All in 401(k) or taxable accounts also

[smr91481]

For someone who hopes to retire early one day would you recommend that instead of investing only in a 401(k) to also invested in taxable accounts? Right now can percent of my income is going into my 401(k)… Five from me and five from my employer. Next July my contribution will go up to 6% because my match goes up to 6% from the employer. After I get a little debt paid off I would like to raise my contribution to at least 10%… Giving me a total of 16%.

I guess my question is instead of putting that extra 4% into my 401(k) should I look at just putting it in some nonretirement mutual funds?

Sorry if this post looks funny or has any grammatical errors… It was created from the voice text on my phone.

 

[pb4uski]

If you want to retire before you reach 59 1/2 (or 55 if your 401k plan allows penalty free withdrawals prior to 59 1/2) then you will want to have some source of penalty free funds to draw on from when you ER to when you can begin to draw funds from tax deferred accounts without penalty.

 

[scrabbler1]

The important part of my ER plan was to be able to make it to age 59.5 intact. That is, using only my non-retirement funds to cover my expenses before my "reinforcemnts" kick in. Those reinforcements include unfettered access to my (rollover) IRA, my frozen company pension, and SS.

This meant that contributing to my 401(k) only enough to take full advantage of the company match was a priority.

I am a little confused by the math in your situation. You wrote you will increase your contribution to 6% next July because your employer will match that 6%. Then you wrote you want to increase it to 10%, for a total of 16%. Did you mean "increase it by 10%, for a total of 16%?" Increasing it to 10% would be an increase of only 4%. Either way, I would strive to pay down your debt (mortgage, car loan, credit card, or something else?) because there is an implied risk-free rate of return in there which is better than what you are earning in a taxable account.

 

[smr91481]

I meant I'll be contributing 6% and my company will contribute 6% for a total of 12%. I want to add another 4% to make the total contribution 16%... My total contribution being 10%. Sorry for the confusion.

 

[Alan]

Like others I wanted enough funds to bridge the gap from 55 to 59.5 without withdrawals from 401ks and IRAs so I did save a chunk of money in after-tax funds.

When calculating your target asset allocation, have your stock funds in after tax accounts and bonds in your 401k to minimize your taxes.

 

[Hamlet]

Your current and expected tax rates are very important to this decision.

If you are currently in a very high tax bracket, it generally makes sense to put more into the 401k, as you are avoiding a large bite right now. It makes even more sense if you expect to have a fairly modest realized income in retirement.

If you are currently in a pretty low tax bracket, the Roth or after tax accounts make more sense. If you're in the 15%, you will probably be better paying the tax now.

For example, when I started I split my money between the 401k and taxable accounts, because I wanted the taxable money available if I lost my job and needed it. I eventually realized that my marginal tax rate was 28%, and that I would be better off puting everything in the 401k, because even if I pulled it out and paid the penalty, I would still save money (15% tax rate +10% penalty).

Nowadays, I max both the 401k and Roth so that I have a little tax flexibility down the road.

 

[smr91481]

I'm not even sure what my tax rate is. I just know it seems like a lot. I make about $75,000 per year.

 

[pb4uski]

There are two important rates to know. First is your average tax rate which is the tax from your Form 1040 divided by your income (probably in the 15-20% range). The second is you marginal tax rate (what tax bracket you are in - probably 25% at your level of earnings).

 

[RunningBum]

The marginal tax rate is far, far more important for questions like this. I wouldn't even guess what it is for the OP without knowing if he or she is married, and whether that income includes deductions & exemptions, and even then the OP should be the one to figure it out.

 

[target2019]

For someone who hopes to retire early one day would you recommend that instead of investing only in a 401(k) to also invested in taxable accounts? Right now can percent of my income is going into my 401(k)… Five from me and five from my employer. Next July my contribution will go up to 6% because my match goes up to 6% from the employer. After I get a little debt paid off I would like to raise my contribution to at least 10%… Giving me a total of 16%.

I guess my question is instead of putting that extra 4% into my 401(k) should I look at just putting it in some nonretirement mutual funds?

Sorry if this post looks funny or has any grammatical errors… It was created from the voice text on my phone.

Nice phone! Does a great job.

I am 59, and maxing my 401(k). I did not have such until age of 53. Even with 10 years of maxing, a 401(k) alone can't support ER. It makes sense to me that you may want to go 15-20%.

You're in the 25% tax bracket, meaning the next dollar you earn gets taxed at 25%. That is how I've always thought of this matter. If I can delay the tax, I look at my other needs (loan, credit card, car, mortgage), and put as much into the tax-advantaged program (401(k), SEP, IRA, etc) as I can.

 

[jerome len]

I'd look at investment choices outside of the options offered in your 401K. I like REITS and since they have tax advantages different than other funds I put my extra dollars partially in Vanguard's REIT. Additionally, I had an IRA, then switched it to a Roth so my money grows tax free and I won't have to take it our until I need it. If you're looking forward to a long life I'm not going to use my Roth until I'm at least 75. I'll have my SS, regular 401k and other investments until I'm older.
You have a lot of options.....other than the options in your 401k. I'd look at all of them before I increased my 401k beyond the match.......UNLESS you don't want to take the time or your 401k has tremendous options that work best for you.

 

[rescueme]

The marginal tax rate is far, far more important for questions like this. I wouldn't even guess what it is for the OP without knowing if he or she is married, and whether that income includes deductions & exemptions, and even then the OP should be the one to figure it out.

Along with where they reside and where they plan to retire.

Being retired (in PA), I pay no state or local income tax on my retirement portfolio withdrawls (e.g. TIRA's & 401(k) rollover accounts), nor for DW's two small pensions, nor our respective SS incomes in the future.

Being that taxes were a big part of our retirement planning, it takes a bit of digging to understand the entire picture of retirement and asset survival techniques as related to taxes in retirement.

 

[clifp]

To give you a really good answer we'd need to know about age, current savings, and expect future income growth. Example if you are a doctor just starting out your income will grow a lot a journeyman carpenter not so much.

However, based on what you said I would start diversifying your saving outside your 401K. Stock index fund or ETF generate very low taxes roughly $3-4/year for every $1,000 invested so they would be good place to start. A ROTH IRA would be another thing to start and would be excellent place to have assets like REITs. ROTHs also provide more flexibility than 401Ks, because you can generally withdraw the contributions (but not earnings) prior to 59.5 without penalty.

Now here is the bad news while saving 10% of your salary with nice match by the employer is fine for a regular retirement in the mid 60s or so. In order to retire early say be 55. You'll almost certainly need to ramp up your savings. So that means
10% contribution to the 401K and another 5-10% in after tax saving and ROTH.

You do have the right priorities paying off any debt except for mortgages (and possibly low interest student loans), is more important than increasing after tax savings.

 

[cons]

As others have suggested already, contribute to a ROTH.

With the limited info you provided, I'd suggest the following:

Contribute up to the match to your 401k (6% in your case). Then max out ROTH (5k/yr). Then go back to 401(k) and contribute up to the max (17k this yr). If you have anything left over to invest after that, contribute it to a taxable brokerage account.

 

[audreyh1]

I maximized my tax deferred savings, but I also put a heck of a lot more in taxable savings/investment. IMO its hard to save enough, or at least it used to be, in tax-deferred accounts alone for an early retirement. Contributions limits are much more generous now than when I was able to contribute.