Question for the Money Doctors
Question submitted on Aug 9, 2021.
My wife and I are big savers / investors. We probably invest 70% of our net income each month into Total Stock Market index funds. We are both financially savvy and would like to retire in 10 years (we are both 35 years old now) and live off of $200k a year in retirement. I have several spreadsheets that point us in the direction of 100% success for this retirement goal, but want to make sure we are funding the right buckets. We currently have just about $1mil in investments (half in passive stock index funds inside a taxable brokerage, and other half in 401k's). Based on our retirement goals, I don't think it makes sense to max out our 401k's anymore, and instead just contribute up to the match we receive from our employers. With the rest of our savings, we intend to keep aggressively funding the taxable brokerage and invest in stock market index funds. Two reasons why:
1.) 15 years of living off investment income 45-60, so don't want to much in 401k's
2.) 401k withdrawals are taxed at ordinary income tax rates, where stock gains (if greater than a year) and dividend income will be taxed at Long term cap gain rates (half the amount). My question to you is if this makes sense or not? I also like how taxable brokerage assets can be used as collateral for loans, where 401k assets cannot.
Congratulations on your savings goals!
I see no problem with maxing your 401(k) contributions since the maximum is currently $19,500 for each of that. That may be only a small portion of your additions to your savings. You will get a tax deduction for the contributions to the 401(k) plan and it will grow tax deferred. It is true you will be paying ordinary tax on the distributions, but you may be in a lower tax bracket then so you are taking advantage of tax bracket arbitrage. This means you get the benefit of the tax deduction at a higher rate and pay tax on the distribution at a lower rate.
Also, if you leave the money in the 401(k), you can access them after age 55 with no penalty. If you rolled it over to an IRA, you will have to wait until 59 1/2.
True, you can borrow against your brokerage account, but that can be expensive and risky.
I've been doing this for 35 years and I have yet met anyone who has too much in their 401(k) plans. Most Americans do not have enough.
When you are in a lower tax bracket, you can convert your 401(k) money into Roth IRAs so they can grow tax free.
Check with your employers if your 401(k) plans provide for the Mega Back Door Roth. This can allow you to sock away about $38K into your 401(k) after tax and do an in service rollover to a Roth. A neat way to put a lot of money into a Roth. Consider this if it is in your 401(k) plan. If not, please rally your colleagues to get the company to add this feature to the 401(k) plan. The Wall Street Journal recently did a very good article on this.
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