401k or Taxable, which would you contribute to?

[StikyBoots]

Here's the scenereos.

Currently:
401k - 10% + 4% company match
HSA - Maxed
Roth IRA - Maxed
$1500/mo to student loans.

This puts me into the 25% tax bracket by $1-2k but in a couple months the $1500/mo student loan payment will drop off as the only remaining ones are at 2.8%.

I'm single, no kids, 30 and looking to FIRE in 15 years. I know these statuses can and most likely will change but it's what I have now and can revise later.

So would you take the $1500/mo and place it in a taxable account, contribute to the 401k, or make Roth 401k contributions? Being that it is monies taxed at the 15% bracket I'm leaning towards the taxable account contributions for my 45-59 retirement phase. But I'd really like other thoughts and ideas to consider.

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[Whisper66]

If your income level allows, first thought would be to put it into ROTH. If funds are
you can withdraw the contributions anytime without penalty. The earnings must sit for 5 yrs before you can pull them without penalty. If not needed, the funds would grow tax free in the ROTH.

 

[growing_older]

Roth. In fact if you can Roth more of your 401k you might consider that as well.

 

[mathjak107]

i would do 401k up to match , then roth , then taxable

 

[surferLife]

Hard to answer since we don't know where you currently are with investments and such. Also, free money is hard to turn down. The answer depends on what your balances are and where you need to bump it up. How much do you expect you'll need in a taxable account and have you calculated that into your 15yr timeline? I'd focus your efforts on the retirement accounts first (Roth 401k for sure if you're in the 15% bracket), get that to where you need it, and then do the taxable account after that. Building up your retirement account will go much faster with the matching, so don't turn that down if you still need to build them up. If you already have enough in retirement accounts, then you can start in on taxable. You'll probably want to use some calculators and know your budget to determine how much you'll need. Might want to increase it for being married with kids..... just to plan ahead. Granted, marriage might not happen for you, but statistics are against you on that.

 

[pb4uski]

I would increase my 401k to bring me back down to the 15% tax bracket and then do taxable account (in equities). As long as you can stay in the 15% tax bracket your dividends and LTCG on your taxable account equities will be tax free... tax-free growth like a Roth but without the constraints of a Roth and will provide funding from ER to 59 1/2.

 

[target2019]

How is your 401k rated? It may be at Brightscope.

The expenses in your plan will help set course.

As mentioned, increase 401k contribution to get back to 15% bracket. Invest the 1500 in two or three accounts and change the amounts as needed.

 

[kaneohe]

If your income level allows, first thought would be to put it into ROTH. If funds are
you can withdraw the contributions anytime without penalty. The earnings must sit for 5 yrs before you can pull them without penalty. If not needed, the funds would grow tax free in the ROTH.

The earnings will be taxed and penalized if you are < 59.5y.o. when you withdraw them.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

 

[kaneohe]

I would increase my 401k to bring me back down to the 15% tax bracket and then do taxable account (in equities). As long as you can stay in the 15% tax bracket your dividends and LTCG on your taxable account equities will be tax free... tax-free growth like a Roth but without the constraints of a Roth and will provide funding from ER to 59 1/2.

I like the idea of a traditional 401K to drop the bracket back into the 15% range. Be aware what that means tho.....your taxable income (including DIV/LTCG) needs to remain within the bracket otherwise you will incur 15% or even 30% marginal rates depending on which type of income increases out of control.

Sounds like you are maxed out on Roth IRAS so I would consider the Roth 401K as long as you convince yourself that when you ER, some funds , at least, will be available to you . I don't know the Roth 401K rules that well but I believe if you rollover the Roth 401K funds into a Roth IRA, the contributions from the Roth 401K should be available.......but you should convince yourself this is true first. Taxable is good if you can stay within the 15% bracket, but perhaps the Roth 401K might give you more leeway if you can work around the constraints..

 

[StikyBoots]

How is your 401k rated? It may be at Brightscope.

The expenses in your plan will help set course.

As mentioned, increase 401k contribution to get back to 15% bracket. Invest the 1500 in two or three accounts and change the amounts as needed.

Unfortunately my 401k is not rated at Brightscope. Currently I would consider my investment opertunities within the 401k rather lackluster. Target date and managed funds with gross expense ratios of 0.76% to 1.26%. But I have been bothering our CFO about adding an index fund and it sounds like we will be getting access to the Fidelity Spartan 500 Index Fund, which I am excited about! A week from today we are are having a meeting about it and free BBQ. Usually I'm more excited about the free BBQ than the meeting material, but not this time! I do think the addition of the Spartan 500 will make the value of the offerings more attractive to me.

I'm going to have to read up on the Roth 401k, I did not realize the contributions could be withdrawn early without fee after 5 years. This has great potential for the 45-59.5 years which is what I would be working on with taxable accounts. Between that and increasing my Traditional 401k to put me solidly into the 15% bracket, I got something good from you guys to think about.

 

[RetireAge50]

It is good to have some tax deferred amounts in retirement as a lot of it will have zero tax (due to personal exemptions and standard deductions). Then if you spread the remaining amounts over all your retirement years it will likely be taxed at 15% or less.
There should not be too much concern about the 10% penalty for early withdrawal. You can use a number of methods to get around this like using a 72t or a Roth conversion ladder.
I would put the maximum into the tax deferred 401k (especially if in 25% marginal tax bracket), then put the maximum into Roth/Roth401k, and lastly to taxable accounts.

 

[ziggy29]

I'm a fan of diversifying retirement investments -- fully taxable, tax-deferred (like 401K and TIRAs) and Roth investment vehicles. Having all of them gives you the maximum flexibility in terms of "engineering" the appropriate amount of taxable retirement income.

That said, if I could pull it off, based on what you have said I'd put just enough into 401K investments to try to get down to the 15% bracket and use a Roth with the rest.

 

[kaneohe]

I'm going to have to read up on the Roth 401k, I did not realize the contributions could be withdrawn early without fee after 5 years. ............

Not sure that anyone said that or if it is true........I got the impression that if you withdraw before age 59.5, the withdrawal is prorated between earnings and contribution basis so there may be taxes/penalty on the earning part?

I did get the impression from this example of a rollover that there might be some possibilities:

"Are there any examples to help explain the rollover rules?
Yes, the following examples illustrate the rollover rules.
Bob receives a $14,000 eligible rollover distribution that is not a qualified distribution from Bob’s designated Roth account, consisting of $11,000 of basis and $3,000 of income. Within 60 days of receipt, Bob rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of basis. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Bob’s gross income."

Retirement Plans FAQs on Designated Roth Accounts

For confirmation of any matters related to your situation, I would suggest posting your question in the retirement forum of fairmark.com and watch for a reply by Alan S.

I have the impression if you do a rollover that there is a 5 yr rule determined by the age of your Roth IRA (not your Roth 401K) so it would be useful to be sure your Roth IRA has that age when you want to withdraw. I have the impression that you are already using Roth IRAs
(maxed, you said) so this probably is not a problem for you.

some interesting reading: https://www.google.com/?gws_rd=ssl#q=distribution+from+roth+401k++site:+fairmark.com

 

[nash031]

Once we cross into the 28% bracket here next year (probably), I'll likely shift my TSP (403b) to Roth contributions so I have more to draw on in those 15 or so gap years as others have mentioned. Until then, the combined $35K in deductions are keeping us down a tax bracket...

 

[thefinancebuff]

So would you take the $1500/mo and place it in a taxable account, contribute to the 401k, or make Roth 401k contributions? Being that it is monies taxed at the 15% bracket I'm leaning towards the taxable account contributions for my 45-59 retirement phase. But I'd really like other thoughts and ideas to consider.

No taxable until 401k is maxed out. Do additional as Roth 401k if you'd like.

 

[RunningBum]

I don't see any reason to make additional 401K contributions once you get down to 15%, except to make room for taxable cap gains and dividends at 0%. Otherwise, you will likely be withdrawing the 401K at 15% or possibly higher. You could just as easy invest in a taxable account and hold onto investments long enough for 15% LTCGs, and 15% dividend--or lower if you stay under the 15% bracket. I can't think of a situation where LTCGs and qualified divs have worse tax treatment than regular (including deferred) income. The tax is either the same or less.

I'm not familiar enough with Roth 401K to know the withdrawal rules to get you to 59.5. 5 years after opening your Roth IRA account you can tap that.

 

[hnzw_rui]

I'm not familiar enough with Roth 401K to know the withdrawal rules to get you to 59.5. 5 years after opening your Roth IRA account you can tap that.

Roth 401k is minimum 5 years after account opening and age 59.5 for penalty-free withdrawals. They're also subject to RMDs.

If you rollover Roth 401k to Roth IRA, Roth IRA rules apply. Same as Roth IRA, basis/contributions can be withdrawn penalty-free and tax-free prior to age 59.5. Earnings are subject to a 5-year account minimum (based on age of your oldest Roth IRA) and age 59.5. Unlike Roth conversions, there's no 5-year holding period for Roth 401k to Roth IRA rollovers. The basis/contributions are automatically treated the same as if they were contributed to Roth IRA in the first place. No RMDs, either. Mind, you might want to keep rollover money separate from your regular Roth IRA to keep ERISA protection.

 

[StikyBoots]

Based on the thought provoking discussion I am going to up my 401k contributions to be about 1-2k under the 25% bracket cutoff. That'll save me especially if I get a Christmas bonus!

I'm going to sit on the taxable vs Roth 401k till 3rd quarter of the year (can only change 401k contributions quarterly) and see what the new index fund in our 401k is and what it's fees are.

Or maybe I'll go buy a new (used) motorcycle as celebration for paying off the student loans!!!

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[surferLife]

+1 motorcycle


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[GTFan]

I'm a fan of diversifying retirement investments -- fully taxable, tax-deferred (like 401K and TIRAs) and Roth investment vehicles. Having all of them gives you the maximum flexibility in terms of "engineering" the appropriate amount of taxable retirement income.

Exactly right - I have approx. 50/50 mix of taxable and deferred and having just retired at 51 now have the flexibility to use my taxable for the next 8 years without having to do 72(t) withdrawals or other games for early distros from the deferred accounts.

OP, max out the 401k to get down into the 15% bracket (if you can), do yearly Roth, then setup automatic investments from savings to whatever taxable funds you want. I started putting $500 a month into Vanguard S&P 500 index twenty years ago (or so), then upped it to $1k a month. Do as much as you feel comfortable with.