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Max out 401K ?
Old 03-16-2006, 10:21 PM   #1
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Max out 401K ?

I was fortunate to get an early start on retirement planning (currently 36 years old).* *I have been in a 401K plan since graduating college.* *I also started fully funding Roth IRA's when they were made available (wife and I).*

My projections show that my current plan (contribute 9% in 401K with 3% match) & fully funding Roth IRA's ($8K total) should allow me to retire at age 55.* *BTW, I should also have a company paid pension at 55.* *My investment projections assume a 9% overall return.* *My investments (Roth & 401K) are in the Vanguard Target Retirement 2035.* I know 9% may be a stretch with some of the latest predictions.*

I recently was promoted to a job with a higher salary.* *The bonus potential in the new position is significantly higher than my previous job.

Here is my question ....

Should I take the additional funds and max out the 401K or focus on funding taxable investments (Index Funds and/or Dividend Paying blue chip stocks).* *I have very little money in taxable savings at this point.*

I have read many articles on this subject.* I really don't know if my tax bracket will be higher or lower at retirement.* *I hope it is lower ...* *However, I currently have the benefit of mortgage interest deduction and two-children (tax credit's) which translates into a very low effective tax rate (less than 10%).* *I think my effective tax rate now is lower than 13 years ago (new college graduate making 25% of current earnings)* * * *

There is a part of me that would like the flexibility of having four legs to secure a solid retirement (Pension, 401K, Roth, & Taxable).* However, the numbers show maxing out my 401K should generate an additional $300K in 18 years (age 55).* *I do feel amassing $300K (or more) in a taxable account over 18 years is also attainable.* *

Anyone crossed this bridge?* * * Thanks ..* *
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Re: Max out 401K ?
Old 03-16-2006, 10:44 PM   #2
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Re: Max out 401K ?

I think it makes sense for people to have investments in taxable savings. I think part of the issue is simply not putting all your egss in one basket. Your pension and 401k would be taxed as ordinary income when you take it out. Capital gains and qualified dividends in taxable accounts are currently taxed as low as 5% so I dont know if you included that in your projections. Tax rates can change though.

You may also need some of the "taxable" accounts for other savings goals besides retirement.
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Re: Max out 401K ?
Old 03-16-2006, 11:40 PM   #3
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Re: Max out 401K ?

Matching in 401K's basically pays future taxes for when you take the money out. If no matching, for sure save in a taxable account instead.

Roths are magic. Whatever you do, max them out.

Maddy is absolutely right on taxable savings. I didn't appreciate the value of capital gains until late. The big negative for me was having to keep detailed records. Considering my sloth, it is just as well that all of my retirement money is in 401k's rolled over into IRAs.
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Re: Max out 401K ?
Old 03-17-2006, 06:32 AM   #4
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Re: Max out 401K ?

Good question, I have 3 kids, no mortgage, but likely lower taxes right now than I would 'guess' given the state of the nations finances. I just a couple of days ago changed my contribution from 16% to 6%. I still capture the max co contribution (9%) and I will take the 10% left after taxes and put in Schwab or sharebuilder. I have ~500k pre tax and ~450 post tax and would like to keep it roughly in that proportion. My logic is when I retire, I will be able to massage which acct I withdrawl from to try to keep the pre tax withdrawls at 25K or so to stay in the lower brackets.

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Re: Max out 401K ?
Old 03-17-2006, 06:57 AM   #5
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Re: Max out 401K ?

The contribution limits for 401(k) and Roth IRA combined are low enough that if you indeed have a "significantly higher" "bonus potential", then the question will become moot.* That is, you will have the funds to max out 401(k) and Roth AND contribute to after-tax accounts and buy new cars and go on nice vacations several times a year and move into a McMansion and retire early.

But then again, if your income goes up enough, then you don't get the child tax credit and you become ineligible for Roth IRAs.

And to add, though your effective tax rate is under 10%, even with a $200K AGI, you may be able to keep your effective tax rate under 17%.

If you already live in a McMansion, go on nice vacations several times a year, and buy a new car every other year, then ignore that part.
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Re: Max out 401K ?
Old 03-17-2006, 08:48 AM   #6
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Re: Max out 401K ?

I'm currently considering the same thing....do I start stockign away $$ in a Simple IRA/ increase my 401k OR put it in a taxable acocunt?

My current AGI is about 27k (LOTS of business deductions). I have a child, and home mortgage interest deductions....I usually get a nice amt of $$ back at the end of the year....I figure my effective tax rate is 10%?

My 401k @ work only matches 1%, if I save 4%. I currently hold back about 7%.

Just based on taxes, I guess it would make the most sense to put this money in a taxable account? The reason being, I wont have a child deduction in 23 years when I retire, nor will I be able to deduct mortgage interest. I assume my salary will be similar in retirement as it is now.

Whaddaya think?
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Re: Max out 401K ?
Old 03-17-2006, 08:53 AM   #7
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Re: Max out 401K ?

Fed, max that Roth IRA since your tax rate is so low.
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Re: Max out 401K ?
Old 03-17-2006, 09:08 AM   #8
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Re: Max out 401K ?

Thanks for the responses ...

Maddy, *I have enjoyed reading your posts in the past. * I am very interested in the dividend growth model and turning the switch at retirement from reinvesting dividends to receiving dividends. * I have opened up a Sharebuilder account for this purpose.

Ed, *The Roth IRA is my #1 Priority. * I consider it a gift.

Daddy O, * I was thinking about the same strategy. * If you have funds in multiple places (401K, Roth, Taxable, etc.), you can pick and choose your withdrawals carefully. *I read somewhere this is a great strategy (since you do not know what the future will look like). *

LOL, Excellent point on watching the income and it's impact on AGI, Roth & Child Tax Credits.* I love new cars but decided to keep my 7 year old vehicle until it breaks down. *I made a decision to wait to purchase my dream car until FI is achieved. * I am very happy with our house. * I live in an area where real estate can be purchased at reasonable levels. * There is a lot to do in this area so expensive vacations are the exception (at this time - maybe when the kids are older). *

thefed, *I agree with Martha on the Roth IRA - Max it out.* *





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Re: Max out 401K ?
Old 03-17-2006, 12:24 PM   #9
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Re: Max out 401K ?

I do max my roth, but need to figure out if the excess should end up in a 401k/ira or taxable
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Re: Max out 401K ?
Old 03-17-2006, 04:07 PM   #10
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Re: Max out 401K ?

Quote:
Originally Posted by thefed
I do max my roth, but need to figure out if the excess should end up in a 401k/ira or taxable
I'd diverisfy in both...split it up 50/50 between 401(k) and taxable, assuming your 401(k) has decent options, since you never know what the future rates/deductions will be, and 50/50 will guarantee you'll be diversified tax-wise.
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Re: Max out 401K ?
Old 03-18-2006, 02:56 PM   #11
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Re: Max out 401K ?

I've ended up with 75% in a traditional IRA although I'm trying to improve my after tax savings. I've been maxing out Roth's since they came out but most of that has been just moving money and not new savings.

The mantra (assuming that the 401k choices are good) is to first get the company match then max out the Roth. If there's still money left to save put it in the 401k. That may not be right for the people that are in the 12% marginal tax bracket.

Assuming a low marginal tax rate now, I'd prefer investing in an index or tax managed mutual fund for the capital gain tax rate. The US has always had preferential tax treatment for capital gains although Prez Hillary may raise the tax rates (for the children, of course -- give me time and I'll slam that great Democratic prez GWB. I am an equal opportunity slimer of politicos).
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