One Year 401K Gap

[dumbrenter]

You cannot put money in 2 401k plans in the same year.
Something I found out the hard way because the employer assholes never told me that (they have no incentive to tell you that).

What I ended up doing few years ago (when still a wage slave)was to max out the 401k in the first 2 months. You can do that by setting 99% of your wage to go to 401k. It automatically stops once you hit the limit for 401K that year.

That way you de-risk yourself from having a taxable event with larger income + any signing bonus you might have gotten for your new job this summer!

As for the cash, I suggest you invest in your regular investment account (not IRA or roth) and invest a little more aggressively based on when you think you will retire

[ltsddd]

here’s another angle to look at it. The assumptions are that you are closer to retirement than aren’t and that you have participated in the 401k plan for many many years (20, 25, 30?). In other words you already have a sizable 401K balance. If that’s the case and if I were you, just kick it and enjoy the “windfall”. At this point in your life, the yearly addition to the plan is really negligible. The only reason why people want to continue to sock it away is because a) they can b) get the matching c) tax break. Since none of these applies to you there’s no need to worry about it. Splurge a little bit. Surprise your SO with a nice vacation or some fancy stuff.

[Coronita]

[quote=dumbrenter]You cannot put money in 2 401k plans in the same year.
Something I found out the hard way because the employer assholes never told me that (they have no incentive to tell you that).

[/quote]
That’s a rule that your employer made up, it’s not a general rule for all 401k plans for all companies. My two previous employers and my current employer have both a traditional 401k and roth 401k plan, and allowed you to allocate any percentage between the two. The only thing that my previous employers stipulate is the annual 5% base salary company match they give you gets deposited in the traditional 401k portion, not the Roth portion. I thought this was some IRS rule, but one person here mentioned that her employer deposits 401k matches in her Roth 401k, so I guess that’s not an IRS rule either, but a varies depending on company.

[quote]
What I ended up doing few years ago (when still a wage slave)was to max out the 401k in the first 2 months. You can do that by setting 99% of your wage to go to 401k. It automatically stops once you hit the limit for 401K that year.
[/quote]

That strategy many not work if your employer does a company match and limits the maximum match per pay period to the maximum amount prorated based on each month… For example, my employer matches 5% of your annual salary, but the maximum they will contribute per pay period is 5%/26 (we’re on a bi-weekly pay period). So if you contributed 99% into the first few weeks of the pay period, I don’t believe you will get the full 5% match for the remaining months, just the months you actually contributed to the 401k.

[quote]
That way you de-risk yourself from having a taxable event with larger income + any signing bonus you might have gotten for your new job this summer!
[/quote]

The maximum tax deferral you can take is $18k. It makes no difference if you take it up front, or spread it out over the months. It might make a difference if you believe there are certain months that tanks market tanks, like for instance if you believe in the sell in may, go away until october. But what people usually do there is to just change the investment elections during those month to be more heavy in cash positions versus stock poitions. It also might make a difference if you have a cash flow issue because you’re trying to max out your 401k AND trying to max out your after tax ESPP stock plan, since those withholdings are with after tax dollars and you won’t get them back for a quarter or in some cases 6 months, until the share purchase, when you can sell.

[Coronita]

[quote=svelte]

Flu, thanks for the back door explanation. Probably way more work and risk than I want to put in – after all, the max I could put into an IRA is just a fraction of what I’d put into a 401K in 2017…think I’ll consider your other suggestion of putting part towards mortgage and a part under the mattress. I’ll run the numbers of how much I’d have to throw at the mortgage to have it paid off when I’m 67, that might steer me towards the right split.

I also should check to see what fund choices they offer – hopefully it isn’t crappy! That might influence my decision on how long I stay.

[/quote]

I wouldn’t worry about it, you’re not going to miss *that* much money from waiting extra year. Who knows, maybe you won’t lose money during that 1 year, in case the stock market tanks. So you never know, maybe there’s reason for this after all 🙂

You definitely should check the sort of funds they offer. A shitty 401k plan will stick you with managed funds that have huge hidden fees/costs, and very little selections of funds that mirror index funds. Index funds are meant to be passive/low cost funds, and a lot of 401k plans don’t have them because the plan administrator obviously wants to make money by offering those actively managed funds.

The other thing you want to check at a small company is if there are any specific rules/restrictions as to when you can do exchanges, and how often you can do exchanges, if there are any sort of extra costs from doing exchanges, and if there are any fees to roll out of the account or transfer out of that account. In my new employer, they were adding a few new funds two months ago. And while they were doing that, the plan administrator locked out anyone from exchanging their funds for about 6 weeks.

The other thing you want to check at a small company is how before one paycheck’s contribution makes it into a 401k account. This should not be longer than 1 week. If the company is doing something shady, you won’t see the funds for several weeks.

[Coronita]

Oh, and if you happen to be have made a mistake and rolled over a 401k into a rollover IRA, making you ineligible for a backdoor Roth IRA with no tax consequences…there is one workaround you can consider…..

If your current employer’s 401k plan is decent and your current employer’s 401k plan allows it, you can roll in your rollover IRA into your companies 401k plan. Again, the IRS treats the 401k plans differently from IRA accounts. So it doesn’t matter how much money you have in any of the 401k accounts of previous employers.

[livinincali]

[quote=flu]
I wouldn’t worry about it, you’re not going to miss *that* much money from waiting extra year. Who knows, maybe you won’t lose money during that 1 year, in case the stock market tanks. So you never know, maybe there’s reason for this after all 🙂
[/quote]

The only thing your really missing out on is the tax benefit. You can open a standard brokerage account and likely invest in the same shitty funds the 401K offers. The question of paying down a mortgage versus investing really just comes down to rate of return and any kind of possible tax advantage/disadvantage. If you pretty confident you can get a rate of return a couple percent higher than the mortgage rate do that. If you can’t then pay down the mortgage.

[Coronita]

[quote=livinincali][quote=flu]
I wouldn’t worry about it, you’re not going to miss *that* much money from waiting extra year. Who knows, maybe you won’t lose money during that 1 year, in case the stock market tanks. So you never know, maybe there’s reason for this after all 🙂
[/quote]

The only thing your really missing out on is the tax benefit. You can open a standard brokerage account and likely invest in the same shitty funds the 401K offers. The question of paying down a mortgage versus investing really just comes down to rate of return and any kind of possible tax advantage/disadvantage. If you pretty confident you can get a rate of return a couple percent higher than the mortgage rate do that. If you can’t then pay down the mortgage.[/quote]

The tax benefit is would be roughly 1.5 years worth of Roth 401k contribution roughly $7750… Assuming a 4% conservative ROI over the next 10 years, that would be roughly $11k available at retirement. If he has a mortgage or loan amount above 4%, perhaps paying off of the higher interest debt would be a better option.

Yes, it’s money, but not completely devastating..Who knows, maybe svelte got more than an $11k net raise (after taxes). I guess it depends on how much of a hassle does svelte want to deal with setting up a backdoor Roth (and whether if he can).
For me, I don’t mind dealing with PITA things when it comes to money. But that’s just me.

[no_such_reality]

[quote=livinincali]

The only thing your really missing out on is the tax benefit. [/quote]

Head bang wall.

He’s stated that his MAGI is too high for Roth. So their MAGI is north of $194K for a couple.

As such, his marginal tax bracket is 9.3% if not 10.3% in California and another 28% for Federal.

Combined a 37% tax hit. So to park that $18K max 401K contribution in a regular brokerage, he’s going to have to allocate $28.5K to pay the $10K+ in taxes and put the $18K in the brokerage. Any realized additional income or gains during the year are also taxed.

Last I checked, a 58% one year return with virtually zero risk was pretty good.

[Coronita]

[quote=no_such_reality][quote=livinincali]

The only thing your really missing out on is the tax benefit. [/quote]

Head bang wall.

He’s stated that his MAGI is too high for Roth. So their MAGI is north of $194K for a couple.

As such, his marginal tax bracket is 9.3% if not 10.3% in California and another 28% for Federal.

Combined a 37% tax hit. So to park that $18K max 401K contribution in a regular brokerage, he’s going to have to allocate $28.5K to pay the $10K+ in taxes and put the $18K in the brokerage. Any realized additional income or gains during the year are also taxed.

Last I checked, a 58% one year return with virtually zero risk was pretty good.[/quote]

Not to be nit picky about this…But his tax rate may not be 37%, more likely around 29% combined. He does have a mortgage, i believe, but would get hit most likely with AMT. My tax rate will be more like 37% combined this year though, since well, one of the things about not having a mortgage:(

[no_such_reality]

Yea well, math mistake on my part too.

I’m talking marginal. He’d have to be close to the bottom limit on the MAGI to get below the $151K and that’ll shave 3% off the Fed rate.

I doubt they drop their AGI below $103K to get under the 9.3% Cali rate.

So maybe 34.3%

Either way, and even at the much lower 29%, getting a zero risk 29% return would make most fund managers drool.

[plm]

The 401K is just tax deferred so that needs to be taken into account in the math. Taxes will have to be paid at some point. I wonder if the rate could actually be higher when you retire and the way I understand it, you have to start taking money out at a certain age.

Backdoor roth ira took me several days to figure out and about a week to execute. But once you have all the accounts set up it and taxes figured out shouldn’t be too hard to repeat. Hopefully doing it again this year will be easier.

[flu]

[quote=plm]The 401K is just tax deferred so that needs to be taken into account in the math. Taxes will have to be paid at some point. I wonder if the rate could actually be higher when you retire and the way I understand it, you have to start taking money out at a certain age.

Backdoor roth ira took me several days to figure out and about a week to execute. But once you have all the accounts set up it and taxes figured out shouldn’t be too hard to repeat. Hopefully doing it again this year will be easier.[/quote]

Yes, if you saved a lot in your pre tax retirement accounts, you could be subject to higher tax rate during your retirement than right now, if your annual required minimum distribution (RMD) is more than what your AGI was when you were working.

Also, you would be subject to the tax rate during that time, which lets face it, will be more than it is now, given the way this country spends….RMD doesn’t kick in until 70.5 I think…a lot of good retirees I know are facing this right now.
Its funny, because one person I know calls their 401k retirement plan the biggest scam for avid savers. His argument is 401k had shitty fund selections that subjected him to a bunch of fees to fatten the fund companies. And that now that he saved so much, his RMD is 2x what his AGI was when he was working. So his tax rate is also much higher now, and hence his argument is this was a beautiful con to get avid savers to pay more taxes. Also, since he never borrowed against his 401k, he claims this money was pretty much dead for use all those years.

He told me he regrets contributing so much to his 401k, and wishes he had just contributed enough to get the company match and then put the rest of his money after tax on real estate, when things like depreciation and other itemized deduction and things like like 1031 exchanged do a wonderful job sheltering money indefinitely… I don’t know if I agree with him, but it was an interesting comment to hear.

[SK in CV]

[quote=bullishgurl]Yes, if you saved a lot in your pre tax retirement accounts, you could be subject to higher tax rate during your retirement than right now, if your annual required minimum distribution (RMD) is more than what your AGI was when you were working.

Also, you would be subject to the tax rate during that time, which lets face it, will be more than it is now, given the way this country spends….RMD doesn’t kick in until 70.5 I think…a lot of good retirees I know are facing this right now.[/quote]

You need a shit-ton of money in retirement accounts for tax rates to be higher post-retirement. RMD at 70, if spouse is sole beneficiary and less than 10 years younger is about 3.6% of value as of 12/31 of the prior year. So to get even to a $100K RMD, it requires almost $3 million in the account.

I do know people with substantially more than that in retirement plans, but they’re in a high tax bracket even if they had no RMDs.

That said, I think a 50/50 split of traditional/roth into 401K’s is a great way to go. Particularly for those that qualified retirement plans are expected to provide substantially all of their retirement funding.

[flu]

[quote=SK in CV][quote=bullishgurl]Yes, if you saved a lot in your pre tax retirement accounts, you could be subject to higher tax rate during your retirement than right now, if your annual required minimum distribution (RMD) is more than what your AGI was when you were working.

Also, you would be subject to the tax rate during that time, which lets face it, will be more than it is now, given the way this country spends….RMD doesn’t kick in until 70.5 I think…a lot of good retirees I know are facing this right now.[/quote]

You need a shit-ton of money in retirement accounts for tax rates to be higher post-retirement. RMD at 70, if spouse is sole beneficiary and less than 10 years younger is about 3.6% of value as of 12/31 of the prior year. So to get even to a $100K RMD, it requires almost $3 million in the account.

I do know people with substantially more than that in retirement plans, but they’re in a high tax bracket even if they had no RMDs.

That said, I think a 50/50 split of traditional/roth into 401K’s is a great way to go. Particularly for those that qualified retirement plans are expected to provide substantially all of their retirement funding.[/quote]

He has a shitload of money in his 401k but made a middle class income during his prime years by bring an complete miser. HE was also one of those guys that had a pension in the defense sector as a machinist that is also adding to the AGI in his retirement years, so I guess combined, his tax rate is much higher than when he was working.

Some of his colleagues are in the same boat.

But I agree with you on the 50/50 split, which is what I do.

[Myriad]

[quote=bullishgurl]
He has a shitload of money in his 401k but made a middle class income during his prime years by bring an complete miser. HE was also one of those guys that had a pension in the defense sector as a machinist that is also adding to the AGI in his retirement years, so I guess combined, his tax rate is much higher than when he was working.

Some of his colleagues are in the same boat.

But I agree with you on the 50/50 split, which is what I do.[/quote]

Seems like a 1st World problem – too much money and now has to pay more tax!

But seriously, that’s why the roth 401k vs traditional 401k is complicated. You have to project what your retirement tax rate is.
I agree with the 50/50 roth/traditional since it provides tax diversification in retirement.
Since the person had a pension, with SS, it’s probably fairly easy to be in a higher tax bracket if his income was average when he was working.

If you do have a large 401k balance, you have to withdraw money from your 401k as soon as you retire (retire early) and slowly move the money to a roth. Once you hit 70.5, the RMD can not be used for a roth. Only once you hit 70.5, you take SS and potentially withdraw money from the roth. So basically burn as much money from a traditional 401k/ira before you hit RMD,

[Author]

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