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Savings allocation question
Old 12-14-2012, 07:10 PM   #1
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Savings allocation question

I plan, at the very least, to go part time in about 6 years at which I will be 50. My DW should be able completely retire if she likes - she would be 55.

We currently max out my 401k and 2 Roth’s. My DW just became eligible for a 401k (no match). Besides the 401k and Roth’s, we should have another 10k available in 2013 for savings.

We don’t really have any taxable savings at this point except for our emergency fund. My question is should I cut back on my 401k - enough to get the match - and start building up a taxable account a little more quickly? Another option would be to start maxing DW’s 401k so that she could make penalty free w/d’s starting at 55 – if that is allowed.


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Old 12-14-2012, 07:24 PM   #2
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Personally, I like the idea of maxing all the tax sheltered space I can. If I decide later I need to get at any of it early, I can always 72t to avoid penalties. If I give up some tax sheltered space to invest in taxable, I can never get it back.

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Old 12-14-2012, 09:01 PM   #3
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Personally my marginal tax bracket is high enough that it is a no-brainer to just max out both 401ks. However, another consideration would be if you have enough cash to meet any lump sum expenditures (e.g., like an around the world trip, condo purchase, etc.)
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Old 12-14-2012, 09:11 PM   #4
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It's all about liquidity.

A common problem for those retiring before they are 59 1/2 is what will they live off between ER and 59 1/2 when they can begin to draw from tax deferred sources penalty free.

If 72t's from the 401ks and penalty-free Roth withdrawals will be sufficient to provide for your desired lifestyle between ER and 59 1/2 then great - otherwise you might face having to pay the 10% penalty (which many, including me, find unpalatable).

Taxable funds are a great source of funds to bridge the gap between ER and 59 1/2.

Unless you're willing to pay the penalty then having a nice nestegg in tax deferred doesn't do you much good unless you can access it.
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Old 12-14-2012, 09:52 PM   #5
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You clearly need to have some plan to span the gap to 59.5. We've hit all the common ones I think: taxable accounts, 401k with retirement after 55, and 72t. You may need to do more than one to make it through.

I like the 401k approach if your taxes will decrease in retirement (from marginal rate today to average rate in retirement). You might save quite a bit in taxes, if the 401k allows. Otherwise, you'll only have the 6 years or so of gains in the 401k before you have to start taking it out again. Not a big incentive there.

The taxable savings approach would be a little simpler than the 72t, requiring no research. However, you might lose some of the tax advantages of making 401k/IRA withdrawals while you have no other income. Might put you in the Medicaid category for the new health insurance subsidies as well (could be good or bad I guess). That's when you can do Roth conversions, but that shouldn't be needed if you're short on taxable funds. That might be a great way to get your emergency fund into a Roth however. So I guess 72t might be better than using taxable accounts, just as good as the 401k at 55, just a different way to access the accounts, with a little less flexibility.
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Old 12-15-2012, 06:14 AM   #6
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Folks in general complain that 401(k) plans have high expenses and limited investment options. Is there anything about her plan (or yours) that makes it a compelling choice? If not, or unless your current marginal tax rates are very high, you will probably not regret having taxable savings once you retire.

A nice mix of taxable and tax deferred investments gives you more flexibility to manage liquidity and taxes over the withdrawal period.
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Old 12-15-2012, 09:39 PM   #7
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The RMD on the OP DW's 401k comes earlier and remains higher since she is five years older. So it will generally be beneficial to fill it last, Roth convert it first, or withdraw from it first.

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