Non Matching 401k vs. Taxable

[UnrealizedPotential]

So I have been thinking for a long time to limit my 401k and just maximize as much as I can the taxable accounts.Today I did just that.I was putting 6% in my 401k every week now I am only putting in the minimum of 1%.I have roughly $67,000 in my 401k and $140,000 in my taxable accounts.This will free up between $175-$200 every week to go into the taxable account.I decided I liked my taxable accounts because of the ability to tap into it any age needed.I also get paid quarterly dividends in my Real Estate and Equity Income Fund which together make up about 91% of my taxable accounts.I hope 8-10 years from now it will get me where I need to be.Any thoughts?

 

[MichaelB]

A lot depends on your curent marginal tax rate. While I don't think there is any consensus or right answer, it appears that a healthy mix of tax-deferred and after-tax investments allows people good flexibility to manage cash flow and try to optimize tax expense over time.

 

[Jackanory]

Be sure to maximize your company's match amount. Many companies match up to 2%, and it'd be a shame not to get that!

 

[UnrealizedPotential]

Be sure to maximize your company's match amount. Many companies match up to 2%, and it'd be a shame not to get that!

That's the problem though.My company does not match the 401k at all.That is part of the reason I went with the Taxable accounts.

 

[NgineER]

I assume you are in the 25% tax bracket right now... You'd most likely be lower in retirement...

You should check your 401(k) plan, they may allow you to withdraw without penalty if you leave at 55, that might make the tax savings advantage more interesting to you.

 

[lemming]

My company matched only2% if you put in 6% of salary.If you put in more it reduced the discretionary amount you got at end of year. So not a good plan for those who wanted to save a lot. I piled money into the account anyway.
Instead of dropping your 401k deduction try putting in the extra dollars into taxable account once a month, then twice a month when you are used to the reduction.

 

[BigBob]

I would consider fully funding a Roth(if eligible), if you are going to plow money into a taxable account. At least there you would get the benefit of eventual gains being non-taxed and you can (with stipulations) remove the contributions at any time.

 

[Oinkette]

I've been pondering the same thing. I was close to maxing out, even though I'm not particularly fond of my employer's choice of funds. I figured I'd do the SEPP/72t thing or IRA rollover thing. Now that I'm investigating each they both seem so complex and riddled with hassles.

I kind of like the idea now of just doing taxable with dividend funds/stocks so there will be no hassle when it's time to pull the plug at work. My goal is mid-40s so I'd have almost 15 years before I can access my 403b without penalty.

It does help that my employer gives (not match) 10%.

 

[pb4uski]

to me, it depends on what your marginal tax rate is. I would assume that it will be 15% or less when you retire. So if your current marginal tax rate is 15%, then it doesn't really matter much. If it is higher than 15%. then tax-deferred savings wins.

And I agree with BigBob that if you decide to save after tax consider a Roth since it can grow tax-free and after you have had the account for 5 years you can withdraw contributions without penalty no matter what your age so at least contributions are similar to taxable savings in that respect.

 

[RenoJay]

Last time I had a "real j*b" in 2008 I chose to forgo the company's non-matching 401k in favor of IRAs and taxable accounts due to the 401k funds' high expense ratios and the plan's 1% "wrap fee" which I learned of only after interrogating the providing firm's rep for half an hour. In my opinion, people often overestimate the value of tax deferment and often fail to realize that index funds are quite tax efficient in taxable accounts. As long as you have the willpower to keep your hands out of the cookie jar then it pays to do the math on your particular 401k options vs. taxable investing.


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[meekie]

I've always gone heavy into 401k, I contribute about 30% of my income because my company matching is really good. But with my hubby and I both working, the tax savings was always a big concern for us as well. We also have average to good funds available, and not too large of fees. We're getting close to the final stretch, maybe looking at 2018 for retirement, and in our 40's, so we are definitely worried about having enough in accessible accounts.

The IRA rollover thing looks like it's going to work well for us, but we will need 5 years of money before we can tap that seriously.

We're finding that we're able to concentrate on our taxable accounts now that we're only a few years out. When we were still 5-10 years out, it was better for us to just get as much as possible into our 401k/Rollover IRAs. A year ago we had 125k/800k, in after tax vs 401k. Now we're at 250k/920k. Contributions into the taxable accounts have gone up, returns on both have been great.

We couldn't contribute to our ROTHs in the last few years because of the income limits (nice problem to have, I guess), but that would have been a huge help if we could. If you're not contributing now, please consider it.

 

[kaneohe]

I would consider fully funding a Roth(if eligible), if you are going to plow money into a taxable account. At least there you would get the benefit of eventual gains being non-taxed and you can (with stipulations) remove the contributions at any time.

What stipulations with contributions?

 

[target2019]

We have followed this guidance for a decade:

1. 401(k) or 403(b) to get the match
2. Roth IRA max
3. Additional to 401(k)
4. Taxable

This doesn't fit every circumstance, though. Need to know the tax bracket, salary, and many other details to optimize what you are doing. If you go against the conventional, it doesn't mean you are wrong. But I prefer to put REITs in a Roth.

Also have a SEP-IRA and I maxed that for many years. We were always in the 25% bracket, so every $1K into a T-IRA or SEP or 403(b) or 401(k) netted us a $250 tax deferment. We will in all likelihood be in the 15% bracket soon, and it makes sense for us to focus on tax-deferred.

 

[Animorph]

The 401k lets you defer a current tax and in addition lets your 401k investments grow tax free. Assuming equal contribution and withdrawal tax rates. So if you can match "tax free" in your taxable account then you are in good shape (it can be done). If your withdrawal tax rates are higher than your contribution tax rate, then you my be losing by going with the 401k. If your withdrawal tax rates are lower, then you gain an additional tax benefit. This can easily be the case if you ER before 59.5 with only taxable capital gains for income. As noted, the 401k may not be as useful before 59.5 and some taxable funds may be required, regardless of extra costs. Or 72t might be useful. Roth conversions can also help if you don't need income from the 401k.

The Roth also lets your investments grow tax free, with no worries about future high tax rates. So it should beat a taxable account in any case where current tax laws still apply.



You can try some of the math using a spreadsheet if you are so inclined.

 

[pb4uski]

I would consider fully funding a Roth(if eligible), if you are going to plow money into a taxable account. At least there you would get the benefit of eventual gains being non-taxed and you can (with stipulations) remove the contributions at any time.

What stipulations with contributions?

I think BigBob's point was after 5 years you can remove contributions without penalty, so the "stipulation" would be that the account if 5 years old.

But of course, you can remove contributions (or earnings) anytime, but if you don't meet stipulations (5 years for contributions and 59 1/2 for earnings) you will be subject to the 10% penalty unless you meet another exception.

 

[kaneohe]

I think BigBob's point was after 5 years you can remove contributions without penalty, so the "stipulation" would be that the account if 5 years old.

But of course, you can remove contributions (or earnings) anytime, but if you don't meet stipulations (5 years for contributions and 59 1/2 for earnings) you will be subject to the 10% penalty unless you meet another exception.

pb4uski, thanks. It was my impression that you could remove contributions anytime without a penalty.........in fact there is some chatter about using Roths for emergency funds for that reason. The 5 year part comes from (taxable) conversions which some call conversion contributions . So depending on what you call things can affect the rest of the sentence.

I prefer to call original contributions "contributions" and conversion contributions "conversions" and in that spirit the stipulations statement seemed unduly restrictive on contribution withdrawals.

 

[Cobra9777]

...In my opinion, people often overestimate the value of tax deferment...

...If your withdrawal tax rates are higher than your contribution tax rate, then you my be losing by going with the 401k...

...I'm not particularly fond of my employer's choice of funds... I kind of like the idea now of just doing taxable...

...My company does not match the 401k at all.That is part of the reason I went with the Taxable accounts.

I realize this is a complicated question, with lots of variables and no universal answers. And I think it's clear that having a mix of taxable and tax-deferred provides valuable flexibility, especially for early retirees. But I'm quite surprised at the willingness to dismiss the benefits of tax deferral, especially early in the accumulation phase. It's not so much about incremental tax rate differentials, or fees, or liquidity, or company match, or less-then-optimal fund choices. It's about using Uncle Sam's money to accelerate portfolio growth. Tax deferral makes more money available for investing, especially for young investors without much discretionary income. That impact over 30+ years is HUGE.

For us, the company match was gravy. We would have maxed out every year even without it. And yes, we tolerated fees and less-than-optimal fund choices for the same reason. Even if we end up in a higher tax bracket in retirement (virtually impossible under current law), that impact pales in comparison to the portfolio growth enabled by tax deferral.

We always maxed-out 401K accounts, and the tax-deferral enabled this to occur MUCH earlier in our careers than we would have otherwise been able to afford. Roths were not an option for us. But as our income grew in our 40s, and kids started dropping off the payroll, the taxable account grew very quickly. We ended up with a 50/50 mix of taxable/tax-deferred.

 

[Animorph]

Tax deferral is actually kind of a wash for a 401k with equal input and output tax rates, if you consider the internal growth as tax free. A tax of 25% going in or coming out has mathematically the same result. Hence the almost equivalence of traditional IRA's and Roth IRA's, if the Roth were limited to contributions equal to tIRA contributions minus taxes. The Roth actually comes out a little better because you can contribute more after-tax value to it. No tax deferral for the Roth.