Personal Finance

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Considering reducing 401k contributions, thoughts?

I'm 36 with about $410k in my 401k, currently invested entirely in S&P 500 index funds. If I leave it untouched, projecting an 8% annual growth for 23 years, I'm looking at roughly $2.4 million by the earliest withdrawal age. I'm currently maxing out contributions, but I've been thinking about cutting back to just the company match.

My understanding is that since these are pre-tax dollars, I'll be taxed on the entire withdrawal amount as ordinary income later on. So, it's income tax on the principal and capital gains tax on the growth, right?

My original strategy was to avoid touching this money until Required Minimum Distributions kick in. I have about $1 million in a taxable brokerage account already. My plan was to shift the difference into that account and accumulate enough to cover the gap between early retirement and Social Security/RMDs. With retirement at 50, RMDs at 73, and SS at 70, that's a 20-year span. If I continue on my current path, I expect to have around $5 million in the taxable account by then, which should be sufficient.

So, my main question is: Does it make sense to reduce my 401k contributions? My wife's 401k, likely around $320k, isn't even factored into these calculations.

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haugenbianca·4 puntos·hace 2mo

just a heads up, 401k withdrawals are taxed as regular income, not capital gains. if you're already set for retirement withdrawals from your 401k, cutting back contributions now isn't the worst idea.

powelllover·1 puntos·hace 2mo

you also dont pay income tax on that money yet, but with other investments you do, leaving u with less capital to invest. roth is smart when you think you'll withdraw at a higher tax bracket than you're currently in.

tony_rome·0 puntos·hace 2mo

try Roth 401k contributions instead, most employers have that option

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tuomas·0 puntos·hace 2mo

If retiring at 50 is the goal, a Roth IRA is a smart move. You can access your contributions penalty-free when you retire. Given your high income, a backdoor Roth is the way to go. That's my strategy too: max 401k, then backdoor Roth, then taxable brokerage.

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the_chidi·0 puntos·hace 2mo

its all just income tax, youre paying yourself from untaxed money. the goal is to mix it with other income sources to keep your effective tax rate down. i dont see why youd stop contributing and shift it elsewhere if youre gonna use it like that.

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leafractal·0 puntos·hace 2mo

inflation will eat away at that $2.4 million though, it wont be worth as much later

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lunavwilliams·0 puntos·hace 2mo

never heard of anyone regretting maxing out their 401k tho

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amanda_101·0 puntos·hace 2mo

life throws curveballs and growth isnt guaranteed, so dont stop contributing. but hey, if you wanna slow down, thats your call.

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randynyc·0 puntos·hace 2mo

definitely at least put in enough to get the company match. that's free money you dont wanna miss.

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dariagreen·0 puntos·hace 2mo

idk man, maybe look into mega backdoor roth if you can? that'd give you more flexibility before 59.5. people here probably wont say to stop contributing, but you're right, waiting for RMDs is bad tax planning.

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mrsbp·0 puntos·hace 2mo

ngl 36 with 1.7 mil in retirement funds means reddit probably isnt ur best spot for finance tips

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lupita.petrov·0 puntos·hace 2mo

what's so unique about this case?

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shyam·0 puntos·hace 2mo

you should always max out the 401k before the taxable account, no matter when you plan to retire. you can still access the money early if needed. dont wait until RMDs.

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diamonds13·0 puntos·hace 2mo

even if you cant access it early penalty-free, the early withdrawal penalty is still usually better than a taxable brokerage account

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mayadvorak·0 puntos·hace 2mo

if its a normal 401k, then sure. but i also have about a third of my retirement money in a Roth 401k, meaning i wont pay income tax when i take it out.

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