (S&P 500 admiral vanguard)
25k (vanguard/select funds)
5.5k (roth IRA/healthcare sector)
5k (pre-tax HSA)

So BJ to your point - I absolutely try to invest in other taxed accounts + real estate. I guess the question is here if I can do both do I decrease the pre-tax 401k contributions to do more in taxed accounts?
Reply With Quote
  #7 (permalink)  
Old 05-17-2017, 06:54 PM
$ Saving HS Junior
 
Join Date: Jun 2016
Forum Posts: 213
Default

Do you have a Roth option in your 401k? Depending on your tax bracket that may be he better play now than traditional.

I think it's horrible advice telling a 26 year old not to max their 401k when they are able to. Marriage, homes, kids etc. can very well take away your ability to max in the future and you will wish you had in your 20's.
Gailete likes this.
Reply With Quote
  #8 (permalink)  
Old 05-17-2017, 06:55 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

AJ - yep. I do have a roth option, but I haven't used it yet since I kind of liked the tax benefits from pre-tax contributions.
Reply With Quote
  #9 (permalink)  
Old 05-17-2017, 07:06 PM
$ Saving College Sophomore
 
Join Date: May 2015
Forum Posts: 855
Default

Quote:
Originally Posted by element926 View Post
Big picture:

95k 401k (pretax)
60k (S&P 500 admiral vanguard)
25k (vanguard/select funds)
5.5k (roth IRA/healthcare sector)
5k (pre-tax HSA)
Only 4.05 million to go to get to 5 million in 401k. 18k times how many years?

If you're not eligible for a direct Roth IRA contribution chances are maxing out the traditional 401k should be fairly easy at this point and it helps to reduce your overall taxable income and reduces the amount of tax you owe now.

Now is the time to accumulate your savings and let the compounding work for you. Time in the market is a favorite saying for investors.
Reply With Quote
  #10 (permalink)  
Old 05-17-2017, 07:09 PM
$ Saving HS Junior
 
Join Date: Jun 2016
Forum Posts: 213
Default

Quote:
Originally Posted by element926 View Post
AJ - yep. I do have a roth option, but I haven't used it yet since I kind of liked the tax benefits from pre-tax contributions.
Roth 401k contributions are not subject to RMD's if they are rolled to a Roth IRA, if the financial consultant didn't tell you that I'm pretty sure what others have suggested in that they were trying to get you to toss more in a taxable account for them to make more money off you is validated.

Personally I tried to keep a mix of Roth/Traditional until I hit the 28% tax bracket and then I switched it all to Traditional.
Reply With Quote
  #11 (permalink)  
Old 05-17-2017, 07:10 PM
$ Saving College Junior
 
Join Date: Oct 2013
Forum Posts: 1,486
Default

What is your current marginal tax bracket? How much do you save each year? Do you qualify for a deductible IRA or Roth IRA contribution?

You are right in that RMD's will start at age 70. If you had $5M in a 401k at that time, you would be required to withdraw $182,481 each year. That's a lot.

This might be good reading:

https://www.bogleheads.org/wiki/Prio...ng_investments

I think you could max the 401k or just contribute to the employer match and boost your taxable. Just be careful with tax efficiency in your taxable:

https://www.bogleheads.org/wiki/Tax-..._asset_classes
Reply With Quote
  #12 (permalink)  
Old 05-17-2017, 07:23 PM
disneysteve's Avatar
Super Moderator
 
Join Date: Jun 2006
Location: New Jersey
Forum Posts: 26,583
Default

Quote:
Originally Posted by corn18 View Post
You are right in that RMD's will start at age 70. If you had $5M in a 401k at that time, you would be required to withdraw $182,481 each year. That's a lot.
Is it, though. You're talking about 45 years from now. Also, that's only if he waits until 70 to start drawing on the account. You can lessen the annual draw by starting earlier. I realize that has tax and investment consequences but it lessens how much you need to draw each year.
__________________
Steve

* Despite the high cost of living, it remains very popular.
* Why should I pay for my daughter's education when she already knows everything?
* There are no shortcuts to anywhere worth going.
Reply With Quote
  #13 (permalink)  
Old 05-17-2017, 07:29 PM
$ Saving College Senior
 
Join Date: Mar 2016
Forum Posts: 1,596
Default

Quote:
Originally Posted by bjl584 View Post
I recently watched a video where a guy was totally against retirement accounts. Basically, the idea was that 401k plans are a scam designed to keep the middle class in the middle. It locks your money away for decades and prevents you from being able to have access to capital to make investments today. His argument was that rich people don't have 401k plans. They are rich today not 40 years from now, and they have much more control over their money than the middle class does. Some would call this view point extreme. The point is, I don't totally max out my 401k. I do like having access to my money in the present should an opportunity arises. It's your call how to approach. I'd say, at least contribute to the match. You can switch to taxable accounts after that if you want.
I'm actually quite on board with the video you reference.
__________________
Don't trust whitey, see a doctor get rid of it.

-- Steve Martin, "The Jerk".
Reply With Quote
  #14 (permalink)  
Old 05-17-2017, 07:30 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.

Last edited by element926; 05-17-2017 at 07:33 PM.
Reply With Quote
  #15 (permalink)  
Old 05-17-2017, 07:46 PM
$ Saving College Junior
 
Join Date: Oct 2013
Forum Posts: 1,486
Default

Quote:
Originally Posted by element926 View Post
A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.
With 3% inflation, that $186k at age 70 is equivalent to $50k in today's dollars. Inflation is an ugly beast.

I think your mix is just right. Your saving 33% in taxes now on the 401k contribution. That's an extra $6k in savings each year. Who knows what taxes will be in 44 years. Keep doing what you're doing. And don't ever pay anyone to give you financial advice. Unless it's a fee only fiduciary. Then it might be ok.
Gailete, Petunia 100 and AJ444 like this.
Reply With Quote
  #16 (permalink)  
Old 05-17-2017, 08:06 PM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

It was free - they wanted me to invest with them obviously - but I haven't done anything yet. Thanks for the insight!
Reply With Quote
  #17 (permalink)  
Old 05-17-2017, 09:28 PM
$ Saving College Senior
 
Join Date: Dec 2010
Forum Posts: 2,079
Default

Quote:
Originally Posted by element926 View Post
A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.
Do you have any interest in retiring early? Keep maxing your 401k, Roth IRA, and throwing some money in taxable to boot and it will be an option far earlier than age 70.
amarowsky likes this.
Reply With Quote
  #18 (permalink)  
Old 05-18-2017, 04:09 AM
$ Saving College Junior
 
Join Date: Oct 2013
Forum Posts: 1,486
Default

Quote:
Originally Posted by Petunia 100 View Post
Do you have any interest in retiring early? Keep maxing your 401k, Roth IRA, and throwing some money in taxable to boot and it will be an option far earlier than age 70.
But you will need to have enough in taxable or Roth to retire before 59 1/2. With your savings rate at age 26, I think early retirement becomes a real possibility. If you have to start deciding between maxing the 401k and taxable (vs. both as you are doing now), then I would consider if you plan to retire before 59 1/2. And as TH has pointed out, you have a LOT more options with taxable investments if you decide to do something other than a 9-5 corporate job. He took $400k and turned it into semi-retirement and now doesn't need a 401k. That would be worth looking into at your young age.
Reply With Quote
  #19 (permalink)  
Old 05-18-2017, 05:19 AM
$ Saving College Senior
 
Join Date: Oct 2006
Forum Posts: 1,673
Default

Quote:
Originally Posted by element926 View Post
It was free - they wanted me to invest with them obviously - but I haven't done anything yet. Thanks for the insight!
If you use an advisor its not free. How do they stay in business if its free? What would be the point of them investing your money if they werent somehow making money from it? The goodness of their heart?

Quote:
Originally Posted by element926 View Post
Hi all,

I'm 26 and currently maxing my employer 401k (18k + 4.5% match of salary so give or take +8k).
What do you mean by "give or take +8k?" A 4.5% match doesnt equate to 8k.


I too have been thinking more and more about how much I contribute to my 401k. Ive been maxing for a while and have a healthy amount in there now. I do have a roth and taxable investments as well. At what point should someone stop maxing...only doing the company match...then investing the rest in a taxable?

Is there a certain dollar amount the 401k would need to be to dial way back and invest a lot elsewhere? Im probably going to dial back in my low 40's and keep maxing roth ira and the rest in taxable. I want to retire early so will need a couple hundred grand. My wife has started funneling $500/month in her taxable so that is going to help.

^edit...I dont think there is a cookie cutter answer to this...just thinking out loud. It would obviously depend on what your expenses are to figure out when to stop investing so much in a 401k and moving the rest to taxable.

Last edited by rennigade; 05-18-2017 at 05:24 AM.
Reply With Quote
  #20 (permalink)  
Old 05-18-2017, 05:29 AM
$ Saving Sixth Grader
 
Join Date: Apr 2014
Forum Posts: 50
Default

Petunia 100, absolutely I would love to "retire" early to escape the 9-5 job.

corn18, who took 400k and retired early? definitely would like to read into this.

rennigade, this was my first introduction meeting - I didn't pay anything and based on the feedback here and my instincts I don't plan on using an advisor.

I mean give or take because I'm a sales employee so the match is 4.5% of my salary and therefore can flux 4.5% of 180,000 is $8100 and that's what I got last year (this year will be more due to a good sales year).

Appreciate the insight on your end. It's a good question...I'm not sure I suppose the easy answer is to just max out the 401k while you can, as soon as you can - as long as you can continue to put a lot into taxable accounts as well.
Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are On
Pingbacks are On
Refbacks are Off



All times are GMT -7. The time now is 09:30 AM.


Powered by vBulletin®
Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
SEO by vBSEO 3.6.0 PL2 ©2011, Crawlability, Inc.