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Financial Freedom => Financial Advice From The Community / Reader Profiles => Topic started by: david123 on February 14, 2019, 11:15:06 AM

Title: Can you have too much money in your 401K?
Post by: david123 on February 14, 2019, 11:15:06 AM
My wife and I are both around 50 years old.  We want to be able to retire at 55.

We max our 401k contributions each year and have a pretty good chunk in 401Ks - approximately $2.5M currently.

We are in the max tax bracket, so reducing our income with 401k contributions is appealing.

We have about $700K in after tax accounts and $100K in Roth IRAs.

My current thoughts are to convert at least some of the 401Ks to IRAs, then to ROTH IRAs over time after we retire and have lower income.

For now - are we better to continue to max the 401Ks, or stop making 401K contributions and start making Roth 401K contributions (which will cost us 37% tax on $52,000 of extra taxable income), but may benefit us in the future?
Title: Re: Can you have too much money in your 401K?
Post by: Sam on February 15, 2019, 08:26:52 AM
Awesome amount in your 401(k)! Congrats. I don't think you can have too much in your 401(k) at all. You've got enough in your after-tax accounts to hold you over, and you can withdraw the money as you see fit until you are required to withdraw at 70.

Have you done any estate planning and set up a trust/will yet?
Title: Re: Can you have too much money in your 401K?
Post by: Money Ronin on February 15, 2019, 10:59:28 PM
The answer is "yes, absolutely" although what counts as too much is dependent on your personal tax situation now and in the future.

The obvious down side is that you will eventually need to pay taxes and no one can predict future tax rates.  Also, you will be forced to take a required minimum distribution (RMD) at 70-1/2 even if you don't need the funds.

Finally, this is what really made me think twice about maxing out my 401K going forward.  I met with a wealth advisor/estate planner.  Whereas everything I own gets a step up in tax basis when I pass away, the 401K and traditional IRAs do not.  If they were funded with pre-tax dollars, they are 100% taxable to my heirs once they start tapping into the funds.

Her advice was that if planned to bequeath anything to charity, bequeath the 401K first and avoid the taxation issues. 

Personally, I like to spread the taxation risk by putting my money in non-retirement accounts, IRAs, 401Ks and Roth IRAs.

I'm not a tax or estate planning professional so hopefully other people can confirm or deny this information.
Title: Re: Can you have too much money in your 401K?
Post by: Fat Tony on February 16, 2019, 07:16:19 PM
Congrats on the great accumulation! I'm sure you know about the Roth IRA conversion ladder and all the associated calculators on the net. If you plan to retire in 5 years, even given your current lopsided ratio of tax-deferred vs. tax-upfront savings (25:1), I would still make regular 401k contributions if you are in the 37% federal bracket.

Your $700K after-tax investments is unlikely to generate too much income and you will likely be in a super-low tax bracket after retirement to do plenty of 22% and 24% bracket Roth IRA conversions (2% dividend yield on stocks = $35K/year mainly qualified dividend income). Tax brackets aren't slated to go up until 2026, although who know what the future holds - it's just unlikely that married taxpayers under $100/150K get a huge hike to above 37%, so you should be fine doing Roth conversions for a while and come out ahead if you defer the taxes.

Tax diversification is useful, but I think this close to retirement and at the max bracket the calculation is simple. What is the tax risk you're willing to bear vs. the amount you are willing to pay upfront? You can try to create a simulation with various tax bracket outcomes throughout retirement, although this is going to be an exercise in crystal ball-ism.
Title: Re: Can you have too much money in your 401K?
Post by: Sam on February 17, 2019, 07:52:37 AM
Quote from: Money Ronin on February 15, 2019, 10:59:28 PM


Personally, I like to spread the taxation risk by putting my money in non-retirement accounts, IRAs, 401Ks and Roth IRAs.


Money Ronin - can you elaborate on this? Why do you consider IRAs, 401ks, and Roth IRAs non-retirement accounts? Thx
Title: Re: Can you have too much money in your 401K?
Post by: whitetail on February 18, 2019, 09:38:56 AM
I generally agree with Fat Tony. I think the most obvious consideration is the tax implications and your expectations for your future tax rate situation.

The next things to really consider would be if you have the right levels of insurance, what your income/retirement goals are, and if you want to leave anything behind. Someone else mentioned the tax downside of inheriting a 401k which could become a consideration for you.

IANA financial or legal advisor. =)
Title: Re: Can you have too much money in your 401K?
Post by: Money Ronin on February 20, 2019, 05:40:38 PM
Quote from: Sam on February 17, 2019, 07:52:37 AM
Quote from: Money Ronin on February 15, 2019, 10:59:28 PM


Personally, I like to spread the taxation risk by putting my money in non-retirement accounts, IRAs, 401Ks and Roth IRAs.


Money Ronin - can you elaborate on this? Why do you consider IRAs, 401ks, and Roth IRAs non-retirement accounts? Thx

I meant non-retirements accounts separate from IRAs and 401Ks.  To clarify, I try to diversify the tax liability risks I will have in the future.  These strategies include:

1. Pay taxes later: 401Ks because I can get the immediate tax deduction (but will pay taxes in the future)
2. Pay taxes now: Roth IRAs/Backdoor IRAs for a tax free investment in the future
3. Pay taxes now: Non-retirement accounts because if I can manage to not touch them until I pass away, my heirs will inherit them with a stepped up tax basis

If things go as planned in retirement, I will live off the (hopefully tax sheltered) income generated by my rentals.  My wife and I do have sizable 401K accounts but now I am trying to minimize the additional future income and taxes generated from forced 401K RMDs.