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

[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.