Should you Max Out and Frontload 401K early?
01-29-2021, 08:58 AM
#21
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Joined APC: Nov 2012
Position: 1900D CA
Posts: 3,391
A lot of the advice posted above is correct.
The most important thing is: Max the 401k out! If you do it early or spread it out, just max it out!
The next thing is to watch the fees. Big fees add up more than people realize. If you are investing with an advisor that charges the standard 1% and they put you in funds that have fees up to 1%, you are getting absolutely killed. A 2% total fee after 30 years will cut your money by about 1/3. Do not do that crap.
Statistically, you are better do front load and get the $19,500 in as early as possible. But if the market is due for a correction, it might be a good time to think about spreading it out. The markets historically do 10% a year, so you should normally be better off getting it in there asap at the start of every year. But, with markets really high now and possible in store for a correction, I think spreading it out is a fine idea for this year.
Lastly, if you are not near retirement, you should be in stocks and not bonds. Bonds are yielding such low rates right now, that with inflation, you'll likely be going backwards. If you have 5 years left, you'll want to start protecting your money, but if you are in your 30s or 40s, you should be all in in stocks. Bonds aren't a good choice for younger folks right now.
Also. Don't take financial advice on a forum. But, you can listen to me
The most important thing is: Max the 401k out! If you do it early or spread it out, just max it out!
The next thing is to watch the fees. Big fees add up more than people realize. If you are investing with an advisor that charges the standard 1% and they put you in funds that have fees up to 1%, you are getting absolutely killed. A 2% total fee after 30 years will cut your money by about 1/3. Do not do that crap.
Statistically, you are better do front load and get the $19,500 in as early as possible. But if the market is due for a correction, it might be a good time to think about spreading it out. The markets historically do 10% a year, so you should normally be better off getting it in there asap at the start of every year. But, with markets really high now and possible in store for a correction, I think spreading it out is a fine idea for this year.
Lastly, if you are not near retirement, you should be in stocks and not bonds. Bonds are yielding such low rates right now, that with inflation, you'll likely be going backwards. If you have 5 years left, you'll want to start protecting your money, but if you are in your 30s or 40s, you should be all in in stocks. Bonds aren't a good choice for younger folks right now.
Also. Don't take financial advice on a forum. But, you can listen to me
01-29-2021, 03:05 PM
#22
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Joined APC: Dec 2012
Posts: 2,078
Originally Posted by flensr
I'm going Roth everywhere I can. I think that tax rates will only go up from here, so I prefer to pay the taxes now. Company DC goes non-roth, so even if roth isn't ideal I'll still have more in non-roth from the company DC anyhow by the time I'm done.
The major threat to Roth is that congress could change the law and apply a means test to Roth distributions, and essentially double-tax those contributions for everyone with a net worth or income over whatever arbitrary number they choose. Nobody trusts career politicians anymore, and I don't know anyone who is confident to absolutely dismiss that possibility. But we DO know that non-roth distributions WILL get taxed, 100% of the time. So I'm going with the Roth, betting that the chance of a tax increase is higher than the chance that congress will start double-taxing Roth.
Some of it also depends on your personal situation. I'm not 100% sure I'll have my house mortgage paid off when I retire, and it would be nice to be able take a nice fat roth distribution one year to pay it off without that large distribution popping me to the highest tax bracket. The numbers are hard to work to *prove* that's a better choice than simply keeping the money in my pocket now or paying off the house faster now, but I *think* the math works out over the long run with maxing out the Roth and then when that's maxxed out, throw any extra at the mortgage, because mortgage interest rates are so low now. I think it gives me more options that way, even if the math shows it to be a wash.
The major threat to Roth is that congress could change the law and apply a means test to Roth distributions, and essentially double-tax those contributions for everyone with a net worth or income over whatever arbitrary number they choose. Nobody trusts career politicians anymore, and I don't know anyone who is confident to absolutely dismiss that possibility. But we DO know that non-roth distributions WILL get taxed, 100% of the time. So I'm going with the Roth, betting that the chance of a tax increase is higher than the chance that congress will start double-taxing Roth.
Some of it also depends on your personal situation. I'm not 100% sure I'll have my house mortgage paid off when I retire, and it would be nice to be able take a nice fat roth distribution one year to pay it off without that large distribution popping me to the highest tax bracket. The numbers are hard to work to *prove* that's a better choice than simply keeping the money in my pocket now or paying off the house faster now, but I *think* the math works out over the long run with maxing out the Roth and then when that's maxxed out, throw any extra at the mortgage, because mortgage interest rates are so low now. I think it gives me more options that way, even if the math shows it to be a wash.
01-29-2021, 06:02 PM
#23
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Joined APC: Nov 2015
Posts: 1,117
Originally Posted by fcoolaiddrinker
Tax brackets can be a helpful gauge. For example, if your single and a mainline captain (or even fo if your in the 200k’s) your more than likely paying 35% tax on the entire 19,500 if you do it as a Roth. I’m fairly confident that won’t be the case in retirement. Based on the today’s same chart it would be 24% to withdraw up to 83k-163k and the amount below 83k is taxed even less. Not only that you just put yourself closer to the AMT.
01-29-2021, 07:54 PM
#24
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Joined APC: Dec 2012
Posts: 2,078
Originally Posted by flensr
I think I'd rather be taxed 35% on 19.5 than 24% on 50 or 70 (assuming doubling every 7-10 years and 15-30 years before drawing much more than RMDs from the Roth). AMT is another factor, for sure.
Last edited by fcoolaiddrinker; 01-29-2021 at 08:31 PM.
01-29-2021, 08:38 PM
#25
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Joined APC: Apr 2005
Posts: 1,397
It is certainly a good idea to transfer funds to a Roth during low income.
Another thing to keep in mind is that Roth income does not count against social security income.
Social security ( depending on your age) is full retirement at 67 and increases 8% a year until 70. You can make an account online and see what you will make at depending on when you collect.
Tax strategies in retirement are a whole new ballgame.
Another thing to keep in mind is that Roth income does not count against social security income.
Social security ( depending on your age) is full retirement at 67 and increases 8% a year until 70. You can make an account online and see what you will make at depending on when you collect.
Tax strategies in retirement are a whole new ballgame.
01-29-2021, 08:48 PM
#26
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Joined APC: Dec 2012
Posts: 2,078
Originally Posted by Rama
It is certainly a good idea to transfer funds to a Roth during low income.
Another thing to keep in mind is that Roth income does not count against social security income.
Social security ( depending on your age) is full retirement at 67 and increases 8% a year until 70. You can make an account online and see what you will make at depending on when you collect.
Tax strategies in retirement are a whole new ballgame.
Another thing to keep in mind is that Roth income does not count against social security income.
Social security ( depending on your age) is full retirement at 67 and increases 8% a year until 70. You can make an account online and see what you will make at depending on when you collect.
Tax strategies in retirement are a whole new ballgame.
Last edited by fcoolaiddrinker; 01-29-2021 at 09:30 PM.
01-30-2021, 12:18 PM
#27
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Joined APC: Apr 2007
Posts: 4,456
Originally Posted by fcoolaiddrinker
My current tax guy likes to keep it non Roth and max a Roth IRA with the 6k tax savings. Best of both worlds for the same $.
01-30-2021, 01:27 PM
#28
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Joined APC: Dec 2012
Posts: 2,078
Originally Posted by Gunfighter
That works when below the income and contribution limits. Once you hit the limits, there is an argument for pre-paying taxes so you have more spendable income in retirement. If your retirement funds are in a traditional IRA, you are using retirement funds to pay taxes. If your retirement funds are in Roth accounts, you are using retirement funds for retirement.
Last edited by fcoolaiddrinker; 01-30-2021 at 01:53 PM.
01-31-2021, 06:40 AM
#29
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Joined APC: Oct 2010
Posts: 4,603
You don’t pay tax on Roth earnings. So even in a high tax bracket now it’s worth putting in Roth. Let’s say you put $19,500 in a Roth 401k today and it gets taxed at 35%.
Let’s say that $19,500 is worth $100,000 in retirement when you decide to withdraw it. My understanding is that entire amount is withdrawn tax free. So I’d rather get taxed at 35% on $19,500 now than get taxed 15-20% on $100,000 as I would on a traditional tax deferred 401k
Let’s say that $19,500 is worth $100,000 in retirement when you decide to withdraw it. My understanding is that entire amount is withdrawn tax free. So I’d rather get taxed at 35% on $19,500 now than get taxed 15-20% on $100,000 as I would on a traditional tax deferred 401k
01-31-2021, 08:43 AM
#30
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Joined APC: Nov 2006
Posts: 492
Ideally, by the time you retire you’ve paid off all your mortgages and loans. You can probably live on $80,000/yr to pay for just utilities, travel, and your retirement goal hobbies. $7000/mo without a mortgage or car payment can get you pretty far. Currently the federal tax bracket for married filing jointly is 12% up to $80,250.
Roth is an amazing vehicle, but your 401k rates at retirement should’ve spook you out to avoid loading it up. Especially if the $19,500 is going to be taxed at 28% this year.
Roth is an amazing vehicle, but your 401k rates at retirement should’ve spook you out to avoid loading it up. Especially if the $19,500 is going to be taxed at 28% this year.
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