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401k catch up contribution ... or not?
Old 02-03-2010, 05:26 AM   #1
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401k catch up contribution ... or not?

Now that our company has a safe harbor 401k plan, I can defer $16,500 plus the $5,500 catch up contribution for 2010.

Right now I'm working 3 days a week generating enough income to cover expenses. I plan to fully retire in August, 2011 at age 56, and then live off savings as long as possible before tapping into 401k around age 60-62. My "savings" is about $150k in cash and about $750k in real estate and business ownership that I may need to hold for awhile to regain value.

The cash on hand may not last me until 59.5 and I may have to liquidate real estate or business assets within the next 3 years unless I save more cash before I fully retire.

So my dilemma is: Do I max the 401k for long term $ ?, or save additional $ in a taxable account to bolster the nest egg for the first few years of retirement?
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Old 02-03-2010, 06:20 AM   #2
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I plan to fully retire in August, 2011 at age 56, and then live off savings as long as possible before tapping into 401k around age 60-62.
I see where your plan is to wait until 60-62 to tap your 401(k) but won't you be allowed to tap it as soon as you retire because you will be at least 55 when you separate? Wouldn't the 401(k) be an option as soon as the cash on hand runs out? Don't know if there are other reasons to not access it until later.
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Old 02-03-2010, 10:46 AM   #3
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Another possibility: put all your savings until retirement into the 401K, and roll it over to an IRA when you leave your job. If you use up all of your taxable savings before age 60-62, you could take a series of "substantially equal payments" from the IRA. I think Buckeye's idea gives you more flexibility on how much money to take out, but sometimes there are more/better investment options in an IRA than may be available in your 401k plan, and it is beneficial to roll over a 401k.
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Old 02-03-2010, 12:42 PM   #4
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I'd max the 401K, you can always start drawing it out at 59.5 without penalty if you need it. (subsequent earnings should cover the 10% penalty if you need to draw a few $ before you hit 59.5) Putting retirement funds in 100% tax free (as opposed to paying income taxes on the earnings and then investing in something else) and the ability for it to grow until you need it a few years down the road would make it the first thing I would fund in your situation. (Mine isn't much different, just a few years behind you...)

...free advice form a stranger on the internet, FWIW.
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Old 02-03-2010, 01:18 PM   #5
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What tax bracket are you in now?
What is your level of expenses now relative to income (spending 50% of income, 75% of income etc...)?
If you did NOT put the excess contributions in a 401k where would you put them... and how much money is this until you retire?

Depending on answers, my commentary might change, but my thought is if tax bracket does not change (meaning the catch up does not lower your tax bracket), put the money in cash accounts unless you know for sure the money in retirement would be taken out at a lower tax bracket.

That might not make sense the first 2-3 times you read it... here is my thinking- if you are in 28% tax bracket now, and the catch up lowers you to 25% bracket, do the catch up and fix retirement income problem later.

If you are in 28% tax bracket now, but know that in retirement your expenses are in 15% tax bracket, again no brainer and do the catch up now to reduce taxes paid now and withdraw at a lower tax bracket later.

But if you are in 28% tax bracket now, and will probably be in same tax bracket when you retire, there is little risk (IMO) to keeping money in cash accounts- it might actually help lower your tax bracket the first few years of retirement for Roth conversions or capital gains.

I would look at this as a tax problem first, then an investing problem second.
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Old 02-03-2010, 01:23 PM   #6
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Do not forget that the rules for 401(k) withdrawals are somewhat different from IRA withdrawals. You can withdraw from a 401(k) starting at age 55 (not age 59.5) if you are retired from that employer. This is one reason why some folks do not rollover their 401(k) to an IRA. Get the facts on this.

You did not state if you are contributing $6000 to a Roth IRA. If not, why not?
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Old 02-03-2010, 05:53 PM   #7
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I see where your plan is to wait until 60-62 to tap your 401(k) but won't you be allowed to tap it as soon as you retire because you will be at least 55 when you separate? Wouldn't the 401(k) be an option as soon as the cash on hand runs out? Don't know if there are other reasons to not access it until later.
I will be over 55 when I separate. But I may do some consulting possibly as a contractor to my current company. I thought that this situation may muddy the situation a little - maybe not. I'm becoming more comfortable with the fact that I'll be able to access the 401k before 59.5 if I need to.
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Old 02-03-2010, 06:00 PM   #8
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Another possibility: put all your savings until retirement into the 401K, and roll it over to an IRA when you leave your job. If you use up all of your taxable savings before age 60-62, you could take a series of "substantially equal payments" from the IRA. I think Buckeye's idea gives you more flexibility on how much money to take out, but sometimes there are more/better investment options in an IRA than may be available in your 401k plan, and it is beneficial to roll over a 401k.
Buckeye's idea does allow more flexibility on how much to take out, but so far every thing I've read says that this option is for a 401k -I didnt see this option for an IRA. Anyway, after I separate from the company, I'll probably roll the 401k into an IRA, which would make SEPP's the only pre 59.5 option for me (unless I find out otherwise)
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Old 02-03-2010, 06:32 PM   #9
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I'd max the 401K,....
I'm leaning in this direction

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Originally Posted by jIMOh View Post
What tax bracket are you in now?
28%

Quote:
Originally Posted by jIMOh View Post
What is your level of expenses now relative to income (spending 50% of income, 75% of income etc...)?
around 75% but will lower in retirement


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Originally Posted by jIMOh View Post
If you did NOT put the excess contributions in a 401k where would you put them... and how much money is this until you retire?
I would put the excess in something very safe and easy to get to. Haven't decided on the exact thing - maybe start a mini cd ladder that would last about 5 years. The additional contributions that I could get into my 401k would only be about $30k before the upper limit kicks in. Anything above that will probably go 100% into taxable.

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If you are in 28% tax bracket now, but know that in retirement your expenses are in 15% tax bracket, again no brainer and do the catch up now to reduce taxes paid now and withdraw at a lower tax bracket later....I would look at this as a tax problem first, then an investing problem second.
I don't think my tax bracket will go below 28% with a maximum contribution, but could if I work less - certainly when I fully retire. Thanks- I'll consider this primarily a tax problem

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Originally Posted by LOL! View Post
Do not forget that the rules for 401(k) withdrawals are somewhat different from IRA withdrawals. You can withdraw from a 401(k) starting at age 55 (not age 59.5) if you are retired from that employer. This is one reason why some folks do not rollover their 401(k) to an IRA. Get the facts on this.

You did not state if you are contributing $6000 to a Roth IRA. If not, why not?
Yes I need to get the details on not rolling the IRA over - I always thought that I would rollover, but now these rules have me wondering.

Shame on me for not doing the Roth - I've been building this cash position in an effort to have it last me from 56 to 60, but now it appears I'll shift gears toward a more favorable tax situation
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Old 02-03-2010, 06:48 PM   #10
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I maxed out my TSP (=401K) including over-50 catchup the whole time until I retired at 61.

I guess what I did tells you more about my opinion, than anything I could possibly say. I should say that I have no regrets.

It is nice to have that tax sheltered account available for some of the bond funds within my asset allocation, since bond funds in taxable accounts are considered to be tax-inefficient. As for moving it into a traditional IRA, I have no opinion/knowledge one way or another.
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Old 02-03-2010, 07:13 PM   #11
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I would put the excess in something very safe and easy to get to. Haven't decided on the exact thing - maybe start a mini cd ladder that would last about 5 years. The additional contributions that I could get into my 401k would only be about $30k before the upper limit kicks in. Anything above that will probably go 100% into taxable.

I don't think my tax bracket will go below 28% with a maximum contribution, but could if I work less - certainly when I fully retire. Thanks- I'll consider this primarily a tax problem
What tax bracket would you retire in? If you are living on 75% of your income now, and expect that to be less in retirement, you are probably going to be in 25% bracket or 15% bracket in retirement.

Run the numbers (for retirement) and verify which tax bracket you think you will be in. If you will be in 15% bracket, use the catch up...

Saves you 28% in taxes now, (so 5000 going in "saves" you $560 in taxes, if you invested in a taxable account, $4440 would be invested with $560 going to taxes).
You will pay 15% taxes or 25% taxes on withdraw.

A caveat to this is that the savings between 28% bracket and 25% bracket are minimal, it might be worth the flexibility to have more money in taxable accounts.
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Old 02-04-2010, 05:00 AM   #12
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What tax bracket would you retire in? If you are living on 75% of your income now, and expect that to be less in retirement, you are probably going to be in 25% bracket or 15% bracket in retirement.

Run the numbers (for retirement) and verify which tax bracket you think you will be in. If you will be in 15% bracket, use the catch up...

Saves you 28% in taxes now, (so 5000 going in "saves" you $560 in taxes, if you invested in a taxable account, $4440 would be invested with $560 going to taxes).
You will pay 15% taxes or 25% taxes on withdraw.

A caveat to this is that the savings between 28% bracket and 25% bracket are minimal, it might be worth the flexibility to have more money in taxable accounts.
We should be able to get into the 15% bracket (which tops out at $68k in 2010). I'll just mix in withdrawals from 401k and already taxed accounts to make this work. DW's small pension also adds to the situation. I'll fine tune the numbers
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Old 02-04-2010, 05:01 AM   #13
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I maxed out my TSP (=401K) including over-50 catchup the whole time until I retired at 61.

I guess what I did tells you more about my opinion, than anything I could possibly say. I should say that I have no regrets.

It is nice to have that tax sheltered account available for some of the bond funds within my asset allocation, since bond funds in taxable accounts are considered to be tax-inefficient. As for moving it into a traditional IRA, I have no opinion/knowledge one way or another.
Thanks - I'm a little bond short in my allocation - looks like a good place to put the additional contribution
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