Anonymous wrote:

Anonymous wrote:PP, please say you've at least been maxing out your roths all these years, considering you can take out contributions anytime you want. That doesn't even touch on 72t distributions, either....

PP wouldn't be eligible for a ROTH

Backdoor Roth FTW!

Anonymous wrote:PP, please say you've at least been maxing out your roths all these years, considering you can take out contributions anytime you want. That doesn't even touch on 72t distributions, either....

PP wouldn't be eligible for a ROTH

Anonymous wrote:

Anonymous wrote:Because it is pre-tax.

This. Say you save the full $17,000 and the employer match is only 4% of your salary. For someone earning $100,000, that's a $4,000 match. But you're also avoiding tax on $13,000 more of your income.

You're not avoiding, rather, you're deferring....and hoping that when you cash out your 401k, you'll be in a lower tax bracket and pay lower percent wise tax on your income (including portion of 401k cashed out).

PP, please say you've at least been maxing out your roths all these years, considering you can take out contributions anytime you want. That doesn't even touch on 72t distributions, either....

We don't invest more than the match. Even though the money invested in a 401(k) is pre-tax the fees can be high (they are for DH's plan) and the money is very much locked-up until retirement.

Instead we have concentrated on primarily building a nest egg outside of the retirement. So at age 44/45 we have several million in a regular investment account and about $300,000 in retirement accounts (about $100k of that is in the federal TSP which is a much better retirement plan than that offered by most private employers).

We did this because we now rely on one (hefty) income and we don't necessarily expect that income to last until age 65. This way we have some flexibility.

This isn't a strategy I'd follow if (1) we weren't disciplined or (2) we were going to need financial aid for college.

FWIW, DH works in finance and I have a background in economics so we have some knowledge of how to invest and like a lot of other people in this forum we invest in low fee (Vanguard) or no fee (individual stocks) options.

There are scenarios where it makes sense to invest in alternatives before maxing out the 401k, but they're usually pretty nuanced and specific. Sure, if your 401k sucks, it makes sense. Otherwise probably not worth the hassle.

The general rule of thumb is 401k to match, then max IRA, then back to 401k until that's maxed too. You need to take into consideration your tax bracket and your 401k investing options. For example, we are in a high tax bracket and have access to a 401k with lots of low ER funds, so we've maxed that out rather than starting IRAs. If you are in a lower tax bracket with a high fee 401k, then switching to a tIRA after exhausting employer match would be your best option.

Don't start a tIRA, however, if the majority of your prime earning years will be high enough to disallow deducting contributions. Stick with Roths and then start doing back door conversions when your income gets too high and you're forced back to tIRAs.

A little known quirk in tax law: If you're maxing out your 401k plans, some allow you to make additional, non-deductible contributions up to an additional 32k or so. In some cases, these plans allow in-service rollovers of these untaxed funds. Untaxed 401k contributions can be rolled over into Roth IRAs, which is very nice if you can manage it.

Anonymous wrote:Because it is pre-tax.

+1

Anonymous wrote:

Anonymous wrote:Because it is pre-tax.

This. Say you save the full $17,000 and the employer match is only 4% of your salary. For someone earning $100,000, that's a $4,000 match. But you're also avoiding tax on $13,000 more of your income.

Exactly. I think the conventional wisdom is to max out your 401k only if you are a high income earner. For us, taking $34k off our income (2 401ks) is a big deal. And we still have money to be able to fund IRAs.

Anonymous wrote:Because it is pre-tax.

This. Say you save the full $17,000 and the employer match is only 4% of your salary. For someone earning $100,000, that's a $4,000 match. But you're also avoiding tax on $13,000 more of your income.

Because it is pre-tax.

Maybe if you really have better options outside the 401k you wouldn't, but a good 401k will offer good options, and if you will be in a lower tax bracket in retirement than you are now the tax deferral is valuable.

I know the conventional wisdom is to max out the amount in your 401(k), but here's my question. If an employer only matches to a certain level, say 4% of your income, why invest more than that amount in the 401(k) if you have other investments that have a greater return/stability?