|
Increase 401K / Decrease Taxable?
08-15-2013, 11:44 AM
|
#1
|
Recycles dryer sheets
Join Date: Aug 2013
Posts: 349
|
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.
Background
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
Question
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.
Thoughts?
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
08-15-2013, 01:21 PM
|
#2
|
Thinks s/he gets paid by the post
Join Date: Aug 2005
Location: Crownsville
Posts: 3,711
|
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!
|
|
|
08-15-2013, 01:26 PM
|
#3
|
Thinks s/he gets paid by the post
Join Date: Jul 2009
Location: North Scottsdale
Posts: 1,545
|
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.
__________________
FIRE'D in July 2009 at 51...Never look back!
|
|
|
08-15-2013, 02:00 PM
|
#4
|
Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,877
|
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.
|
|
|
08-15-2013, 02:01 PM
|
#5
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
|
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.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
|
|
|
08-16-2013, 10:40 AM
|
#6
|
Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
|
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.
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|