Final year...401k strategy

[Lemonade]

My DH retirement is looming and we're trying to decide what to do about 401k contributions in the final year. Do we max them out (save on taxes now, convert to Roth next year at lower tax rate) or stop them completely in order to have more cash (to cover SRR concerns or have money on hand to manage income for possible healthcare subsidies)?

Did you increase/decrease your 401k contributions as you were on the final stretch? Why/why not?

 

[COcheesehead]

I kept them at the max. I built a sizable taxable account over time to use as a bridge.

 

[boilerman]

I maxed until the very end

 

[Out-to-Lunch]

When will you be eligible to withdraw these funds? I.e., how old are you and does your 401(k) allow partial "Rule of 55" withdrawals?

You seem to be conflating two different concerns: AA and investment vehicle. I.e., what to invest in vs. what account to use.

 

[Koolau]

I maxed out and wish I had put it into taxable savings. I have too much in qualified savings. YMMV

 

[HI Bill]

Since I'm not yet SS-aged, but am taking inherited IRA RMDs, I went ahead and voted. Not sure the utility of this, as It might have been more meaningful to ask 'when you start taking SS and pensions/RMDs...or something like that. It mentions Pensions and RMDs, but not ESOPs, which I consider like a pension...no two folks have the same situation here, it seems!

 

[Alex The Great]

I always contributed up to the limit into 401K including this year which is final for the career. I also maxed out annual after tax 401K contributions during the last 5 years since my employer enabled it.
But starting next year, pre-tax catch up contributions into regular 401K are not allowed for those with income exceeding $145K annually. Instead, they will come after tax into Roth 401K which is not good especially for those with higher income.

 

[Surewhitey]

If earlier in the year, I'd stop as your tax bracket is likely much lower. If in the 22%+ bracket, I'd max it out.

We have a 40% stash in taxable accounts too, so you may need some bridge funds too vs more pre-tax.

 

[Surewhitey]

But starting next year, pre-tax catch up contributions into regular 401K are not allowed for those with income exceeding $145K annually. Instead, they will come after tax into Roth 401K which is not good especially for those with higher income.

First I'm hearing of this. Very disappointing...

 

[Dash man]

We had built up our after tax savings and ten years later still haven’t touched our tax deferred or Roth accounts other than for conversions. When working, I was splitting my 401k between tax deferred and a Roth until I retired.

 

[MarieIG]

I maxed out and front loaded 401k contributions my final year. I then put cash in taxable accounts to cover taxes for conversions and such after retirement, so that I would not have to sell - if I did not want to sell. (Some of my holdings stunk, so I did want to ditch them.)

 

[Aerides]

My DH retirement is looming and we're trying to decide what to do about 401k contributions in the final year. Do we max them out (save on taxes now, convert to Roth next year at lower tax rate) or stop them completely in order to have more cash (to cover SRR concerns or have money on hand to manage income for possible healthcare subsidies)?

Did you increase/decrease your 401k contributions as you were on the final stretch? Why/why not?

It depends on your personal situation. I had no worries about deciding between 401k and cash, I had already planned and had the right amount of cash for my planning. I always maxed my 401k each year, and the final year I just front loaded it to make sure it was all in before I left.

If you don't have enough cash to be comfortable, and you don't have enough to "do both", focus on cash/taxable savings first. I see far to many posts here from folks who are about to retire and only then realize they have insufficient taxable dollars to stretch themselves to 401k time. If there are concerns with having enough till then, figure that out before you do anything else.

Aside from that. Yes, I maxed my 401k contributions in 1Q to make sure all was in before my earliest possible retirement. This made for some pretty skimpy paychecks those months!

And be very aware if you have a company match, when that happens. For me, it meant I had to be employed on the last day of the quarter, i.e. 3/31. So I knew that if I planned to retire it had to be 4/1, 7/1, etc.

 

[Koolau]

It depends on your personal situation. I had no worries about deciding between 401k and cash, I had already planned and had the right amount of cash for my planning. I always maxed my 401k each year, and the final year I just front loaded it to make sure it was all in before I left.

If you don't have enough cash to be comfortable, and you don't have enough to "do both", focus on cash/taxable savings first. I see far to many posts here from folks who are about to retire and only then realize they have insufficient taxable dollars to stretch themselves to 401k time. If there are concerns with having enough till then, figure that out before you do anything else.

Aside from that. Yes, I maxed my 401k contributions in 1Q to make sure all was in before my earliest possible retirement. This made for some pretty skimpy paychecks those months!

And be very aware if you have a company match, when that happens. For me, it meant I had to be employed on the last day of the quarter, i.e. 3/31. So I knew that if I planned to retire it had to be 4/1, 7/1, etc.

All sounds very familiar. We thought we had lots of "cash" as we planned to sell our house and use that cash to Roth and to tide us over to 401(k) money. Heh, heh, we didn't realize we would use it all to rehab two places in Hawaii in our first 3 years. So, we essentially converted all our taxable cash to home equity. It was what we wanted at the time, but meant we were cash short.

Better to have a bigger source of cash going in if you retire before 59 1/2 and/or plan to do Roth conversions or anything else cash intensive (travel?) YMMV

 

[tulak]

I always contributed up to the limit into 401K including this year which is final for the career. I also maxed out annual after tax 401K contributions during the last 5 years since my employer enabled it.
But starting next year, pre-tax catch up contributions into regular 401K are not allowed for those with income exceeding $145K annually. Instead, they will come after tax into Roth 401K which is not good especially for those with higher income.

This is the first I heard about the pre-tax contribution limit. It appears that it is unintentional, from an article I found:

Planning expert Ed Slott of Ed Slott and Co. tells ThinkAdvisor the issue amounts to a “technical error in the law that will be fixed.”

“I don’t think the plan catch-up provisions are at risk,” Slott says. “This provision is not effective until 2024, and it will be fixed by then.”

So maybe we’ll see it fixed before/during 2024?

 

[LateToFIRE]

I've been "planning" to retire for several years now, long suffering from OMY syndrome, so still putting max into 401K, including the catch-up contributions. It's really just habit and laziness at this point - been contributing the legal max for 30 years, 80% equities, so as you can imagine, the balance in pre-tax $$$ has become significant. Made sense given high income tax bracket in a very high tax city/state.

To offset that, we have also put about an equal amount into after-tax accounts thru sale of restricted stocks, real estate, etc., and intend to further boost after-tax accounts with additional asset sales when we retire. So most of the retirement scenarios I've run are showing little to no need to ever tap the pre-tax savings but for that little problem of forced RMD's in about 15 years. Which is where careful Roth conversion planning will be soon needed. I suppose kind of a luxury problem to have.

 

[Koolau]

I've been "planning" to retire for several years now, long suffering from OMY syndrome, so still putting max into 401K, including the catch-up contributions. It's really just habit and laziness at this point - been contributing the legal max for 30 years, 80% equities, so as you can imagine, the balance in pre-tax $$$ has become significant. Made sense given high income tax bracket in a very high tax city/state.

To offset that, we have also put about an equal amount into after-tax accounts thru sale of restricted stocks, real estate, etc., and intend to further boost after-tax accounts with additional asset sales when we retire. So most of the retirement scenarios I've run are showing little to no need to ever tap the pre-tax savings but for that little problem of forced RMD's in about 15 years. Which is where careful Roth conversion planning will be soon needed. I suppose kind of a luxury problem to have.

Sounds like you have planned well. Is there a low(er) tax state you are considering for your future? That would be the hat trick of a plan like yours. Enjoy executing your plan!

 

[Musica40]

Maxed Out

I maxed until the very end

I kept maxing out till the end. Took advantage of my employers 12% match.

 

[Alex The Great]

So maybe we’ll see it fixed before/during 2024?

Well, this is yet to see if it get fixed or not.
Meantime, I do see a trend to raise taxes for higher earners and this change may be a part of it.

 

[Montecfo]

I maxed them out. But I do not know the rest of your budget etc. So hard to say.

 

[jollystomper]

I kept my maxed out. We were not eligible to have Roth IRAs. We were getting a good employer match (regular plus "catchup" due to a pension freeze). We also had enough income to build up our cash cushion without impacting our contributions. In fact, for several periods before I retired we "experimented" living on our planned retirement income, which helped build our cash up.

The only change I made to my 401K was to shift to a less aggressive AA six months before my retirement.

 

[tulak]

Well, this is yet to see if it get fixed or not.

Meantime, I do see a trend to raise taxes for higher earners and this change may be a part of it.

At least we’ll be able to add the catch-up contribution to a Roth, protecting it from future taxes.

If you look at the numbers, I don’t think it’s that bad. The 2023 catch-up amount is $7,500 (assuming under 60). You’ll only miss out on the tax arbitrage between the 401k and Roth, which based on current rates is max 13% for single filers. Odds are it’ll also help with avoiding future RMDs.

For those that are curious on the new rules for catch-up contributions, Fidelity has a good write-up in section 2:

https://www.fidelity.com/learning-center/personal-finance/secure-act-2

 

[LateToFIRE]

Sounds like you have planned well. Is there a low(er) tax state you are considering for your future? That would be the hat trick of a plan like yours. Enjoy executing your plan!

Sorta - I'm relocating to a "lower" tax state but I'll still be within the top ten highest tax states in the U.S., so jumping from the frying pan to the skillet as the saying goes. Not ideal. But waddayahgonnado! This is where most of our small family is located.

I do note that the pre-tax funds can practically double in size over a 15 year period (time remaining to RMD) if left untouched - don't know why that surprises me as its basic compounding - I think I'm just surprised by the magnitude of the "problem."

I do have some well-heeled friends that try to game things by domiciling themselves in place like FL even though they don't actually spend >50% of their time there. They do things like pay everything in cash when they're not in FL or get me to pay for dinner and then Venmo me the their half, silliness like that. But, I am starting to see why they feel the hassle is worth it.

 

[Slim11]

I maxed mine out, but I have a 457, so if I need it I can take it out immediately. I also used the 457 catch up plan to double my contributions for this year and last. Will be retired in August.

 

[Phroig]

This is the first I heard about the pre-tax contribution limit. It appears that it is unintentional, from an article I found:
So maybe we’ll see it fixed before/during 2024?

The new rule seems to be that unless a Roth option is offered, nobody can make catch-up contributions, including those under the limit. My school offers a Roth 403b, but no Roth 457, which means nobody can make excess 457 contributions going forward.

 

[Al18]

Just keep contributing at the normal rate you’ve done previous years. Any extra savings should go to savings and RothIRA contribution.

The reason is it seems silly to max out the 401K, and when you go to pull some out after you’re retired, you’ll be hit with a mandatory 20% withholding for Federal tax.