Case against maxing 401k (pre-tax)

[element926]

Hi all,

I'm 26 and currently maxing my employer 401k (18k + 4.5% match of salary so give or take +8k).

I recently talked to an investing consultant and they recommended that I decrease the amount I put into my 401k and put it in other taxable accounts. The reasoning behind it was that if I stuck to this model when I do have to start pulling money from the 401k at the required age of 70. If the 401k was let's say 5 million that means I would be required to withdraw 100k+ per year (and then get taxed at a high tax bracket). Eliminating the theory behind being in a lower tax bracket when I'm retired and paying less taxes when pulling from your 401k.

The thought was to start putting more into other accounts because then I would only be taxed a long term capital gain rates vs. regular income rates of the pre-tax 401k when in retirement

Any thoughts here?

[Jluke]

The investing consultant will make more money off of you if you are actively putting money in a taxable account. Assuming that you would use this person for your investments and they get AUM plus fund fees. .

Otherwise I like to have several buckets of investments - 401k, Roth and taxable.

[disneysteve]

Do you qualify to fund a Roth?

[element926]

Fair point, that might be what they were trying to push me towards.

I cannot directly deposit into a Roth IRA, but I did take advantage of the backdoor IRA (traditional IRA and immediately convert to roth at $5,500). That's my only tax free account (the rest is pre-tax 401k, vanguard, robinhood, pre-tax HSA)

[bjl584]

I recently watched a video where a guy was totally against retirement accounts. Basically, the idea was that 401k plans are a scam designed to keep the middle class in the middle. It locks your money away for decades and prevents you from being able to have access to capital to make investments today. His argument was that rich people don't have 401k plans. They are rich today not 40 years from now, and they have much more control over their money than the middle class does. Some would call this view point extreme. The point is, I don't totally max out my 401k. I do like having access to my money in the present should an opportunity arises. It's your call how to approach. I'd say, at least contribute to the match. You can switch to taxable accounts after that if you want.

[element926]

Big picture:

95k 401k (pretax)
60k (S&P 500 admiral vanguard)
25k (vanguard/select funds)
5.5k (roth IRA/healthcare sector)
5k (pre-tax HSA)

So BJ to your point - I absolutely try to invest in other taxed accounts + real estate. I guess the question is here if I can do both do I decrease the pre-tax 401k contributions to do more in taxed accounts?

[AJ444]

Do you have a Roth option in your 401k? Depending on your tax bracket that may be he better play now than traditional.

I think it's horrible advice telling a 26 year old not to max their 401k when they are able to. Marriage, homes, kids etc. can very well take away your ability to max in the future and you will wish you had in your 20's.

[element926]

AJ - yep. I do have a roth option, but I haven't used it yet since I kind of liked the tax benefits from pre-tax contributions.

[Jluke]

Big picture:

95k 401k (pretax)
60k (S&P 500 admiral vanguard)
25k (vanguard/select funds)
5.5k (roth IRA/healthcare sector)
5k (pre-tax HSA)

Only 4.05 million to go to get to 5 million in 401k. 18k times how many years?

If you're not eligible for a direct Roth IRA contribution chances are maxing out the traditional 401k should be fairly easy at this point and it helps to reduce your overall taxable income and reduces the amount of tax you owe now.

Now is the time to accumulate your savings and let the compounding work for you. Time in the market is a favorite saying for investors.

[AJ444]

AJ - yep. I do have a roth option, but I haven't used it yet since I kind of liked the tax benefits from pre-tax contributions.

Roth 401k contributions are not subject to RMD's if they are rolled to a Roth IRA, if the financial consultant didn't tell you that I'm pretty sure what others have suggested in that they were trying to get you to toss more in a taxable account for them to make more money off you is validated.

Personally I tried to keep a mix of Roth/Traditional until I hit the 28% tax bracket and then I switched it all to Traditional.

[corn18]

What is your current marginal tax bracket? How much do you save each year? Do you qualify for a deductible IRA or Roth IRA contribution?

You are right in that RMD's will start at age 70. If you had $5M in a 401k at that time, you would be required to withdraw $182,481 each year. That's a lot.

This might be good reading:

https://www.bogleheads.org/wiki/Prioritizing_investments

I think you could max the 401k or just contribute to the employer match and boost your taxable. Just be careful with tax efficiency in your taxable:

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement#Tax_efficiency_of_various_asset_classes

[disneysteve]

You are right in that RMD's will start at age 70. If you had $5M in a 401k at that time, you would be required to withdraw $182,481 each year. That's a lot.

Is it, though. You're talking about 45 years from now. Also, that's only if he waits until 70 to start drawing on the account. You can lessen the annual draw by starting earlier. I realize that has tax and investment consequences but it lessens how much you need to draw each year.

[TexasHusker]

I recently watched a video where a guy was totally against retirement accounts. Basically, the idea was that 401k plans are a scam designed to keep the middle class in the middle. It locks your money away for decades and prevents you from being able to have access to capital to make investments today. His argument was that rich people don't have 401k plans. They are rich today not 40 years from now, and they have much more control over their money than the middle class does. Some would call this view point extreme. The point is, I don't totally max out my 401k. I do like having access to my money in the present should an opportunity arises. It's your call how to approach. I'd say, at least contribute to the match. You can switch to taxable accounts after that if you want.

I'm actually quite on board with the video you reference.

[element926]

A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.

[corn18]

A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.

With 3% inflation, that $186k at age 70 is equivalent to $50k in today's dollars. Inflation is an ugly beast.

I think your mix is just right. Your saving 33% in taxes now on the 401k contribution. That's an extra $6k in savings each year. Who knows what taxes will be in 44 years. Keep doing what you're doing. And don't ever pay anyone to give you financial advice. Unless it's a fee only fiduciary. Then it might be ok.