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Increase 401K / Decrease Taxable?
Old 08-15-2013, 11:44 AM   #1
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Increase 401K / Decrease Taxable?

I've been a recent lurker here and on bogleheads. Most of us could not afford to pay for the collective wisdom related to personal finance that you provide through these boards. Thank you.

I am starting a new job next month. The company allows me to contribute from 1-50% of my salary (pre-tax) to a 401k and will match 50% up to 3% of the salary contributed.

I don't know yet what investments the plan offers. How much I contribute will be determined based on that answer. However, assuming that I have decent options for low cost index investing, I do have a question for the board.


Based on my budget, we can afford to put 5% my salary into the 401k.

My salary puts us in the 25% tax bracket.

We currently have saved between 15x to 30x our anticipated annual expenses in retirement, depending on whether we have a lavish or bare necessities budget. This does not include social security. We have money for the kids college outside of this. We are debt free including our home.

For our current investments, the account breakdown is as follows.

72.5% in ROTH IRA Accounts
04.5% in Traditional IRA Accounts
23.0% in Taxable Brokerage Accounts


Does it make sense to increase the contribution to my 401k above the 5% budget in order to bring us down to the 15% tax bracket? We can make up the budget shortfall by divesting some of our investments and paying long-term gains?

I'm thinking along two lines of reasoning. The first is we gain on the tax savings between reducing my income vs the long-term gains. The second is we only have 4.5% of our income in traditional ira accounts. This would effectively allow us to move some out of taxable accounts and increase the traditional ira account as we look to balance our roth, traditional, and taxable accounts.


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Old 08-15-2013, 01:21 PM   #2
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I don't have any advice to give, but wanted to say welcome to the forums! And, I'm in a somewhat similar situation, so I'd be curious to see what advice others have.

Right now I max out my Roth IRA, and my 401K every year (federal limit plus 4% match in my case). But I'm afraid that I'm getting too loaded-up in pre-tax investments, and won't have enough after-tax to get me through if I retire early. So I've been thinking about cutting back on the 401k.

Like you though, I'm in the 25% bracket, and throw on state and local, and that puts me up to about 33%. So, for every dollar I'm reducing my 401k contribution by, I'm paying 33 cents in taxes and only have 67 cents to invest in after-tax. That concept is bugging me a bit. But, I guess I can get over it!

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Old 08-15-2013, 01:26 PM   #3
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sounds like a math problem to me....but if I could drop from a 25% tax rate to a 15% tax rate and get more "match" dollars it would seem to be a good move.
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Old 08-15-2013, 02:00 PM   #4
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At some point it does not make sense to contribute to a 401k beyond the employer match. Once dollars are trapped inside a 401k all the dividends and cap gains eventually get taxed as ordinary income. If I instead invest outside the 401k, I can get the advantage of the reduced tax rate on divs and CGs.
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Old 08-15-2013, 02:01 PM   #5
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If you can drop down into the 15% bracket (including capital gains) then the capital gains would be taxed at 0% and the other income at ordinary rates. You could play wiht TaxCaster and get an idea of the tradeoffs. So essentially you will be deferring earnings that would be subject to 25% tax and presumable at a 15% or 10% rate wen you take the withdrawals. And as a bonus you will pay 0% on LTCG if you manage your gains right.

Finally, you are light in the tax deferred so to put more in the 401k will add some balance.
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Old 08-16-2013, 10:40 AM   #6
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I think dropping into the 15% tax bracket would be a good idea. When you ER you will be able to Roth convert, hopefully within the 15% tax bracket or lower. Income within the 10% bracket and cap gains extending to the top of the 15% (0% CG tax) bracket would be nice if your income works out like that. After ER, stay in the 10% or 15% bracket and fill in the rest of your needs with the Roth if you can withdraw contributions or are over 59.5. Whatever minimizes you taxes.

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401k vs taxable

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