Lower 401k contribution to increase taxable contributions?

[sergio]

Is there ever a situation where it makes sense to put less in a traditional 401k and more in a taxable account?

For example, instead of investing $6k in Roth + $19.5k in 401k + $10k in taxable every year, what about $6k in Roth + $10k in 401k + $19.5k in taxable? This assumes you put enough in to get full employer match.

If you are retiring early, accessing 401k money comes with a penalty but holdings in a taxable account can be sold or dividends can be collected and spent rather than reinvested.

There's also a remote chance that income taxes shoot up (hurting 401k withdrawals) but dividend/capital gains don't (helping taxable accounts). ERs can come into play as well if your 401k has high (1%+ ERs) but a taxable account has very low ERs.

Has this been discussed anywhere? Is anyone aware of an analysis like this?

[statsman]

I would think ER well before 59.5 might be a good reason to increase the taxable accounts to help cover living costs at least until 59.5.

[RunningBum]

Yes, it can make a lot of sense, especially retiring before 59.5. I recall it being mentioned a few times but I don't know why there hasn't been more analysis of this. Most of my money is in taxable due to stock options so I never really had to consider this.

[Out-to-Lunch]

I did this. I will have access to my 403(b) deferred funds due to the rule of 55, but I did so anyway. My goal was to build up a cash reserve for: (1) large, one-time expenditures if we moved, and (2) to pay taxes on Roth conversions.

If (2) doesn't quite make sense to you, here was my thinking. I want to convert to the top of the 22% bracket between retirement (later this year) and when the rates (presumably) will increase in 2026. Taking more in cash now allows me to use more of the 22% bracket in years 2018-2020. Then when I use that money to pay taxes, I will effectively be moving it into a Roth.

I have to admit that I think I did not manage to hang onto that cash quite as well as I would have if it were to have been inaccessible, in tax-deferred.

[chassis]

Agree with all of the above. A model (Excel) is needed to forecast liquidity when it is needed. Contributing to a taxable account is part of a liquidity or cash management strategy. I suggest that 401k contributions should maximize employer match.

[HI Bill]

To me, this mostly depends on your adjusted gross income, your filing status, and your effective tax rate. If your earnings keep you in the 10-12% tax bracket, even without tax-deferred contributions, then it's a no-brainer to invest in a ROTH IRA or ROTH 401(k). If you have a higher AGI, placing that 'extra' income in the 22% bracket, then the tax-deferred option may be better. But you also need to consider your anticipated level of income and taxes in retirement.

[RxMan]

I wondered about this myself. For now I’ve kept all my retirement contributions the same to max them out. But I still want to find a way to increase my taxable accounts. It tough because if you are trying to max everything the money adds up.

I still need to check with my employer to see if I have the Rule of 55 option in my 401k plan. It seems kind of silly to call and ask them considering I’m still in my 40s but I like to plan ahead.