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Minimizing 401k contributions - Coming at it from the Other Direction
Old 06-08-2018, 05:00 PM   #1
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Minimizing 401k contributions - Coming at it from the Other Direction

Hi all,

I know there are often questions (which I even asked here myself a few years ago in my former life) about stopping 401k contributions or just cutting down to the employer match level to help fund the "bridge" years before 59.5 in early retirement.

This is kind of the opposite question, and I'm interested in how other people would handle it. Would you keep contributing to your 401k in this situation?

My current piles, as I close in on age 52:
* Extremely low seven-figures that I can access now, between a spousal inherited IRA and a taxable brokerage account
* mid six figures in my own 401k
* a teeny rollover IRA from my old job with only pre-tax monies in it
* an even teenier Roth profile, having just opened my own Roth for the first time a few weeks ago and also having done an in-plan rollover of a few $k in after-tax money in my 401k to the in-plan Roth

Also of note:
* Currently maxing 401k contributions plus catch-up, so $24k/year.
* A new Roth 401k option alongside the 401k.
* My company dropped their 401k match down to 1% a few years ago, opting to replace the rest of the match with a Cash Balance account. Company matches 1% of Roth contributions, but not after-tax.
* Now planning to probably work a few more years.
* No direct heirs.
* Access to a non-COLA pension at 65, Survivor SS as early as 60, and DH's non-COLA pension already bringing me about $10k/year. By the time I'm 67, this could add up to over $65k a year.

Unless I head down the hookers-and-blow path, I see the potential for six-figure RMDs, and lots and lots of money that will be taxed as income when I access it, and so am starting to think about ways to combat that very first-world problem.

If this were your setup, would you switch to contributing to the Roth 401k? Or just dumping the former 401k contributions into the taxable brokerage account? Or some percentage of both?

I'm also finding that I have a bit of a weird mental block on dipping into the inherited IRA because it's taxed as income (and I am already flirting with the 24% bracket thanks to wages, dividends, small DH pension, cap gains, etc), so the notion of more taxable funds and more Roth contributions is enticing.

But maybe I'm missing something.

Thoughts?
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Old 06-08-2018, 05:12 PM   #2
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I would retire immediately therefore eliminating the 'problem' of high RMD.
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Old 06-08-2018, 05:15 PM   #3
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That was my plan, then my job had to go and get all interesting again.
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Old 06-08-2018, 05:39 PM   #4
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I would max out every tax-sheltered option available to me, not worrying in the least about having too much money or paying too many taxes down the road.

If you do not have heirs or family beneficiaries, there are plenty of worthy charities that you could gain satisfaction from helping.

We have a six-figure RMD starting this year and will end up paying taxes. It is not something that we anguish over.

Be careful that you do not work yourself into a frenzy that minimizes taxes while also reducing what you have left over after they are paid.
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Old 06-08-2018, 06:01 PM   #5
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I am planning on opening a donor advised fund account and am sure that some of my RMDs will end up as charitable donations.
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Old 06-08-2018, 06:02 PM   #6
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I'm still working (3 months till RE), and I max out my 401K but all Roth, and have for past 5 years. I was in the 28% marginal bracket last year. I don't know what taxes will do later but I expect dems will retake congress and / or president one day and taxes will go back up. I say do what you have to get 1% match, and then the remainder into Roth. You will have some peace knowing that you took care of the taxes already on that money. Still, you will have a big pile that you will need to apply RMD to, but remember you have 18 years before they kick in at 70. While you may not be able or want to convert the whole pile to Roth, you have 18 years to move from your Traditional IRA.

My plan would be to switch everything I can for contributions to Roth and start converting at some point from your pretax traditional IRA to a Roth IRA. However, this is your money, not mine
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Old 06-08-2018, 06:32 PM   #7
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I am contributing 61k to employer retirement accounts now. After I retire at 57, I will do Roth convention to solve RMD.

You should either build your own excel or invest in a good calculator.
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Old 06-08-2018, 06:47 PM   #8
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Quote:
Originally Posted by HillCountry View Post
I am contributing 61k to employer retirement accounts now. After I retire at 57, I will do Roth convention to solve RMD.

You should either build your own excel or invest in a good calculator.
I think some people here would be pretty alarmed by the spreadsheet that I have! It was in playing with it that I started realizing that perhaps, in my situation, continuing to plow money into pre-tax when I may not have more than a couple years in a tax bracket lower than now might be less than optimal, especially when I have so little in Roth.

My company only added the Roth 401k option earlier this year, so it's just not anything I ever considered.

The fact that I will probably never file jointly again might make my situation a little different than couples have it.
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Old 06-08-2018, 06:51 PM   #9
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Quote:
Originally Posted by googily View Post
I am planning on opening a donor advised fund account and am sure that some of my RMDs will end up as charitable donations.
You're a long way from RMD time, but FYI under current tax laws direct transfers from the IRA to the charity via a qualified charitable distribution (QCD) are the way to go; donor-advised funds do not qualify for QCDs however.
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Old 06-08-2018, 06:55 PM   #10
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Yes, sorry, should have made clear that I know that at RMD time the contributions would need to be QCDs.
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Old 06-09-2018, 06:06 AM   #11
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Quote:
Originally Posted by OldShooter View Post
You're a long way from RMD time, but FYI under current tax laws direct transfers from the IRA to the charity via a qualified charitable distribution (QCD) are the way to go; donor-advised funds do not qualify for QCDs however.
Arenít donor advised funds loaded with fees?
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Old 06-09-2018, 06:31 AM   #12
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Originally Posted by OldShooter View Post
I would max out every tax-sheltered option available to me, not worrying in the least about having too much money or paying too many taxes down the road.

If you do not have heirs or family beneficiaries, there are plenty of worthy charities that you could gain satisfaction from helping.

We have a six-figure RMD starting this year and will end up paying taxes. It is not something that we anguish over.

Be careful that you do not work yourself into a frenzy that minimizes taxes while also reducing what you have left over after they are paid.
My advise would be this ^.
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Old 06-09-2018, 06:40 AM   #13
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Arenít donor advised funds loaded with fees?
I'm sure that some are. AFIK Fido and Schwab are reasonable. We're not quite there yet.
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Old 06-09-2018, 07:43 AM   #14
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I would max out every tax-sheltered option available to me, not worrying in the least about having too much money or paying too many taxes down the road.
+1

That is my gut reaction. I have not analyzed the OP's specific situation.
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Old 06-09-2018, 08:08 AM   #15
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I can only add that I wish I had put more money into a Roth IRA earlier and less into the IRA's. The RMD's tax and IRMAA will hit us at some time.

My employer didn't have a Roth 401K option during my working years. Look into the fine details of Roth 401K vs Roth IRA before deciding. They are different. IIRC, Roth 401K's will require RMD's. They are not taxed, but if moved to a taxable account, gains will be. If I am wrong, somebody will correct me.
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Old 06-09-2018, 08:18 AM   #16
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Thanks. I imagine my Roth 401 will never get beyond five figures, given that I only plan to work a few more years and so can't get that much into it in the first place. But I'll check.

I thank the others who have commented recently, though I might add that actually looking at my specific situation might be helpful, since the reason I posted was because I am in somewhat of an unusual situation where I have no shortage of tax deferred monies already but almost no Roth. And could very well be making $80k as a single filer just from SS and pensions before my RMDs ever hit my accounts.

FWIW, I found a Betterment calculator to help decide on Trade vs Roth 401k and it said I should be doing all Roth, though making sure I max my Roth IRA contributions as well as contributing to the Roth 401k.
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