Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Savings allocation question
Old 12-14-2012, 06:10 PM   #1
Recycles dryer sheets
Join Date: Dec 2006
Posts: 423
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.


JohnDoe is offline   Reply With Quote
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 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!

Old 12-14-2012, 06:24 PM   #2
Thinks s/he gets paid by the post
Join Date: Jun 2007
Posts: 2,388
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.

growing_older is offline   Reply With Quote
Old 12-14-2012, 08:01 PM   #3
Thinks s/he gets paid by the post
photoguy's Avatar
Join Date: Jun 2010
Posts: 2,231
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.)
photoguy is offline   Reply With Quote
Old 12-14-2012, 08:11 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 13,212
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.
pb4uski is offline   Reply With Quote
Old 12-14-2012, 08:52 PM   #5
Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 3,805
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.
Animorph is offline   Reply With Quote
Old 12-15-2012, 05:14 AM   #6
MichaelB's Avatar
Join Date: Jan 2008
Location: On the road again
Posts: 21,182
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.
MichaelB is online now   Reply With Quote
Old 12-15-2012, 08:39 PM   #7
Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 3,805
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.

Animorph is offline   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


All times are GMT -6. The time now is 02:01 PM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2016, vBulletin Solutions, Inc.