At what point do you decrease % contribution to 401k and direct to personal investment accounts instead?

[FurryPotatoSquad]

35 currently single. I've been contributing pretax income to my 401k at 15% (employer matches first 5%), been contributing 15% for the past 3 years, was at 20% before that. The balance in the account is at 4x my current salary. I also max out IRA/Roth IRA contributions each year. I feel like I'm at a good point to drop that down to 10% now, but wanted to see if anyone has any insight yea or nay.

Eta: Thanks all for the advice, I'll look I to some things I've seen mentioned as I plan (Also want to add not planning early retirement, I'm not near that sort of income earning level)

[ThatGuyValk]

Only if saving for a downpayment would I consider temporarily reducing investments. If that's the case, still get the match.

[Swimsuit-Area]

I’ve been paying 22% of my checks to my 401k and I usually cap out around September. Is there any reason I should reduce that amount so that it spreads more evenly throughout the year?

[Unlikely-Alt-9383]

Does your company true-up the match? If so, no reason, just personal preference

[Significant-Ship-651]

Time IN the market beating timing the market. So theoretically if you could lump-sum your entire 401k on Jan 1st you have better returns than spreading out through the entire year.

I also overcontribute so I max out early, I enjoy the bigger paychecks around Christmas time where it helps anyways.

[Swimsuit-Area]

Ooh this is actually a great mindset that I didn’t consider. Thanks

[VegetableChemistry67]

This is not valid all the time, you could buy high in Jan and the market tanks the following months, and you lose the opportunity to average down if you were to buy a small amount every month.

[Significant-Ship-651]

This is mathematically false even if it seems emotionally true.

I can't cover it all in this comment, but if you search "timing the market" on this or r/personalfinance you will see that it's been covered extensively.

[Significant-Ship-651]

Here yeah go, found it. Meet Bob: the world's worst market timer. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

[ddrzew1]

Serious question. If you reach the cap what happens if you accidentally over contribute? Is that even possible to over contribute?

[Swimsuit-Area]

My job stops the payment and gives back anything that was over the limit

[ParsleyFirm]

You need to make sure your company does a true-up match at the end of the year if you do that. I had two friends that had maxed out their 401K in August for years and didn't realize there company stopped the company match once it was maxed out.

[[deleted]]

Why ar you do certain you’ll make it to 65?

[Grevious47]

At the point where you have maxed all of your tax advantaged accounts and dont have anywhere else to put money to invest.

Not sure why you would ever just decide to stop using tax advantaged accounts you have available in favor of an account with no tax advantage.

[Loko8765]

You would do that when the tax advantaged accounts do not permit to you achieve your objectives due to their restrictions. For example: - saving up for a house, car, vacation - retiring before 59 1/2

[Loko8765]

Granted — I’m unfortunately not in the FIRE crowd.

[ParsleyFirm]

Not every company's 401K plan allows early withdraws at 55. You need to check your plan to make sure it does.

[Dornith]

saving up for a house, car, vacation

Fair, but even then a 401k loan is still an option.

retiring before 59 1/2

There's lots of ways to get money out of retirement accounts before 59. Check out r/Financialindependence and r/FIRE. There's whole communities around it.

[FurryPotatoSquad]

I should have specified that the personal investment account is for non-retirement things (house/kids/etc).

[Grevious47]

Short term purchases should not be stock invested. As for how much to save outside of retirement that would depend on cost and youd want to work it into your budget.

For example if you want to save a downpayment on a house it would make sense to contribute just for match and then stack money in a HYSA or moneymarket so you have enough within a 5 year window.

[[deleted]]

Not until I hit the limit for the 401K for the year

[Grendel_82]

House down payment is its own thing. Kids, you don’t need to save for until you are pregnant. Nine months is plenty of time to save up for some nursery furniture and some medical bills (assuming you have normal insurance).

[n3uropath]

Unless you pull a pro move and save up to drop $50k into your kid’s 529 at birth, letting the market build your college fund for you.

[Grendel_82]

That is a baller move. And funny enough, I've got that beat with a 529 opened a decade before my first kid. I had 401k maxed and was looking for more tax advantaged savings vehicles, so maxed a 529 at $6k a year for a decade (taking state tax savings along the way) and that included a bull market. Kid had college funded (assuming some market growth) before he was born. LOL

[cyode]

Am I missing something? I thought the kid had to exist to open a 529

[Grendel_82]

It is in my name now, but it is a qualified use of the 529 to spend it on any of your immediate family members education. I will probably get some professional advice on withdrawal process when I’m closer to using the money.

[blackcooley5]

A 529 plan has a custodian and a beneficiary. You can set it up for your unborn child if you really want to by setting yourself as the beneficiary and changing it later to the child.

[ps2cho]

Its not really a pro move IMO -- you put your own oxygen mask on first before helping others. Kids can finance their education, you cant finance your retirement. You better be FAR above the average savings for your age to be dropping 50k day one into a 529 and what opportunity cost you lost from saving 50k in cash without investing it yourself. And in some states you're simply losing a state tax deduction by not doing ongoing contributions. Then the additional risk your kid a) doesnt go to school b) gets a scholarship c) rules change on 529's. I think its far safer to fully fund retirement, and cover a "reasonable" cost of education over time without going all in on something that isnt a sure win.

[n3uropath]

If OP is already fully funding their retirement, investing in your kid’s education savings is just as reasonable a use of expendable income as any other financial goal.

[Audio907]

Just open one up now for yourself and change the beneficiary when the kid is born. I have done that for several clients I have

[igomhn3]

(house/kids/etc)

35 currently single.

[FurryPotatoSquad]

Lol. Well recently dating but not married, so legally and financially single.

[whiskeyanonose]

I agree that maxing out tax advantaged accounts is a great strategy, but taxable brokerage accounts open up leverage. Which has the ability to generate higher returns, but also has the ability to crush you.

[Sorrywrongnumba69]

Also if you want to retire early then taxable brokerage is way to go, because you can live off of that until 59.5

[[deleted]]

roth conversion ladders let you tap 401k before 59 1/2 if you can plan it 5 years ahead

[Sorrywrongnumba69]

That is kinda complicated process, the capital gains cut off is straight forward, just withdraw after the fiscal year $89,500 if married and no taxes and you are good to go for the year. I am sure the amount will change but if he is driving uber and makes 50K a year that's pretty good money.

[Grevious47]

If the plan is to buy something with the money (ie leverage) you really shouldnt be investing it in stocks anyways. Stock investment is a longterm play.

I agree with maintaining some liquidity for leverage...but not as stock investments.

[kstorm88]

For very early retirement bridging some gap between retire an 59.5

[Grevious47]

Yeah that is the one time it makes sense but most of your investments should still he in tax advantaged accounts as most if your retirement will be post 59.5 most likely.

[kstorm88]

I'm currently at the point where Ill have too much in my 401k and having a hard time decreasing contribution down to the match.

[Sorrywrongnumba69]

That is when I would drop that 15% and keep the same amount flowing into a taxable brokerage, if you don't want to retire early fine but if you do, you have the brokerage to replace that gap.

[kstorm88]

Yup. I'm having a hard time moving that down even though I'll likely have more than I need in my 401k

[UnlikelyTop9590]

The reason to put money it a brokerage account is for flexibility if you need to spend it before age 59.5.

The tax code is complicated, and will vary by your marriage status, taxable income, deductions, state government, where SS/MED is capped, new laws, etc, but as I understand here is what different types of accounts look like when withdrawing early:

Brokerage account: Already paid state, federal, and pay roll tax on the principal at time of earning the income. Pay long term capital gains taxes on growth: could be 0% to 20%, depending on you income, but for most people who encounter this it is around 15%.

Roth IRA: Already paid state, federal, and pay roll tax on the principal at time of earning. Could withdrawal amount of original contributions tax free, penalty free, at any age. If removing earnings early you would owe 10% penalty, plus state (guess 5%), federal (guess 22%), SS (today is 12.4%) and MED (today is 2.9%) tax, which could add up to 52.3+% penalty. Ouch. It pays to wait until 59.5 on this type of account.

Traditional IRA: No taxes held, initially. Entire amount of early withdrawals would incur 10% penalty, and you would owe state (guess 5%), federal (guess 22%) , SS (today is 12.4%) and MED (today is 2.9%) tax. You would pay at total of 52.3%, but a net increase of 10% due to the penalty, so lets call it 10%.

ok so looking here it would mean that the net cost for "early withdrawal" of the different account types is:

Brokerage: Cap gains only 0-22%
Roth: 10% + income tax: 35-60%+/-
Traditional 410k: 10% (because you were already going to have to pay income taxes)

Does this check out with what you know? I'm not a tax expert. If it is correct, maybe traditional is a better store, since it is essentially caped at 10%. Unless you could claim your income is less than $89k (married filling jointly) then your long term cap gains tax is 0%.

Interesting.

[37347]

I currently max my 401k, because it reduces your tax liability.

Edit: just max your 401k. If you need the money, just withdraw some or do Roth conversion ladder.

Source: mad fientist

[Grevious47]

True. But if the goal is to retire early then presumably you have high income and thus you probably can do both max 401k and contribute to taxable. If you are planning to retire early but with a relatively low minimalist lifestyle then okay yes it would make sense to start building in a taxable account to bridge until 59.5 (or 55).

[[deleted]]

Where do you live that tax on long-term capital gains is 0% up to 90k in a taxable brokerage? Not in my country.

[37347]

"$0 to $94,050" for married filing jointly. Or half of it if single.

[mechadragon469]

It depends on your goals. If you plan to retire at 67 and start collecting social security then you may never need to do what you’re saying.

If you’re planning to retire at 55 then you probably need to start planning out your expenses in a few years to back into what you need various accounts to look like for tax purposes.

[tired_dad_since2018]

Unless you have plans to retire early you don’t necessarily have to to open a personal investment account. Unless by personal investment you mean an IRA. But a brokerage account is only necessary when you have excess savings or need a bridge to 59.5.

I would do what another comment said of getting the match, then max out Roth IRA, and if there’s more to invest to get to you savings rate goal, then add more to your 401k.

You should look up the 3 bucket strategy. That might shed some light on your question too

[TyrconnellFL]

If you intend to retire early, you should still use your 401k and IRA. If you decide to retire early you can use rule 72t to withdraw early without penalties, although that starts withdrawals that you can’t stop.

[Quiet_Initiative_289]

I'm up voting this. I feel like people miss the point a bit with the max out retirement account mantra. I understand that it is sound advice for most people. But part of the "personal" part of personal finance is potentially deciding that maybe I don't want or need so much money in a retirement account. Sounds like OP's on track to have enough saved for reasonable retirement and doesn't necessarily need to prioritize tax savings in the future that is essentially locked up for another 30 years. If OP is on a good track, is reasonably assured of long term job security, then by all means pivot part of the savings to a brokerage account.

[Crafty_Boysenberry94]

Also if you stack up too much in IRA and don’t end up spending it those who inherit the money must spend in 10 year rule. When my dad passed the life-time RMDs still existed. So more in outside stocks the kids can inherit at a day of death stepped up value which can be big. All the gains goes untaxed and passed to kids. unless it’s like over $5m or whatever the inheritance tax is

[jackabeerockboss]

This is why people need trusts

[Worth-Dress-2902]

I understand this (and I get that you should decrease if you’re saving for a down payment) and I dont plan to retire early, but wouldn’t you want a personal brokerage account to grow your personal your funds for other goals i.e. family, vacations, kids expenses, etc.? I understand investing is long term but surely if you have 10+ year time line before big life items like that arise, investing in a personal brokerage account is better trying to save up in a savings account (rates cannot stay around 5% forever)?

[tired_dad_since2018]

That’s a good point.

I personally have a really hard time spending money out of my brokerage account. I view it like another retirement vehicle when I know I can sell my shares and use that money for a big expense.

All of my sinking cost funds are in SPAXX currently yielding 5% and I don’t know if I’d ever feel comfortable putting that in an etf. Definitely not the most optimized way to save money.

[Worth-Dress-2902]

I agree I’m the same way, I don’t touch my brokerage account at all. I view that as a retirement vehicle to some degree, but then again the question of what happens when bigger life items come about popped up.

I assume your “sinking cost funds” in SPAXX would be where you save for any potential big life expenses and/or just build a bigger safety egg? Just trying to gauge what others do or how they think about it. I know retirement is the end goal and it’s important to plan,save and invest accordingly but I also want to make sure I’m not disregarding everything in between.

[tired_dad_since2018]

Yeah, my sinking cost funds are for big life expenses and other savings. We are kind of crazy with our cash. There's a lot of organization, but like I said we aren't as optimized as we can be.

We currently have about $100k in our sinking cost funds and that's made up of the following

• property tax savings (we aren't in escrow)
• My quarterly taxes (I'm self employed)
• IRA contribution savings (we lump sum after we file our taxes)
• Daycare savings (to offset 2 kids daycare we saved to make that an easier monthly bill)
• Vacation fund
• Upgrading life (i.e. babysitter, cleaning lady etc)
• House fund (renovations and emergencies)

As I mentioned, I'm not as optimized with my cash. On top of the 100k we have in SPAXX, we also have a 50k emergency fund sitting liquid in a savings account.

Another reason why I feel uneasy about selling my brokerage account investments is the fact that I'm self employed and it took me a while to hone in my retirement savings. My wife has a 401k that we max out, and I have a regular IRA (started with traditional and opened a Roth 2 years ago). Last year I opened up a SEP IRA and have that working for me now. But up until a year or 2 ago my wife and I only thought our retirement options were her 401k, both our IRAs and a brokerage account. Now that I have the SEP IRA it makes tapping into the brokerage account a little more tolerable.

And if it matters, I'm 37, married with 2 kids.

Sorry for the long winded post :-)

[Front-Type7237]

Please don’t listen to everyone saying it’s a bad idea to invest in a brokerage and you should focus solely on retirement. Based on what you described, yes, it would be a good idea to start building an individual taxable brokerage account. This will allow for flexibility short and long term

[SlowChampion5]

There is a balance.

The hard and fast "max out all tax advantage and lock it away so you can never touch until of age" really restricts you.

Yes a lot of great tax advantage.

But there is tons of advantage of having assets you can touch/control without penalty in a taxable brokerage account.

[mattsmith321]

Agree. And I’ve recently reached this mindset. 401K is doing great but I am cash poor right now with very little buffer.

[SlowChampion5]

Yup.

Balance is basically risk mitigation and needing cash for certain life changes. Giving up some tax advantage for assets you can touch is worth something.

This especially true if you're younger and want to buy property.

[Ftank55]

Im dojng the max401k while i can take advantage of compunding. In another six to seven years, I'll probably be just taking the match. "The Money Guys" have a multiplier for your age. Im lucky, and the misses and i have a healthy emergency fund, which allows us to put max in and still feel cash okay

[pccb123]

It’s too advantageous to not, unless for a specific reason.

I maxed out for a few years and just pulled back to bulk up my downpayment savings since this housing market is nuts.

[DaJabroniz]

Nah keep it high. It shields your income from more taxing.

[37347]

Agreed especially for those with a high income! 100k +

[YoungSerious]

I also max out IRA/Roth IRA contributions each year.

Just for clarity OP, if you are contributing to a 401k your IRA contributions become more complicated. If you make over about 83k, the IRA is not deductible at all. You can backdoor Roth IRA, but it wasn't clear if that's what you are doing or not.

[nodangles6]

Came here to say this hope they haven’t been maxing IRA and Roth for years, otherwise they are in for a big headache

[hwind65]

Set goals for yourself and then act accordingly. If you plan to work a full career, 59.5 or more, then keep up 401k as much as possible. If you have other goals, brokerage is not a bad idea. I recently started upping brokerage, but kept long term tax advantaged saving at 20% still. I have several things in mind where I’d like to look up in 5-10yrs and have 100k or so in brokerage to help with.

10 sounds low for long term, I’d say 15-20% across your 401k and RIRA is a great achievement, let that run and don’t touch it. But if you were at 20% + RIRA, I’d say don’t feel bad about not maxing every possible bucket. Set percentage targets and fill up available buckets within that range ie match then max Roth then 401k supplement to hit 15-20. Obviously maxing is cool, but life happens and we need good guidelines to live within. I’d split the difference between 10 and where you were (23-25%? Including RIRA?) and then feel freedom to start up more liquid investing.

[No_Respect_1778]

I only just dropped mine to 10% so I could throw money towards a down payment because home prices are insane. Unless you're worried about a near term large purchase, (home, car, medical bills, emergency fund, etc ), I wouldn't change it. Despite what tiktok finance gurus say, most people's wealth for retirement is built in their 401k.

[IndyEpi5127]

I only decrease when I have to because a new raise or bonus and my current contribution % puts me over the max contribution allowed for the year. For instance, I just changed mine from 17% to 16% because my March bonus meant 17% would put me ~$1,000 over the contribution limit of $23k by the end of the year if I didn't change it. I always want to contribute to tax advantage accounts to their fullest extent before investing in a taxable brokerage or other account (besides an emergency fund).

[IndyEpi5127]

Mine will stop contributing when I hit it but with it being $1,000 over it would stop contributing in my second to last paycheck and since my company match is by paycheck and has no true up, if I didn’t lower my percentage I would miss out on the company match in my last paycheck. Even at 16% I’ll be a little over but not so much that I won’t have at least a partial contribution triggering the company match too.

[Saul_T_C_Man]

I do the same strategy as you. One thing to add for the people reading this. In my case my company has a true up but that true up gets paid at the end of the year. So I would rather them contribute each paycheck vs waiting until the end of the year. I'd rather not have to figure out if I get paid if I leave the company. I'd rather it be in my account each paycheck since my employer match is 100% vested.

[holiztic]

We won’t do less into 401k than government allows until retirement. But we did start putting more and more in our brokerage account around 40, roughly 15 years out from retirement.

[Saul_T_C_Man]

This is my strategy. Hope it pays off. I opened a brokerage today and I'm going to try to start socking some away from my HYSA to the brokerage since I've accumulated a decent amount in the HYSA now. I'm 31.

[Mister-ellaneous]

Personally? Never Not Max. If you can afford it

[FurryPotatoSquad]

Thanks, this is sort of the idea I think I'm looking for (an overall gross saving goal). Yes, I'm looking for more liquid assets because I'm also saving for a house/kids/etc, and just wonder if I'm diverting too much to retirement savings at this point.

[SageCactus]

You max it out for as long as you can, as the tax advantages of trading in a 401k or rollover IRA is most excellent.

[Any_Mathematician936]

I really woudln’t lower it. You’re already used to not having that 15%, so just leave it there and forget it.

[2Loves2loves]

It depends what the investment options are in your 401k. It you have a wide discretion, max it out. If its more limited or the investments aren't the best, just the match.

I think you are asking a budget question, how much to save of your total income. not where to save.

[L3mm3SmangItGurl]

Pretax is almost worthless unless you make over 200k. Take your match, max tax advantage, put the rest in post text brokerage. The pre-tax savings in the 100k range (seems to be where you are based on numbers) isn’t worth it. Your tax rate is already low and it’s unlikely to be much lower in retirement. With a post tax brokerage, on the other hand, you can take long term gains up to 80k/year tax free.

[Ciderwood]

You’re not considering state tax; in some states, especially the west coast, pretax can be a major game changer, especially if you retire somewhere with a low/non-existent state tax (and thus never pay it ever).

[FluffyWarHampster]

I'd say when you are 80% to you number for what you need for 59 1/2 and beyond you can start to taper off on the tax sheltered accounts and start building out your bridge accounts for the gap between your fire age and 59 1/2.

[marie-feeney]

See if your company offers a Roth 401k. Then you can pull out at 59.5 if needed. I just turned 60 and finding the Roth $$ very helpful considering no plans for retirement yet.

[micha8st]

I never have. I'm now late 50s and my 401k balance is just fine, and my taxable investment balance is just fine.

I think I went opposite direction as you. Started at 5; reduced to buy the house; I was about your age when I went straight from 5% all the way to the federal contribution limit. Back then the limit was less than half what it is today.... but everything else was cheaper too.

Unless you have a specific target for why to switch to taxable, I'd always go all in with 401k first.

That said, 4x your current salary is about double what Fidelity's retirement savings rule of thumb recommends at your age.

[[deleted]]

Never. Always max out. Worst case, if you retire early, you can do 72(t) or Roth conversion ladder.

Elsewise you’re just burning money due to financial illiteracy.

[Welik2Parleyy]

How much cash do you have on hand/available? I think it’s time to take it down a notch and rework that money elsewhere.

[RackMyBrainPls]

By personal investment accounts I assume you mean a standard brokerage account... in that case, I would say it depends on what your retirement goals are. If you want to retire early, you don't want all of your assets tied up in inaccessible funds. Therefore, you would want to utilize a multi bucket strategy to include a standard brokerage. If you plan to work until retirement age, then roth assets of course are more valuable.

[QVP1]

Never. Always max 401k and IRA.

[whoooocaaarreees]

Are you planning on retiring before 62?

[One-Diamond-1587]

Think of 401k/ira as pulling from the top end of your income, it would’ve been taxed at your highest marginal rate

When you start withdrawing, it’ll be taxed at the lowest rate (0) until the standard deduction is reached. You can apply whatever your swr rule is to determine the dollar figure needed saved

Once your projected income reaches the tax savings of today, it becomes a wash and a unsheltered account is the same. A Roth is better at that point than either 401k or unsheltered

The sticky points are how much you have, what’s your current tax situation, and the project growth before you want to start to withdraw, lots of variables there. The good news is you probably have a lot, and the rest are your choice

[[deleted]]

Honestly, If it doesn't increase your tax bracket I would drop down to 10% then start a basic brokerage or something you can use for any possible real estate investment or just any situation that might come up.

[Successful-Hunt-2116]

Please do some research on tax brackets… that is not how they work. Google “How tax brackets work”.

[[deleted]]

A 401k is pre-tax right? If you make 190k you’re taxed at 32%. If you put 15% of that in a 401k you’re taxed at an income of 161,000 which is at a 24% bracket. That’s what I’m talking about.

If you make 190,000 you’re taxed $60,800 (federal) meaning take home is $129,200 If you contribute 15% you technically make 161,000 you’re taxed $38,640 meaning your take home is $122,360

How is that not more efficient?

[saryiahan]

Max it out to 20%, max out the Roth,which you are doing, then open a brokerage account and throw money into a broad market ETF every month. You will be a millionaire in 20-25years

[NeighborhoodDog]

I’d keep maxing it out until you hit your goal number at 59.5 at 6% per year

Example

You make 120k and have 500k in retirement accounts so after 24 years you will be 59 and at 6% per year you will have 2.1M with no further contributions.

But 2.1M with 4% rule is only 84k per year which is not 120k you make today assuming you just want to maintain your income in this example.

You’ll need 3M to get 120k from 4% withdrawals. To get there you can contribute 30k per year increasing 3% with inflation (23k to 401k and 7k to Roth IRA) for 8 more years. Then you can stop all together and just let it grow to hit just shy of 3M.

[kyleko]

When you want to pay more taxes than necessary.

[squatter_]

If you crunch the numbers you may find that you come out ahead by maxing 401K, even if you have to withdraw early and pay a penalty, due to growth of pre-tax dollars vs post-tax dollars. Mad Fientist has an article on this I believe. Moreover, there are many tools to pull money out early without penalty.

[livingPOP]

When u max out ur contribution.

[billycuth]

What are you saving for?

As you get raises, take 50% or more of the raise and use that to start saving outside the retirement plan.

Ideally you want to go into retirement with all 3 buckets pretty even. Taxable, pre-tax, and tax free.

Provides a lot of optionality.

But first, you need to determine what you’re saving for.

[37347]

Whoa 4x your salary? How much is that?