Reduce Retirement Contribution?

[Anonymous]

DH and I are both 30 and have $250k in retirement accounts (401Ks, Roth IRAs). We just had our first DC this summer and I have recently returned to work. While we are fine in terms of our monthly living expenses, the majority our previous monthly savings are now going towards childcare. Other than our mortgage, we have no other debt. We currently each contribute 10% into our 401ks and max out our Roth IRAs each year (only have about 1-2 more years until we will be over the max contribution income). We do have an emergency fund (6 months) and other, smaller savings accounts, but are thinking of reducing how much we contribute to retirement and to put that extra money into savings and to just have access to a little bit of additional cash each month. Is this a stupid move? We both have 30+ years to go until retirement, and we've been relatively aggressive up to now. Any advice would be great.
TIA.

[Anonymous]

if you can manage not to do it, don't. You'll lose the tax benefit on those $, which is a sure ~25% return on your money. I would try to squeeze your budget in other ways. Keep track of every expense (YNAB or mint) and find ways to trim. Try to keep at least 3 months of an emergency fund. Good luck, it gets easier.

[Anonymous]

I'd squeeze elsewhere first personally - ditch the lawn care service, get rid of the maid, refinance, trade down to a cheaper car, etc.

That said, in the grand scheme of things, reducing your contributions for a year isn't going to make the difference between a successful retirement and a failed one. If you are finding yourself a bit cash strapped, the mental peace of not being so is worth something.

We used to max out both our 401Ks before we had kids, now we only max out one and do 5% in the other. Its a temporary tradeoff.

[Anonymous]

one thing you can't catch up on is compound interest.

you can't borrow for retirement

[Anonymous]

Anonymous wrote:if you can manage not to do it, don't. You'll lose the tax benefit on those $, which is a sure ~25% return on your money. I would try to squeeze your budget in other ways. Keep track of every expense (YNAB or mint) and find ways to trim. Try to keep at least 3 months of an emergency fund. Good luck, it gets easier.

Is this really true? Maybe someone can explain it to me. You have to pay full taxes on 401k distributions when you retire, right? So all you are doing is *hoping* that the tax rate will be lower in retirement than it is now.

I must be missing something, so if someone could fill me in, I would appreciate it.

[Anonymous]

i would not do it. perform the calculations to determine what your taxes and take home pay would be at your current saving rate vs. reducing. the numbers will demonstrate how you lose out by paying more taxes, even if you take home a little more.

i would try to ride it out until you truly feel you are in a precarious situation and need the cash. find other ways to trim.

[Anonymous]

Keep maxing out your Roths. Savings accounts are still not returning much and if you really need the cash there are no penalties for withdrawing contributions to a Roth, only on withdrawing earnings.

In regards to rising income, research "backdoor Roth". The limits aren't really an issue anymore.

[Anonymous]

Anonymous wrote:Keep maxing out your Roths. Savings accounts are still not returning much and if you really need the cash there are no penalties for withdrawing contributions to a Roth, only on withdrawing earnings.

In regards to rising income, research "backdoor Roth". The limits aren't really an issue anymore.

Actually, I'd suggest reducing the Roth contribution and keeping the 401K contribution, so as to take advantage of the tax benefits.

[Anonymous]

Anonymous wrote:

Anonymous wrote:if you can manage not to do it, don't. You'll lose the tax benefit on those $, which is a sure ~25% return on your money. I would try to squeeze your budget in other ways. Keep track of every expense (YNAB or mint) and find ways to trim. Try to keep at least 3 months of an emergency fund. Good luck, it gets easier.

Is this really true? Maybe someone can explain it to me. You have to pay full taxes on 401k distributions when you retire, right? So all you are doing is *hoping* that the tax rate will be lower in retirement than it is now.

I must be missing something, so if someone could fill me in, I would appreciate it.

PP is talking about the tax benefit you get NOW by contributing to your 401k.

[Anonymous]

I would not increase cash flow.
How old are the kids? When they get older, their expenses increase. Will your income increase definately-are you sure of that? So will living expenses. You might think you get an extra $100 to spend now, a year later, $50 won't hurt, another 6 months, $50 won't hurt. Next thing you know, you only have 5% retirement saving! It creeps up on you slowly.

[Anonymous]

Anonymous wrote:

Anonymous wrote:if you can manage not to do it, don't. You'll lose the tax benefit on those $, which is a sure ~25% return on your money. I would try to squeeze your budget in other ways. Keep track of every expense (YNAB or mint) and find ways to trim. Try to keep at least 3 months of an emergency fund. Good luck, it gets easier.

Is this really true? Maybe someone can explain it to me. You have to pay full taxes on 401k distributions when you retire, right? So all you are doing is *hoping* that the tax rate will be lower in retirement than it is now.

I must be missing something, so if someone could fill me in, I would appreciate it.

The reason you make much more money by paying the taxes at retirement is that you get compound interest on the deferred tax payment during your working years. Even if your taxes will theoetically be higher at retirement, you'll still probably come out way ahead by having the deferred tax payment. (This is one reason why it seems like people on this board are a bit too high on Roth IRAs, IMO).

(If your point is just that PP was not technically correct in characterizing this as "a sure ~25% return on your money," you are correct. The "return" is not the money you don't pay in taxes, it is the compound interest generated by the delayed tax payment.)