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Retiring in April, should I max my 401k deduction for the four months?
Old 09-21-2013, 11:51 AM   #1
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Retiring in April, should I max my 401k deduction for the four months?

Planning on ER in April 2014. I annually always contribute max + catchup since my employer does a 25% match. My deduction is set at 7% so that it cost averages across the entire year, always reaching the limits by EOY. Since my plan is to stop in April I could up the deduction to my employers allowed max to capture as much of the match plus tax benefit. Is there any reason not to?


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Old 09-21-2013, 12:18 PM   #2
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The only reason I see not to is if you don't have enough funds in ER until you can start tapping from your retirement accounts, but I'd be looking for ways around that so you can get the employer match. I maxed out my 401K in the same situation. If I'm remembering correctly it left some room to do some Roth conversion that year, since I had deferred so much of my income.

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Old 09-21-2013, 12:46 PM   #3
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That's what I did and my taxable earnings were minimal. If you have a Roth, you may want to adjust your 401k w/h so you have enough earnings to be eligible to fund the Roth.
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Old 09-21-2013, 01:08 PM   #4
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That's what I did this year...thinking I might join the class of 2013, but so far suffering from OMY syndrome. In my case, my employer matches 80% of my 6% basic contribution of a pay period. I reached my IRS annual max in May, I changed my deduction to 6% after tax so I can continue to get the co match. Check with your plan to see if there a limit on the co match for each pay period.
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Old 09-21-2013, 04:56 PM   #5
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If you plan to max out in April you'd need to raise your 401k contribution rate of 21% to 28% (depending on when in April you plan to retire). Depending on your salary, you may run afoul of your 401k plan's HCE rules.
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Old 09-21-2013, 05:14 PM   #6
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When I knew my retirement rate I bumped up my contribution to the max percentage allowed of my salary, which IIRC was 25%. At that point the goal was to stuff as much money into the 401K as possible before I walked out the door.
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Old 09-21-2013, 05:43 PM   #7
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If you only work a part of the year, you could have taken the money with only small income tax owed and by putting it in the 401k you will now incur income tax when it is withdrawn. If you have a Roth 401k option, you might consider that for the part-year contributions since the lower income tax you pay will allow you to sock the money away in a tax-free vehicle.
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Old 09-21-2013, 06:42 PM   #8
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I have DW signed up for 65% contribution for 2014. We already maxed out early this year since she was supposed to retire in July. Now she's half time and thinking July again in 2014. That ought to max out her 401k. Her employer allows 75% max.

However, like many here I think, her company only matches the first x% of each contribution. They make a catch-up employer contribution in January if you didn't get the whole match due to large contributions early and no contributions later. Make sure you know how your employer handles that if it is a major factor for you.

In our case, it works out best in 2014, as a low income year, for DW to max out the 401k while I Roth convert my tIRA. If we were the same age, her Roth 401k option would have been just as good as a quick Roth conversion. Unless you need more in your taxable accounts, this is still a good way to pack as much value into retirement accounts as you can.
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Old 09-22-2013, 06:24 AM   #9
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I retired in April, 2007, and this is exactly what I did. I was able to almost max my 401(k) contribution for that year. It was absolutely the right thing for me to do. However, the way my employer did matching, I did not get extra matching that year -- the most they would match was 4% per paycheck or something like that -- so my match was only about 30% for 2007 what it would have been had I finished out the year there.

I think the biggest reason not to do it (or at least it becomes a more complicated decision) is if you will be in a low federal+state tax bracket for 2014 or if you lack liquidity in taxable accounts for your retirement years before you can access your IRAs.

If your employer is doing a 25% match on all your contributions, including the excess contributions that you would be making in 2014, then I would contribute as much as I could to the 401(k) no matter what the circumstances.
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Old 09-22-2013, 09:55 AM   #10
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My employer annual match was based on 1/12 per month such that I could only get 5/12 of annual match when I retired in May. I presume you've checked out that you can get entire annual match in less than a year.

Sounds like you're 2014 income & thus taxes will be lower such that if your employer has a Roth 401k you can consider some or all of your contribution for that. My employer had Roth 401k but the match was pre-tax such that the match went strictly to the regular 401k.

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