Reduce Contribution?

[Enjoy the Ride]

Hi,

I wanted to run this by someone and thought this group would know what I'm talking about. My wife and I are currently 46 and wondering if we should reduce our 401k/409a contribution. We've been used to maxing our 401k and 409a deferred comp contribution but that takes us further away from 24% tax bracket. We're trying to stay as close to 24% tax bracket as possible and we can do this if we reduce our 401k and 409a contribution to only get up to employer match. Reasoning for this is below.

1. We currently have about 1.2M in IRA/401k and 200k in 409a so, assuming I work till at least 60, this is going to get really big so my tax bracket isn't going to be lower tier. I'm thinking we'll be at least mid tier tax bracket when we start taking withdrawals.
2. 24% tax bracket is historically low for mid tier tax bracket so better to take advantage of this now.
3. We need some cash now but, once that's done in about 2 yrs, I'm thinking about doing Roth 401k contribution up to as close to 24% tax bracket as possible.

We're so used to just auto pilot maxing 401k/409a contribution so just wanted to run it by with this group. Thank you in advance for any feedback and feel free to ask for more detail.

 

[SnowballCamper]

Do you have anything in a regular (taxable) brokerage?

So you want to limit your use of the tax deferred contribution up to the 24% tax bracket (only willing to pay 22%), or up to the 32% tax bracket (so paying 24%)?

It is very helpful to have a chunk in brokerage (taxable) in case you decide to retire before 59.5, or for medical insurance before medicare.

It seems a wash to avoid the 2% jump from 22% to 24% based on the assumption that you're going to be in the 24% bracket in 15 years. Building a stash in the brokerage to have easy access before 59.5 is worth the 2% difference today, IMHO.

 

[Koolau]

Yeah, this one is tough to figure. In concept, you can save "too much" in qualified investments (tIRAs, 401(k), etc.). Once you begin to use the money (or more likely are required to take it via RMDs) the tax situation may be out of your control - not to mention things like IRMAA and NIIT.

Planning ahead is difficult because you don't know your future income, you don't know when you will retire, you don't know inflation and it's effects on taxes, etc., you don't know your investment growth rate and you certainly don't know how the laws might change.

SO, taking the company match is the first "no brainer." After that, get a (big) back of an envelope and do some "what if" calculations. Hold your breath (and your nose) and take a stab at a strategy.

I ended up with way too much in qualified investments and had to do a lot of Roth conversions before RMDs. You have the added advantage of age 75 for RMDs (while I had to take at 71). MY BIGGEST problem was retiring with too little CASH. It's different for everyone.


Feel free to bounce ideas off of us.

All the best in figuring this out.

 

[Al18]

Considering you are in the 22% tax bracket, you’ll likely want to continue putting 70% of your savings in the 401k/deferred comp plan for the tax savings. I would contribute $7k to a RothIRA, and the remainder in an iBond (currently paying 4.03%) and a brokerage account in a CD/stock index fund. If you think you’ll be in the 12% tax bracket once retired, you’ll be able to sell the stock funds at the 0% LTCG rate.

 

[SecretlyFI]

It is very helpful to have a chunk in brokerage (taxable) in case you decide to retire before 59.5, or for medical insurance before medicare.

It seems a wash to avoid the 2% jump from 22% to 24% based on the assumption that you're going to be in the 24% bracket in 15 years. Building a stash in the brokerage to have easy access before 59.5 is worth the 2% difference today, IMHO.

+1. I’m living this right now and SO glad I hoarded cash and taxable brokerage money the last few years. The impact on ACA premiums is immediate when you retire (assuming pre-65) and substantial. It means the difference for us of premiums of $396 a month instead of $2218 a month, starting 1/1/26. If you don’t have available cash flow to keep income under the subsidy cliff, the $$$$ premiums are very painful.

My projections show we will owe 0 federal taxes for the next few years. Eventually I’ll do a deep dive on post-65 planning, roth conversions and RMD’s. But that longer term planning takes a back seat to health insurance strategies until medicare, for now.

 

[GrayHare]

It's good you are thinking about this since a large tax-deferred amount can lead to large taxes. If I had it to do over, I'd save less (but not zero) into deferred accounts and more into taxable accounts because capital gains in the latter receive more favorable tax treatment.

 

[Koolau]

Yeah, I never had to do the ACA thing (much too old to have experienced that) so I forgot to mention it.

Some very good advice so far. I'm guessing some others will chime in with more.

 

[Enjoy the Ride]

Thanks everyone for responding. Overall, sounds like I'm not completely crazy so that's good. For ACA, my wife works for local gov't and they have an awesome plan where we can be in gov't plan with employer subsidy even if we retire pre-medicare. If this somehow changes, I might work till medicare kicks in. No one knows the future but I'm pretty happy working.

Thank you for also pointing out importance of putting money in taxable brokerage.

 

[NomDeER]

For ACA, my wife works for local gov't and they have an awesome plan where we can be in gov't plan with employer subsidy even if we retire pre-medicare. If this somehow changes, I might work till medicare kicks in. No one knows the future but I'm pretty happy working.

As a retired government employee, I have health insurance. I waited until I was eligible for it before I retired early. But, there were times where funding for my job was iffy, and I was looking at health care alternatives.

Even though I'm not worried about qualifying for the ACA subsidies, I still think that I probably put too much in my tax deferred accounts. I'm almost certainly not going to be in a lower tax bracket when I start withdrawing and could very well end up in a higher one, especially with RMDs.

When you're figuring this stuff out, try to figure out what you would tap before 59.5 if you end up retiring early by choice or necessity. And, if you are thinking about what you want to leave to heirs, you may want to consider the implications for them of tax deferred versus brokerage (likely step up in value) and Roth (likely tax free over ten years). Also consider the tax implications if/when one of you is widowed.