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Is it time to start scaling back my 401k?
12-22-2016, 08:48 AM
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#1
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Thinks s/he gets paid by the post
Join Date: Aug 2005
Location: Crownsville
Posts: 3,746
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Is it time to start scaling back my 401k?
I know this is probably a question that only I can answer, in the end, but figured I'd throw it out there.
Back in 2005, I was able to contribute the federal maximum to my 401k, and gotta admit, it felt good to do so. Ever since then, I've been maxing out my contribution. On top of that, I also contribute the max to a Roth IRA, and any after-tax investing goes into either mutual funds or an online brokerage.
Anyway, here's my current situation. I'll be 47 in April. Ideally, I'd like to retire around 51, although I'm willing to push that back a bit, if need be. I have about $450K in tax deferred accounts (401k, rollover IRAs), $590K in after tax accounts (mutual funds and the online brokerage) and $95K in the Roth.
If I retire when I want to, I won't have access to the tax-deferred stuff for another 8.5 years without penalty, so I'm starting to wonder if I should cut back on the 401k, and use that money to beef up my after-tax accounts, to help me bridge the gap to 59.5?
I'd still contribute enough to at least get the company match, which means I'd scale back to around $3000 per year, versus the $18K I'm putting in this year. But then, that $15K would get hit with taxes, and in my bracket, I'd only see about $10K. Over the next 4 years, that's only $40K that would go into the after-tax, which isn't really an earth-shattering amount.
So, maybe I'm just over-thinking this situation, and whichever choice I do make, in the end there's not that much difference?
Is there anything I'm missing? Oh, as for expenses, I've budgeted for $60K per year, and FireCalc says I have a 98% chance of achieving that, once you factor in SS. And $60K per year would give me enough wiggle room that I could cut back if I had to.
As always, I appreciate any comments, opinions, insight, etc!
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12-22-2016, 08:58 AM
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#2
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,925
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Keep maxing out the 401K. You can always get access to the money with a 72t disbursement.
You never know how much the 401K can grow to. I am surprised at the value of mine. It also teaches you to get by on less money now, even though you have it available.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
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12-22-2016, 09:03 AM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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$60k * 8.5 years = $510k that you would need to carry you from retirement at 51 to 59.5... so you should have plenty in after-tax savings when you retire at 51 given that you have $590k in after-tax savings now.
I would continue what you have been doing because of the tax benefits... you're saving 28% or 33% in tax now and from 51 until 70 can do low cost Roth conversions at probably 10% or so... and that 18-23% in savings adds up quick.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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12-22-2016, 09:12 AM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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+1
One needs to have enough after-tax money to live on till 59-1/2, and the OP seems to do. The 72t penalty-free withdrawal is too restrictive, and I am glad I did not need that.
Once the earned income stops, the OP can immediately do Roth conversions to line up more penalty-free money for future spending.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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12-22-2016, 10:59 AM
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#5
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Thinks s/he gets paid by the post
Join Date: Aug 2013
Posts: 1,660
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Keep maxing out all tax deferred (and Roth accounts). Later you will likely be in lower tax bracket. Plenty of ways to get money without penalty. 72t, Roth contribution ladder, home equity. Even taking the penalty would be better than paying taxes now.
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12-22-2016, 11:57 AM
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#6
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Thinks s/he gets paid by the post
Join Date: Aug 2005
Location: Crownsville
Posts: 3,746
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Thanks guys...I had a gut feeling the consensus was going to sway towards maxing out the 401k.
I never really thought about a Roth conversion, partly because I didn't understand it, and, I guess I figured I'd be okay without having to do it. But, I can see the advantages of it.
When they talk of "Traditional" IRA though, would that simply mean any IRA that's not a Roth? Two of my IRAs are Rollover IRAs, old 401ks that were rolled over once I left the company. One of them is called a "BDA" (Beneficiary Designation Account) that I inherited from my grandmother. Would the Rollovers and BDAs be considered "Traditional", or fall under some other category that would make them inelligible for a Roth conversion?
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12-22-2016, 01:08 PM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Inherited IRAs cannot be converted to Roth IRAs. They are what they are. If they start out as inherited Roth IRA, they are a Roth IRA. If they start out as a traditional IRA, they are a traditional IRA. OTOH, there is no penalty for withdrawing them early. That is, one has the RMD, but one can always withdraw more than the RMD if they want to.
A rollover IRA is typically a tax-deferred IRA which is a traditional IRA. But it could be rollover from a Roth 401(k), then it would be a Roth iRA.
The semantics between Roth and traditional is simply that withdrawals from a Roth (whether inherited, from a rollover (say from a Roth 401(k)), or not) are not taxed, while withdrawals from tax-deferred account are taxed (except for the bits that were non-deductible contributions).
So one had better get this all straight in their mind before they go off and cost themselves some penalties and taxes that could be easily avoided.
IRS Publications 590A and 590B are the go-to sources for information. Happy Reading!
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12-22-2016, 01:14 PM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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In the beginning there was only the IRA, which could be a rollover from a 401k. Roth IRA was created later, hence the original was called Traditional for a distinction.
LOL explained it well above, with the ramifications of the inherited IRAs with its pre-59-1/2 RMD for non-spousal beneficiaries, etc...
By the way, I am glad I never made non-deductible contributions to a traditional IRA or 401k. Mingling the two creates another level of bookkeeping. I already have to keep track of the basis of reinvested MF distributions, which gets tedious when they accumulated over decades.
We do have separate Roth accounts though.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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12-22-2016, 01:33 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by NW-Bound
....By the way, I am glad I never made non-deductible contributions to a traditional IRA or 401k. Mingling the two creates another level of bookkeeping. I already have to keep track of the basis of reinvested MF distributions, which gets tedious when they accumulated over decades. ...
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+1
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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12-24-2016, 10:21 PM
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#10
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Confused about dryer sheets
Join Date: Dec 2016
Location: San Diego
Posts: 7
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Don't stop investing in your 401k unless you need to. My father stopped around your age... My mother continued and hers is 5 times his. It is worth it to keep investing.
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12-29-2016, 08:57 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Nov 2013
Location: Twin Cities
Posts: 3,941
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If you can make it to 55+ and then quit, you can likely access your 401k penalty-free. That's our plan. The 55+ provision is common but I had to dig to verify the rules in our plans, because the administrators hardly ever get that question since so few people have saved enough to even considering FIREing. I got dumb looks, then had to keep reminding HR to check, who finally responded, "Yeah, I guess you're right." Note that this 55+ provision does not apply to IRAs.
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12-30-2016, 11:26 AM
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#12
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Recycles dryer sheets
Join Date: May 2016
Posts: 317
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The 55+ departure while employed with company with the 401K is an IRS rule. I'd be surprised if a company does not allow this when the IRS allows it.
Maybe hanging on from age 51 to the Year in which the Op turns 55 might be feasible.
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12-30-2016, 12:04 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Dec 2015
Location: Santa Paula
Posts: 4,076
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Quote:
Originally Posted by Senator
Keep maxing out the 401K. You can always get access to the money with a 72t disbursement.
You never know how much the 401K can grow to. I am surprised at the value of mine. It also teaches you to get by on less money now, even though you have it available.
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I agree, when I converted my 401K to a self directed IRA in 2009 when I retired, it was worth less than 1/3 of what it is now.
__________________
Retired Jan 2009 Have not looked back.
AA 60/35/5 considering SS and pensions a SP annuity
WR 2% with 2SS & 2 Pensions
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12-30-2016, 12:11 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by CDRE
The 55+ departure while employed with company with the 401K is an IRS rule. I'd be surprised if a company does not allow this when the IRS allows it.
Maybe hanging on from age 51 to the Year in which the Op turns 55 might be feasible.
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some plans don't - mine doesn't
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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12-30-2016, 12:33 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,604
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Quote:
Originally Posted by Big_Hitter
some plans don't - mine doesn't
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Your plan doesn't allow distributions from your 401k after you have separated from service? This doesn't sound right.
Assuming the plan will give you a distribution, the additional 10% penalty can be waived by you on IRS form 5329 line 2 Exception 01 if the following applies:
"Qualified retirement plan distributions (does not apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). "
The company is not involved.
reference: IRS From 5329 instructions Chapter 2
-gauss
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12-30-2016, 12:36 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by gauss
Your plan doesn't allow distributions from your 401k after you have separated from service? This doesn't sound right.
Assuming the plan will give you a distribution, the additional 10% penalty can be waived by you on IRS form 5329 line 2 Exception 01 if the following applies:
"Qualified retirement plan distributions (does not apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). "
The company is not involved.
reference: IRS From 5329 instructions Chapter 2
-gauss
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it allows distributions but I think we get a 10% hickey if we take them before 59.5 and don't roll them over - let me double check
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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12-30-2016, 12:42 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Gauss - you are right - I don't get the hickey if I quit after 55
not sure why I missed that the first time I read it
__________________
You can't be a retirement plan actuary without a retirement plan, otherwise you lose all credibility...
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12-30-2016, 12:54 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Aug 2011
Posts: 3,604
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Good to hear Big_Hitter!
Advice to others investigating the rule of 55 with regards to 401k distributions that avoid the 10% penalty:
If anyone calls their 401k plan administrator or reads the terms the question to ask is "When am I allowed to take a distribution?" Leave it at that -- Keep it simple. Don't complicate the question by asking the plan administrator to give you tax advice.
The age 55 exception to qualified plan distributions is between you and the IRS. The company/plan administrator is not involved.
The only thing that you may wish to get from the company is a letter acknowledging your separation of service and the date that the separation is effective.
-gauss
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12-30-2016, 01:02 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2013
Posts: 11,078
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Quote:
Originally Posted by CDRE
The 55+ departure while employed with company with the 401K is an IRS rule. I'd be surprised if a company does not allow this when the IRS allows it.
Maybe hanging on from age 51 to the Year in which the Op turns 55 might be feasible.
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Well be surprised.
Your correct the IRS says that they can distribute. The proper verbiage has to be in the Summary Plan Description(SPD), some omit this. Then the custodian has to have the ability to do a partial distribution, some don't.
There's a bunch of stories on the board about plans that do not allow penalty free distributions at 55.
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12-30-2016, 01:20 PM
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#20
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Recycles dryer sheets
Join Date: Oct 2011
Posts: 107
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Lots of advice to put all future contributions in 401k funds. While OP only needs about $510k in after-tax funds I would plan for closer to $1 mil in case of steep losses just before RE. These after-tax funds aren't going to be tapped at 4%. More like 12% which doesn't allow for recovery if you hit a bad sequence of returns.
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