Put less in my 401K?

[Hermes]

My numbers:

• Age 42
• $809k in retirement accounts (401k, ira)
• $700k in non-retirement accounts
• Goal: Early retire at age 50 (goal $1.5M - $2M in non-retirement accounts)
• Make about $140k per year
  • Edit: This is before bonuses, which can be an additional 12.5% - 25% of my income on top of my income

Currently, I'm contributing the maximum amount in the 401k each year. My employer will match up to 6% of my salary, which equals about $8k per year.

I'm wondering if it'd be worth putting the minimum amount into my 401k to get the employer match and then put the rest toward my non-retirement account. Yes, I realize I'd be giving up some tax breaks, and, admittedly, taxes are where I'm not strong in my financial education, hence the question.

Running the numbers:

• Assuming just putting in enough for the employer match plus the employer match, I should have (conservatively) $1.6M in my retirement accounts at age 50. Then, if I contribute nothing from age 50 - 67, it'll be $7.6M at age 67.
• If I added the money I'd normally be putting in my 401K to my individual account, it looks like it'll grow to $155k in 8 years

Thoughts? What am I missing/not considering?

 

[Surewhitey]

I'd still max out your 401k personally. You're in the 24% bracket and possibly 28% in 2026...you'll be able to do some big Roth conversions after 50...

You didn't mention your annual spend for more consideration.

 

[jazz4cash]

Weather you max out or not it is very very helpful to be diversified taxwise. Tax deferred, Roth, and taxable each have pros and cons. I kinda piled everything into the 401k (never maxed out though) because Roth was not an option. I had to course correct in the last few years.

 

[RetireBy90]

I would consider matching the tax deferred (401K) with after tax savings. This will add $17K per year to retirement savings. You will need the after tax for living expenses until age 59 1/2 when you can start drawing from retirement accounts. I would plan to do Roth conversions from 50 to 67, which is a whole different conversation covered many times here.

 

[bada bing]

It's possible you're saving too much in traditional (pre-tax). If you're saving the money anyway, it's hard to argue against Roth as the alternative to pre-tax for long term savings. Especially if your 401K allows in service roll overs. 401K's have individual rules and you have to know what your particular plan allows or doesn't to maximize your use of it.

You didn't ask, but some 401K plans allow what is called a "mega-backdoor Roth", which can be very useful to savers who exceed the normal saving limits of their plan.

 

[Hermes]

I'd still max out your 401k personally. You're in the 24% bracket and possibly 28% in 2026...you'll be able to do some big Roth conversions after 50...

You didn't mention your annual spend for more consideration.


Thank you for this! Annual spend is in flux at the moment due to moving to a new area, but I save at least 50% of my income each month.

 

[Hermes]

I would consider matching the tax deferred (401K) with after tax savings. This will add $17K per year to retirement savings. You will need the after tax for living expenses until age 59 1/2 when you can start drawing from retirement accounts. I would plan to do Roth conversions from 50 to 67, which is a whole different conversation covered many times here.

Oh yes, I'm also saving between $2k and $3k per month in after tax savings, on top of the 401k

 

[FlaGator]

If your income stops at 50, you need to manage liquidity for spending and possibly taxable income for ACA subsidies/health care for as much as 15 years.

I did it for 10 years with what I thought was a reasonable taxable portfolio. But old, low-cost positions in that account complicated it. I spent a lot of frustrating hours the last few years trying to balance taxable income and ACA thresholds. The larger your taxable account it, and the wider range of age of your holdings, the easier that will be.

 

[NgineER]

I’d max out the 401k until you retire, start a Roth IRA too if you haven’t. You have such a long time horizon that you are a perfect candidate for a Roth roll over ladder to manage your expenses and being in a low tax bracket. If you can truly save 24-26% now by deferring taxes and then withdraw at a lower rate it seems like a no-brainer to me.
Letting the 401k grow unfettered until 67 would be silly.
Drawing down the 401k over 17 years through Roth conversions or ladder would be the absolute best choice IMO.

 

[Surewhitey]

50% is awesome. I'd add to max out an HSA (if available) every year for future health expenses. 3x tax advantages... Better than the 401k imo. It adds up over time ($70k+ for us so far).

 

[latexman]

Doesn't your company have a Roth 401k? If not, I'd start politicking for one with the boss and HR. You have 8 more years, and it'd be helpful to you. Like someone else mentioned, start a Roth IRA (start that 5 year clock!).

I'd get the match (preferably by using a Roth 401k), start an HSA, contribute to Roth IRA, and put the rest in non-retirement accounts.

 

[Exchme]

OP is being very optimistic on return projections or is forgetting to adjust for inflation. On an inflation adjusted basis, a portfolio of 100% stocks has produced more like 6.7%, with tremendous variability. Op's projected values seem based on over 9% real returns. Also, OP may want to examine putting bonds in tax deferred accounts, that generally improves tax efficiency.

If OP leaves the money in taxable, taxes are paid now at 24% and then it creates tax drag in taxable year after year. What it gives you in taxable is easy access to spend it without bumping into things like limiting ACA premium credits. If available, using Roth contributions is an option, but would have to be looked at to see if that makes sense. OP should start a Roth IRA and make a contribution to it, even just a small one, as that gets one of the 5 year clocks started that could otherwise limit access to Roth money.

I suggest OP use a high fidelity financial model to give you some insights and let you look at trade-offs. The only tools I'm aware of that let you put your bonds in tax deferred while holding your portfolio asset allocation the same are the bogleheads.org Retiree Portfolio Model (free spreadsheet) and Pralana (pralanaretirementcalculator.com). RPM is more simplified in that it does not automatically calculate things like SS & medicare taxes while working, ACA premium credits at different income levels, taxes on capital gains or a return to the pre-TCJA tax system. There is a Monte Carlo variant (though I've never used it) but no historical modeling. Withdrawals and Roth Conversions are manually entered. Finding optimal Roth Conversions is very time consuming as you can't visualize the various tax phase-in thresholds and have to search around different sheets to figure out what might be causing a conversion to look attractive or unattractive.

Pralana has been a paid Excel sheet, but just came out with a subscription based online version as well. Both versions are outstanding, with tremendous power and flexibility and automatic or semi-automatic ways of handling all the things I wish RPM did better.

 

[USGrant1962]

Tax diversification is extremely useful for an early retiree. In ER, having a combination of:

• taxable (generally at sweat capital gains rates only on the gains),
• post-tax Roth,
• tax deferred tIRA/401(k), and
• tax-free HSA funds

lets you optimize gap bridging (between ER and 59.5, and between 59.5 and SS), tax cliff avoidance, and tax subsidy/break capture. And as NgineER points out above, it lets you levelize your tax rate during ER.

When working, I wasn't aware of RMDs, IRMAA or NIIT, and things like ACA subsidies didn't exist, so I mostly maxed out my traditional 401(k) and ended up with 75%+ of my stash in tax deferred. A really good result, but it could have been better optimized. I didn't have Roth options, but better balance between taxable and tax deferred would have given me more tax flexibility to levelize taxes, capture subsidies, do Roth conversions that are not on top of salary, and avoid certain tax cliffs and stealth taxes.

Bottom line is that you are doing great. Keep funding your 401(k) but look for ways to get money into Roth and HSA accounts. HSA is a no-brainer if available under your medical plan. It looks like your MAGI might be too high for Roth IRA eligibility (assuming you are filing single) but if Roth 401(k) is available definitely use it. If you need to lower your 401(k) contributions to fund Roth, that is a reasonable trade-off (especially as, under current law, future tax brackets will be higher).

 

[HI Bill]

I would get the company match with the 401(k), then as others have said, contribute to a ROTH 401(k) if available, and a ROTH IRA if not. Then anything left over can go towards a taxable brokerage account. I had limited ROTH contribution options because my employers didn't offer them throughout most of my career, and I sure wish they had! I'm now in a higher tax bracket than prior to ER, and sure wish I had more taxable and ROTH investments to lower my tax bracket!

 

[USGrant1962]

Ugh, I can no longer edit my terrible typo two posts above...

 

[Gallaher]

I would get the company match with the 401(k), then as others have said, contribute to a ROTH 401(k) if available, and a ROTH IRA if not. Then anything left over can go towards a taxable brokerage account. I had limited ROTH contribution options because my employers didn't offer them throughout most of my career, and I sure wish they had! I'm now in a higher tax bracket than prior to ER, and sure wish I had more taxable and ROTH investments to lower my tax bracket!

Do what HI Bill says. And dont worry, be happy you’ll never get the equation perfect. But you will get it very right.

Just need to brag, my total worth is $1.4mill more than when I was “laid off” from work 7 years ago. And my blood pressure is almost 10 points lower.
Don’t sweat it, you’ll do fine.

 

[Ronstar]

I maxed out my 401k every year. Now 10 years into retirement, my pretax ira portion of my portfolio is 90% of my portfolio. Our upcoming rmd’s will be significantly more than our expenses. Looking back, it may have made more sense to put less in my 401 and more into a Roth. I wish I had more after tax now, one reason is I may want to buy a new house and pulling from my Tira would create a taxable event that I don’t want.

It may be tough for the 42 yo op to figure out a best case scenario mathematically due to a variety of reasons, but I would look at lessening the 401k contribution some and funding a Roth.

 

[RetireBy90]

I maxed out my 401k every year. Now 10 years into retirement, my pretax ira portion of my portfolio is 90% of my portfolio. Our upcoming rmd’s will be significantly more than our expenses. Looking back, it may have made more sense to put less in my 401 and more into a Roth. I wish I had more after tax now, one reason is I may want to buy a new house and pulling from my Tira would create a taxable event that I don’t want.

It may be tough for the 42 yo op to figure out a best case scenario mathematically due to a variety of reasons, but I would look at lessening the 401k contribution some and funding a Roth.

I maxed out 401K for several years. For some reason, the last 4 or 5 years I started putting it into Roth 401K when they offered it. I still had about 75% in traditional 401K and IRA. I have since converted where today I'm about 70/30 Roth/Traditional. I didn't have a specific plan or strategy in place but I'm very happy I contributed to the Roth 401K when it was offered, even paying taxes at my highest income and tax rates.
I'm sure that your outcome will be different but I am sure I would pay a higher rate in the near future than I did. YMMV

 

[RxMan]

To the OP, you’re doing great! Keep up the great work saving and consider Roth conversions to diversify your portfolio.

I have a similar question so I thought I’d post it here.

I’m starting a new job after being out of full time work for over a year. I also turned 50 years old earlier this year. I’ve been freelancing this year but I haven’t made a lot of money (about $40K-$45K total). My only retirement savings this year has been to continue to max my Roth IRA contributions.

My new position doesn’t have much in the form of benefits due to being a contract job but there is a non-matching 401k with a Roth 401k option. I’m in the process of signing up for it now.

I have my old 401k sitting in a Fidelity account that is $1.1 million of which approximately $85000 is in the Roth 401k. I also have a Roth IRA that I contribute to the maximum that currently has a balance of $180000. I also have about $100000 in a taxable brokerage account.

My wife has less saved but much more of her savings is in a taxable account. We probably have about $400000 total in taxable accounts and roughly $1.8 million total through all accounts.

I wasn’t sure if I should try to max this new 401k or shift gears and direct more money to taxable accounts. Since I am 50, the maximum I could contribute to a 401k plan in 2025 is $31000 which would be a significant percentage of my income.

My hourly rate translates to about $130000 for this new job if I work for the full year in 2025. I’m wondering how to handle this new 401k contribution.

I’ve initially signed up to have 5% go to the traditional 401k and 10% go towards the Roth 401k. I’ve also shifted my 401k investments to be roughly 70% stocks, 20% bonds, and 10% cash equivalents which is a slightly more conservative investment allocation than I have been doing up until now. That contribution amount would be no where near the maximum amount allowed next year but it gives me some freedom to add money to my taxable brokerage account.

I’m also wondering if it’s time to start considering Roth conversions as a tax management strategy for my retirement savings. I think I’m just worried because my 401k is such a large percentage of our networth that the future RMDs will be significantly higher than necessary to fund our retirement lifestyle.

Are there any suggestions regarding how to handle these accounts? We’re probably targeting $6000/month for expenses in retirement but that amount could change. It’s hard to pinpoint an exit date but I’m planning on working another 5-7 years to age 55-57.

I’ve been freelancing this year and will continue to do it part-time while doing my full-time job. I could continue to freelance part time after quitting the workforce to provide some income. My income projections for next year did not include any income from my freelance work.

I guess that I’m worried that I spent too much of my focus on 401k savings during my career and now I need to diversify my retirement portfolio for tax management purposes. Any thoughts would be greatly appreciated!

 

[athena53]

I maxed out my 401k every year. Now 10 years into retirement, my pretax ira portion of my portfolio is 90% of my portfolio. Our upcoming rmd’s will be significantly more than our expenses. Looking back, it may have made more sense to put less in my 401 and more into a Roth.

Hindsight! I feel the same way. Maxed out 401(k)s but Roths were an option only the last few years of my career. I have enough income from pensions, SS and after-tax investments that "managing" my income to qualify for ACA subsidies in the 4 years till I qualified for Medicare was never an option.

OP, it's hard to say. The conventional wisdom used to be that you'd be in a lower tax bracket in retirement but that hasn't been true for me and of course you get hit with IRMAA surcharges on your Medicare premiums and steep RMDs when you hit 73. Any money you take out of pre-tax funds is 100% ordinary income- no favorable treatment for LT gains or dividends. That's a big drawback for me. I'm moving to Iowa a couple of years earlier than planned (DS and family live there) because Iowa doesn't tax IRA withdrawals and my state does.

Tax laws change so it's a moving target. OP, my advice would be to do what you need to do to get any 401(k) match, preferably in a Roth, and put the rest in after-tax but that's my own hindsight. And, as Ronstar notes later in the post, after-tax funds are more easily accessible if you need them.

 

[RetireBy90]

To OP and RxMan, I maxed out Roth my last few years of work, and spent last 5 years doing conversions so I’m about 70/30 Roth to Traditional. My after tax was low and even worse now as I paid tax on conversions.
I thought I knew taxes would be lower early on, so took the deductions for 401K and IRA contributions. Then I thought i knew taxes would be higher in 2026. Now I know I don’t know.
Now I’m happy with good balance between Roth and traditional accounts. I’m 68 so watching IRMAA. Get good balance between account types and don’t ignore impact of susviving spouse being in higher tax brackets.

 

[Kings over Queens]

I'm wondering if it'd be worth putting the minimum amount into my 401k to get the employer match and then put the rest toward my non-retirement account. Yes, I realize I'd be giving up some tax breaks, and, admittedly, taxes are where I'm not strong in my financial education, hence the question.

Thoughts? What am I missing/not considering?

If it were me, after taking the company match, I'd put money in my Roth before my taxable account. This assuming you don't think you'll need the taxable account money soon. I'd rather have the flexibility of pure tax free income later.

 

[Montecfo]

I mostly saved in tax deferred. But a couple of times in my career when my earnings dipped ( I went to work for a startup) I did a Roth conversion back when you could pay taxes over 3 years. Otherwise I did some roth contributions at max when I qualified (mostly after I retired by spounse still working). Long story short (and with aggressive investing) I ended up with a good bit in Roth.

But I never substituted one for the other.

Not sure you should either, unless you hit a lull in earnings.

Post retirement but pre age 73 is best time I think. Then you have the best view of tax rates current and future. It is really impossible for you to know that now.

 

[Texas Proud]

Can you max out the annual limit?

Just me but I would not put any more in regular 401... ROTH all the way... you do not get current tax saving but you do get options later in life...

I am currently taking most of my money out of ROTH to get the ACA credits... my taxable IRAs are growing big now and RMDs are going to hurt... it is not what you have today that would sway my decision but what I think I would have 10 to 15 years from now... your $1 mill could easily be $2 mill..

 

[SnowballCamper]

I'd think hard on the spending model for age 50-59.5 and focus on getting the not tax deferred account(s) up enough to meet the spending plan. 700k/10 years is only 70k per year. But you're right to contribute enough to get the company match all along the way. There are ways to get money out of the IRA before 59.5 (SEPP / 72t plan) but you get locked in to a small amount (based on life expectancy) until the latter of five years or age 59.5. A combination of drawing the non tax deferred accounts down with a 72t plan would be an option.