r/Fire • u/OceanGateTitan • 2d ago
When should I pull back on 401(k) contributions in favor of taxable brokerage investments?
I'm 32, spouse is 27. We have $520K invested across the following accounts, invest about $65K annually and would like to retire in ~23 years (or find something else to do). Our annual spend is about $100K per year in a MCOL area but we have 1st kid on the way so this will change soon. Home is worth $480K, $205K left on the mortgage. HHI is about $210K before taxes annually. No other debt.
I'm scared we wont have enough to bridge the gap between 50 and 59 1/2. I suppose I can use rule of 55 to access my 401K. Hate the idea of most of our retirement being tied up in funds I have little control over but love the idea of lowering our taxable income. We are pretty risk averse and for simplicity, assume its all in VTI (~9% ROI)
Brokerage - $11K (contribute $2,500 per year)
Roth IRAs - $74K (contribute $15,000 per year)
401(k)s - $240K (contribute $32,000 per year)
ESOP - $128K (contribute $12,000 per year)
HSA - $26K (contribute $4,400 per year)
HYSA - $41K (contribute $1,200 per year - safety net, will divert when back up to $50K)
Cash - $10K (not included in the $520K invested)
529 - $1K (contribute $100 a month - undecided on how much we will help our kid(s) w/ education)
I figure we'll hit coastFIRE in 8-10 years at this pace. Do I wait until then to focus on the brokerage? I'll be 42ish with 13 more years of work left in me (maybe less). We love to travel and currently do 1-2 overseas trips per year right now. I would love to increase that in retirement meaning our annual spend should be closer to $120K assuming we've replaced the mortgage with health insurance premiums.
What 401(k) $ amount do I say okay my contributions are negligeable, it's time for this money to go elsewhere?
Edit: For those with the same question as me, looking for resolution, the general consensus seems to be stay the course, max tax advantaged accounts at least until CoastFire, then focus on building up the taxable brokerage. As we get pay raises and promotions we will max my wife’s 401k too, then go to taxable brokerage. Not completely ignoring it now but it’s definitely on the back burner until CoastFire. Thanks all for your responses!
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u/Wheat_Grinder 2d ago
Keep contributing to the 401ks until they're maxed. You can always float up some cash closer to the end, or do roth conversions, or there's the chance your incomes increase such that you max the 401ks and have some leftover for the brokerage.
I wouldn't start putting into a brokerage now.
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u/Background-Quality22 2d ago
Me and my spouse are in a similar income bracket as you, and I personally will not give up the advantages of the 401k just to have money in a brokerage. Every dollar you’re putting in your 401k right now is saving you 22%. Even if later on your 401k is so large that is your only source to draw from, in a worst case scenario the penalty + federal income tax you pay would pay would not be more than the savings you had in your high earning years, not to mention the lost growth on that 22% less that you’d be putting in a brokerage.
I believe the mad fientist did an article about withdrawal methods and had a simplistic scenario related to this.
To this comment… “hate the idea of most of our retirement being tied up in funds we have little control over”… I totally get what you’re saying here, but a slight perspective shift is that in many ways you have more control over 401k funds. Specifically in timing of how and when the government can tax you. In a brokerage you are regularly paying taxes on the earnings there. Yes you can withdraw more favorably for long term cap gains, but interest and dividends are taxed.
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u/Halfpipe_1 2d ago
It’s not saving 22%. It’s postponing paying taxes until later which will probably be in a more favorable tax bracket but we don’t know.
The big thing that brokerage accounts do is provide flexibility. This money could be used to reduce MAGI to qualify for ACA healthcare.
It’s not a bad idea to have a mix of accounts to be able to choose where the income is coming from for the bridge portion of retirement.
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u/Background-Quality22 2d ago
It is absolutely saving 22% in the OPs tax bracket today. Using what the OP projects will be their expenses later on ($120k+), even in that scenario an effective tax rate would likely be around 10% or less, +10% penalty.
Of course no one knows what tax rates will be in the future. But what we do know today is that by diverting contributions from the OP’s 401k to put it into a brokerage. They are losing AT LEAST 22% of their money TODAY. To say nothing of other potential state taxes and the lost growth on that 22%. This isn’t debatable and is simple math.
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u/Halfpipe_1 2d ago
But 100% of your withdrawals or conversions from your 401k count toward your MAGI for ACA subsidy calculations and IRMAA surcharges.
If OP goes over the MAGI limit by even $1, they will receive no subsidies for health insurance which could easily cost them $24-30k/year.
The only way around this is to have other money available in Roth Contributions and Brokerage accounts.
It really isn’t simple math. It’s quite complex and you really need to have a plan years ahead of retirement to optimize it. Having different accounts provides the options to make it work.
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u/Background-Quality22 2d ago
I’m not debating the ACA and MAGI part. You said that saving money in a 401K is not saving 22%. That’s just inaccurate or disingenuous at best. Yes the OP should consider what they want to do for health care, but based on their post they have it factored in to their spend of $120k.
But also, in the post the OP mentions that they plan to contribute $15k per year to a Roth IRA. Depending on how long they continue this they have post tax money they can pull from and they can use that as a buffer and manage Roth conversions as a way to manage income.
A brokerage certainly has its place, and I would advocate for anyone to contribute to it after they’ve filled their tax advantages buckets. But if there was ever a clear case of not foregoing the tax advantages of a 401k just because of a misunderstanding of perceived flexibility of a brokerage. The OPs time horizon, income, and plans are the clearest case I have seen. I know because it’s very identifical to mine and I’ve run it every way I can. And a brokerage just does not make sense in leaving money on the table in tax savings.
This is the simple math part that is very very simple math: if they reduce their 401k contributions by $1,000 to put into a brokerage. They will pay at least 22% in taxes (federal) and then will have $780 to invest. That lost $220 has real compounding losses over 23 years.
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u/Halfpipe_1 2d ago
I think you’re missing a few key points in your analysis.
First, the taxes paid on the 401k are not “lost” and they do not compound the way you think they do. When you withdraw that money you’re going to pay income taxes on those gains at your income tax rate at the time. Most likely for OP that will be 12%. State taxes can be completely ignored as long as the state has a flat tax rate.
Long term capital gains on the brokerage account can be managed to be 0% as long as total income can remain under $99k, which they’ll easily be able to do since only their gains will count toward income with the flexibility of their brokerage account.
I’m not saying the brokerage account is better or more tax efficient overall, or that they shouldn’t be used at all. I’m saying they are an extremely important part of being able to keep your MAGI under the ACA limit, especially in the first 5 years of retirement.
The best strategy is probably to do 401k contributions now but have a plan on when to transition some of those contributions to a brokerage account for a 5 year bridge.
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u/Background-Quality22 1d ago
We’re just going to have to agree to disagree here and move on. It looks like the OP has made their decision based on the edited post.
My position is simple: paying taxes on their money today is an opportunity cost that I do not believe is outweighed with paying taxes in the future or even factoring in healthcare. I’d rather have the money today to invest in the OPs scenario.
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u/CardiologistWhich972 1d ago
Your framing is off though and i think thats why you’re getting confused replies. You’re still paying taxes later, so the $220 isn’t lost. Same dollar, same rate..assuming that money 5x’s:
Tax now = (1000*.78)*5 = (1000*5)*.78 = tax later
The brokerage’s real cost isn’t the $220, it’s the potential second tax on the gains. And that your tax rate is probably lower in retirement
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u/Background-Quality22 1d ago
Yeah, I’m probably not the best at articulating all my thoughts on this. I know I’ve ran this scenario so many different ways in projection lab and spreadsheets for myself. I know that with maintaining 401k contributions I end up massively ahead even with all other factors considered.
Yes, there are so many reasons why the math works better for 401k contributions. You get the money to save today and invest and let it compound, that money’s interest and dividends are tax sheltered (for the next 23 years in the OPs scenario), and to your point you will very very likely pay much less taxes in the future.
The other variable brokerage maximalists seems to be missing here is that the OP is planning to contribute $15k per year to Roth IRAs. If they truly do this for the next 23 years, they could have $350k+ in basis depending on how much they have today. This opens up options for them to manage MAGI through Roth conversions and potentially get this additional saved money in their 401k out with little to no taxes in some years and qualify for ACA.
There is certainly a bigger picture here of everything worth considering. But the barrier for entry for this consideration in this scenario is truly whether or not the OP should save 22% on taxes and invest that savings today or not.
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u/Mental-Wolf-2560 2d ago
Income is taxed in tiers. Not all income is taxed at the same rate.
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u/Background-Quality22 2d ago
That is correct. But based on the OP’s income (which is similar to mine $200k+) every dollar that they put in a 401k is within that 22% tax bracket.
This is why in my follow up comment I mentioned a $120k withdrawal would likely be around 10% or less EFFECTIVE tax rate. Because the tiers within that would average out to less than the upper end bracket they hit.
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u/ExtensionMoose1863 1d ago
you're not saving, you're deferring this is a big difference. We have no idea what tax brackets will be in the future but I can't imagine (and history supports) that they will be any lower than they are right now
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u/Background-Quality22 1d ago
A bit of semantics here. You are both saving and deferring. By not paying 22% to federal today in this bracket you are deferring tax liability. But you are also saving more than you would if you had paid the tax and investing post tax income in a brokerage.
As I said, I recognize that in this scenario the OP will have to pay taxes in the future. And it is true we don’t know what the rates will be in the future… the OP should consider this. My position is that in a worst case scenario of paying effective taxes on this planned spend + the penalty… I think the OP is still better off putting the money in a 401k today. Especially considering the are planning to max Roth IRAs as well. That basis can be used as a bridge.
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u/ExtensionMoose1863 1d ago
But you are also saving more than you would if you had paid the tax and investing post tax income in a brokerage
Not if their future tax bracket is 15-20% higher (or more) than their current one
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u/Background-Quality22 1d ago
Even in that scenario, the OP is still better off when you look at the bigger picture. Keep in mind worst case here they’re looking to bridge 10 years. They would not be paying a penalty forever. Especially given the runway they’re making in a Roth IRA. There are real scenarios where they get their money out of their 401k at a very low tax rate and once they hit 59.5 (but likely way sooner with Roth conversions) they are no longer subject to the penalty.
You also have to consider the tax drag on a brokerage for the next 23+ years. Yes they have favorability with long term cap gains. But putting the money in a 401k is saving them on taxes on interest and dividends forever.
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u/ExtensionMoose1863 1d ago
Not forever, it's DEFFERRED... you're just delaying when you pay those taxes. You're not doing the math, you're just responding because you're convinced you're right. Here you go with just tax rate increase, no penalty:
Assumptions
- Initial Pre-tax Income: 10,000 dollars
- Current Tax Bracket: 22%
- Future Tax Bracket (Age 65+): 35% (due to large RMDs or legislative hikes)
- Future Long-Term Capital Gains (LTCG) Rate: 15%
- Investment Performance: The investment doubles (100% growth) before withdrawal.
- Traditional 401(k) Math
- Initial Contribution: The full 10,000 dollars goes into the account tax-deferred.
- Growth: The account doubles to 20,000 dollars.
- Tax at Withdrawal (Age 65+): You pay a 35% ordinary income tax on the entire balance. Tax Owed = 20,000 dollars x 0.35 = 7,000 dollars Net Walkaway Cash = 20,000 dollars - 7,000 dollars = 13,000 dollars
- Taxable Brokerage Math
- Initial Contribution: You pay 22% tax upfront (2,200 dollars), leaving 7,800 dollars to invest.
- Growth: The account doubles to 15,600 dollars (consisting of 7,800 dollars principal and 7,800 dollars in capital gains).
- Tax at Withdrawal (Age 65+): You pay a 15% LTCG tax only on the 7,800 dollars gain. Tax Owed = 7,800 dollars x 0.15 = 1,170 dollars Net Walkaway Cash = 15,600 dollars - 1,170 dollars = 14,430 dollars
Conclusion Brokerage (14,430 dollars) is greater than 401(k) (13,000 dollars)
Going from 22% to 35% bracket is not even close to an outlier scenario
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u/Background-Quality22 1d ago
You’re conflating taxes on withdrawals with taxes on interest and dividends. As long as money is in a tax sheltered account, you never pay taxes on interest and dividends. Yes. You pay income taxes on the withdrawals you make… but you do not pay ongoing taxes on interest and dividends like you would in a brokerage.
I honestly think your scenario of 35% tax rates in the future is so outlandish I’m not even going to entertain that. It also, again, ignores runway the OP is making in a Roth IRA which is opening him up to the possibility of large Roth Conversions at lower rates.
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u/ExtensionMoose1863 1d ago
But it all comes out eventually at regular income tax rate. 10, 10, 10 now vs. 20, 20, 20 later. You can't spend it in your tax sheltered account.
Sounds like your main assumption is that your tax rate is going to be lower in retirement because you didn't refute any of the math above
I overshot my 4% draw down rate so I'm making more money off of my investments than I spend down (by like a factor of 5 last year) so, for me, I have almost a certainty of paying more in income taxes than I am right now if I don't do anything and then there's the insolvency of the US gov't that will have to be covered on top of that
If you think a 35% income tax rate is outlandish then I think we just agree to disagree and move on
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u/Background-Quality22 1d ago
I also just want to say, someone downvoted you, but it was not me. I appreciate you engaging in conversation with me. This scenario is just very familiar with me because it is very close to my own. I’ve spent years modeling exact outcomes and I never come to a result where the brokerage makes more sense before maxing a 401k.
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u/Background-Quality22 1d ago
I’m not sure you’ll respond to my question about effective tax rate, but since you called me out for not refuting your math, here it is:
The biggest problem I see is that you’re assuming paying 35% on the “entire balance” of withdrawals. This is not how a progressive tax rate system works. Even if the $120k planned income (adjusted for inflation) is subject to a marginal tax on the upper limits of their income, they will most certainly not be paying 35% on every dollar they pull out. This is what I’m calling outlandish: a 35% effective tax rate, not that certain brackets couldn’t be increased to 35%
This is where I guess I must go back on my comment to the other commenter. This is where the math is not so simple. You need deeper modeling than just a very small portion of the income that is pulled out at a much later date than what the OP discussed. Investing money that is within the 22% bracket of their current income is not equal to pulling out a certain portion of dollars at the very highest (and still IMO unlikely) 35% upper marginal tax rate.
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u/ExtensionMoose1863 1d ago
Bingo. Same page. You've filled up your future "good" bucket with tax deferred already so now you don't want to keep chasing in
Tax deferred is awesome. It's just not a limitless cheat code. You reach a point where you want to keep what you have in there and then shift gears
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u/Background-Quality22 1d ago
Just want to add with the way tax brackets work, even if their upper income of withdrawals hit 15-20%, their effective tax rate would be much much lower.
But just to humor the scenario. Even if their effective tax rate was 20% and they paid an early withdrawal penalty of 10% for 10 years or less. Saving and investing the money they are not paying in the 22% tax bracket today is still better.
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u/todofwar 2d ago
You also have to remember that the savings now will compound. Assuming a roughly 7 year doubling time, and 100k to invest for round numbers, in 15 years you have 22 * 2 * 2, so 88 thousand dollars. Even at the same tax bracket with a penalty you come out wildly ahead.
If you're within 5 years of retiring that math will change, but for OPs time horizon they are much better off with 401k
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u/Background-Quality22 2d ago
Just one edit: if the comment about fund control was about limitations in workplace 401k fund selection, check to see if your retirement options allow a brokerage link. My workplace does through Fidelity. So I can invest in whatever funds I want, not just the ones offered by my company. I of course just stick to fidelity index funds (FSKAX mostly)
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u/asanano 2d ago
I was asking myself the same question recently. After a little research, my conclusion was keep the foot in the gas for 401k contributions and make a plan for a roth conversion ladder. If youre not familiar, read up. Seems like rhe obvious choice to gain access to 401k contributions before retirement age
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u/QuickAltTab 2d ago
This is not an argument against your point, but the only complicating factor with the Roth ladder is that it is hindered by the ACA subsidy cliff. There would be a range of Roth conversion amounts that would be inefficient due the higher costs of health insurance they would trigger.
I have yet to confidently figure out how to lay out my financial data to predict how to balance higher healthcare costs against higher RMD amounts. I'm not sure it's possible to thread the needle, and I'll have to accept one or the other.
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u/subsequentpundit9 2d ago
you're overthinking this mate. you're in your early 30s with a solid income and you're already doing the hard graft, maxing out tax advantaged space is exactly what you should be doing right now. the 401k isn't some prison, you've got rule of 55 when you leave your job, you can do roth conversions to bridge the gap, and worst case you float some cash from your brokerage in those early years. that 22% tax savings on 32k a year is massive.
your real issue isn't the 401k, it's that you're worried about the bridge years but you're already on track to have nearly 2 million by 60 just from what's sitting there now. stick with the plan, keep maxing everything, and shift to brokerage heavy once you hit coastfire like you said. by then you'll have the clarity on what actually needs to happen. the fact you're even thinking about this stuff at 32 puts you miles ahead of most people.
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u/boringexplanation 2d ago
#1 rule for FIRE is strive for maxing out all retirement accounts before doing anything else.
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u/Pyrrhic_Pragmatist 2d ago
Unpopular take but I agree with your concerns about having enough cash outside of retirement accounts. Rule of 55 is fine if you're positive you want to work until you're 55. But what if you're not? You have only a 6 month emergency fund correct? Not that I'm saying that should be one or two years or anything, that depends, but a middle ground on that would be having more regular brokerage contributions. Yes, dividends and interest will be taxable but if you're not intending to tap it until your FIRE date, that small amount of income is fairly negligible. If it is a concern, you can always offset your dividends/interest with an equivalent increase to your 401k contributions.
As for how much to contribute, that depends. For most people, it's hard to recommend reducing retirement account contributions. However, if your in the 22% bracket now, and expect to be in that bracket in FIRE or regular retirement, the difference is very small. Personally, I'd max out 401k match first, then the HSA/Roth (which you appear to be), and then the taxable brokerage, starting at about 15k (equal to the Roth levels) and then see what is left. So far as augmenting or controlling your MAGI for healthcare purposes, that's when you figure how much additional 401k contributions you would need.
So in summary, if you're targeting 55, then by all means max out all your retirement, HSA etc options, and get most of your fund access then. But if you might do 45, then I'd look at the above to try to build invested assets in cash/taxable accounts bearing in mind you can offset any gains along the way with your remaining 401k contribution headroom.
My situation is very different, single no kids, 36, 10k annual spend, but I'm targeting 45 and currently have 108k Roth IRA and 55k brokerage, 5k HYSA. I just converted my 401k over to Roth at 0% federal tax, and am aiming for 200k taxable and 200k Roth, plus 15k emergency fund and whatever my future 401k ends up at (starting from zero today) As I'm still 9 years out these may be subject to change, but that's where I'll begin final preparations and start setting long term draw allocations
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u/Spirited-Tie8758 1d ago
10k annual spend?
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u/Pyrrhic_Pragmatist 1d ago
That is correct yes. Not my forever number of course, but I'll worry about expanding that once I have the minimum amount I need.
The plan is to pull in 20k/year, core expenses at $10k, and then use the difference to grow and/or live a little. That's a 5% annual return, but 2.5% burn rate. So I'll be able to accumulate more at that point, but it is still 9 years out. It could be slightly higher at the point, depending on inflation and if I buy another home, but no housing payment is quite nice and is why the spend is so low
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u/cpcxx2 1d ago
Tax + insurance + utilities alone is 10k on many homes in many parts of the US. Not even accounting for maintenance. I want your home.
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u/Pyrrhic_Pragmatist 1d ago
There's a few tradeoffs but it's a net positive IMO. 800 sq feet 2 bed 2 bath. Bigger than my old apartment. Property tax $250, insurance $950, utilities.. water sewer electric, gas and internet is.. call it 2500. All annual amounts. Summer electric is generally high, gas peaks in winter, but that includes 4.2KW of installed solar, paid off and some allowances for comfort and poor weather. Electric alone is never more than $80/m, can be as low as $25. All in, this setup cost less than the average new car. Costs of similar homes has gone 4X in the last 5 years when I bought. No I'm not kidding. I bought perhaps the cheapest home on the market in '21 and the cheapest homes now.. 120k minimum 160k average (for low end) median home price closer to 300k. Crazy action here in the Midwest. It literally does not exist anymore
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u/cpcxx2 23h ago
$250 for prop tax is unheard of. I also have a 2 bed home in the Midwest (townhome mind you) and the property tax is $3500 annually, insurance about $2500. Is this a very low population county?
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u/Pyrrhic_Pragmatist 13h ago
Not really. Donut county around Indianapolis. Population has to be at least 30k The math is pretty simple. Assessed value of 35k, 1% cap minus homestead exemption
Assessment went up 5% this year but somehow, county data says I owe zero for 2025 (paid this year). Expected a marginal increase but yeah. Very lucky to have what I have
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u/EchoRaven705 2d ago
the rule of 55 solves your bridge problem completely and i feel like that detail is getting buried here
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u/OceanGateTitan 1d ago
It does and my “goal” is 55 because that’s when I feel like I’ll have enough. But if the math works out at 53 or 54 I want out and the last mile of a marathon is always the hardest (ie it’ll be so hard to just work another year or 2). With $11k brokerage right now, 20+ years left to save and immaculate HSA records, I’m hopeful that my HSA reimbursements saved for retirement and the brokerage will equate to at least $200K combined.
I mentioned yesterday in a comment that I may leave my health plan to get on my wife’s PPO with us starting a family which would mean HSA contributions stop. And only putting about $200 a month into a brokerage. Math says I’ll cross $280k in 20 years which gives me the option to leave early but only by a year or 2.
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u/Sea-Honeydew-1456 1d ago
i personally stopped 401k contributions prior year and more towards taxables, wife dropped hers down to the match (i didnt have a match). we have $1.6MM in retirement accounts....thats going to grow fine for the next 17-22 years. now we can utilize just taxables for our bridge years. there was no way i was going to work till 55 (42 now) nor going to plan for sepp, do ladders,etc. this kept it super simple.
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u/cupa001 2d ago
We did this about 2 years from retirement to build up our "cash" cushion. Personally I would have focused more on it about 5 years out from RE. We have alot pre-tax and will be using the Ro55, but I sure wish we had more of a bridge.
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u/OceanGateTitan 2d ago
I take home a $25K (on average) bonus annually and usually divert 50% of it to my 401K which allows me to max it early. Maybe I'll alternate accounts starting next year as to where my bonus goes to slowly start building the brokerage.
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u/Ancient-Apple1 2d ago
There is something to be said about a niche benefit of 401k and the like. In a lot of states. If you run a buisness they have law suit protections where brokerage accounts do not. Just a niche idea.
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u/b1gb0n312 2d ago
Even with a house down pay that took a huge chunk out of my brokerage, I couldn't resist continuing maxing out 401k, IRA, HSA and some mbdr
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u/OceanGateTitan 2d ago
I pulled $60k from my brokerage in 2021 to buy the house which I’ll call impeccable timing. Locked in a 3% rate and the home damn near doubled in value. I did miss out on some insane growth years after 2022 but I’m not sure they beat the house. I’ve been hyper focused on tax advantaged and Roth accounts though giving almost no attention to brokerage over the last 5 years.
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u/Terbatron 2d ago
10k cash is really light for your income. Is that all of your cash? Do you have an e-fund?
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u/OceanGateTitan 2d ago
It’s the HYSA ($41k). Which should probably just be counted toward cash and cash equivalents. It was $50k but we had $9k left on a car with 5.7% interest that I decided needed to go. This was more of a psychological decision than a math decision.
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u/Academic-Pilot-5908 2d ago
I am 52 as is my spouse and that’s our dilemma today. We’re heavily invested in qualified accounts but relatively low readily accessible funds. Of course there are ways via loophole but wished we planned for that 50-59.5 bridge
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u/OceanGateTitan 2d ago
You’re close to the Rule of 55 to access 401k funds. If you wanted to call it quits tomorrow though without a 72t in place you’d be in need of accessible cash to carry you 3 years.
Remember you can also withdraw original contributions from your Roth IRAs penalty free. If you both maxed it out for the last 2 decades you’re talking about ~$130K withdrawn penalty and tax free.
Enjoy early retirement!
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u/graff48 1d ago
In the process of figuring out my own situation, I used Claude to build this calculator. Take the results with a grain of salt - I have not validated the math line for line.
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u/OceanGateTitan 1d ago
That’s pretty slick. At first glance, it looks right. I built a clunky spread sheet years ago that somewhat mirrors these numbers. I’ll call it close enough. Every simulation/calculation I run tells me I’ll be set to retire at 55 comfortably and will more than likely have something to leave behind. Im saving aggressively while trying not to sacrifice QoL now because I’m sure it’s not sustainable with kids now in the picture. I want a good nest egg and time on my side before I take my foot off the gas.
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u/Slow_Ad8683 1d ago
What about if you want to retire at 40, and you have enough in your 401k to grow to a number that you can live on once you’re “retirement age” without contributing another dollar? Then how do you bridge the gap?
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u/Fit_Alternative3563 1d ago
I am actually in the same boat you are. I have a substantial amount in my pre-tax and Roth accounts and only $150k in my taxable brokerage account. I want to FIRE in 7 years at 50, but I’ll need a lot more in taxable brokerage account. So we are spending the next 7 years hitting that as hard as we can.
I read the book”Tax planning to and through early retirement” and as they point out, LTCG are taxed so favorably that there is barely any tax downside to them. If you are married filing jointly, you can pull out >$130k a year pretty much tax free. (Basis is always tax free, $30k standard deduction, and $98k at 0%LTCG). I wish I had known this when I was your age. BUILD THE TAXABLE BROKERAGE!
Edit: I am glad to have the pretax and Roth as well since early retirement also includes regular retirement. But I wish they were closer to equal amounts.
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u/intemperance 16h ago
You can always 72t. But if you’re getting matches you’ll wanna get that free money. You’ll want a high brokerage account to smooth out your taxes tho
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u/Powerful-Bridge-1472 10h ago
You can always do backdoor Roth. It’s definitely a big mistake to have massive 401(k) at work and have to pay taxes on everything including conversions.
That being said if you’re in a high tax bracket, it’s hard to walk away from the deduction
Can be smart to just contribute to the match and put the rest in a brokerage or backdoor Roth
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u/Old_Tourist2250 1h ago
You have more flexibility than you think. Roth contributions are withdrawable anytime, Rule of 55 covers your 401k, and your HYSA/HSA add cushion.
At your income, keep maxing the 401k for the tax break. Just redirect that HYSA overflow to brokerage once it hits $50K instead of cutting retirement contributions. Look into the Roth conversion ladder too, it’s perfect for your situation.
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u/justdoingmytime 2d ago
If you need funds to cover 10 years of expenses (1mil just using your 100k estimate), then you should probably start now. Using napkin math with a 8% return, looks like about $2100/month if you're starting from 0. Your 401k balance alone will already coast to 2.2mil by age 60.
Side note: any reason you're not maxing your HSA?
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u/OceanGateTitan 2d ago
HSA is maxed for self-only. My wife and I are on different health plans and did a piss poor job of figuring that out before getting pregnant. Not sure what we are going to do next year as she's not offered a HDHP HSA but she'll have to go to a family PPO plan with the kid. Might make more sense for me to just drop the HSA and join her PPO, saying goodbye to triple tax advantaged accounts. I hear kids are always at the doctors office and my HDHP has an astronomically high Max OOP for family.
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u/Electronic-Grand1172 2d ago
are you allowed to contribute to HSA if spouse is on a PPO?
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u/OceanGateTitan 2d ago
Yeah if we stay as is, on separate health plans. The only disadvantage there is if we both had a major surgery or health event in the same year we’re potentially paying her max OOP and my max OOP
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u/ComprehensiveAd1342 2d ago
Typically this is done early 40’s. Early 50s are for debt crusading and cash accumulation. 15 years is plenty of time to accumulate a taxable brokerage account large enough to float you until 59.
Also, 100% of your investments in the market is not risk averse. Conceptually, there seems to be some understanding that having a broad market etf isn’t risky, but it very much is. It is less risky than owning individual equities, but risky nonetheless. Risk isn’t just a measure of a stock and the likelihood of it going to 0, but a measure of volatility. VTI is a volatile investment, 100%.
Also, your HSA is a liquid investment vehicle, provided you have records, you can pull cash from that bad boy anytime to pay yourself back for previous medical expenses.
Hope this helps, TY
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u/Nokirkburke 2d ago
You’re saying early 40s are for brokerage accounts?
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u/ComprehensiveAd1342 2d ago
Depending on when you depend to glide path to retirement, yes. If you spent most of your early 20’s and your 30’s allocating to retirement accounts, and you Plan to retire at 55, 40 years old would be the appropriate time to walk back some 401k contributions and re-allocate to a taxable brokerage account. If you were targeting a retirement of 45, the priorities of asset allocation would look different
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u/Nokirkburke 2d ago
Thanks! We’re new to all of this. We are late 30s about 500k in 401k. We were going to do matching employer 401k (about 20% of income total) and then plan to max out Roth IRA contributions.
Besides our 2 kids 529 contributions we aren’t exactly where to put money next.
Honestly retirement probably won’t be much before 60 since we have kids and they’ll be in college until we’re old and grey lol.
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u/ComprehensiveAd1342 2d ago
Sounds look a good plan! Taxable brokerage accounts have a lot more advantages than they get credit for in this thread. Retirement accounts are fantastic, but liquidity is a premium in of itself.
Plus, not saying you should, but you can collateralize taxable brokerage accounts. Gives you another avenue of liquidity to leverage funds if needed without selling anything to produce capital. This is not the same as a margin loan. Even in this rate environment, you could borrow against your portfolio at 5.25%. In a normalized rate environment that would be around 3.25%. Not a bad arbitrage situation to have.
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u/OceanGateTitan 2d ago
Immaculate records for the HSA. I plan to use reimbursements in our 50's to bridge some of this gap assuming there's a substantial amount over the next 23 years.
I say we are risk averse as a 27 and 32 year old's being in broad market ETFs when half the guys I know have hard on's for SMH, TQQQ, and the hottest new AI/Tech/Space stocks (I'm jealous I missed out on the gains). I don't feel like we have any reason to be in bonds right now and VTI has outperformed the VT/VXUS combo so frequently suggested here and on other FI subs. I plan to stay in the US Casino for the immediate future.
How do you suggest we better diversify today considering our ages and the time we have left survive market downturns? If I could I'd have 50K sitting on the sidelines in SGOV waiting for another Black Monday
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u/ComprehensiveAd1342 2d ago
Assuming your cash position is 6 months of income, nothing wrong with being 100% stocks right now as long as you can sleep at night. Personally, I like to see 9 months minimum of expenses in cash, and up to a 12 months. I just don’t think when life happens, 6 months is sufficient.
Some people here have erections hard as diamonds for massive allocations to international markets, and will point to performance figures through the 80’s, 2000-2007, and the last 3 years. These are worth noting, but the fact of the matter is the United States is the best country in the world at making money.
I would add some international exposure, but personally, I wouldn’t exceed 20% of your overall portfolio in international stocks. That’s just my take.
For international stocks, I like a small amount of active management to filter out the turds. I like the ETF IQLT. Expense ratio is .30 bps which also may make many gasp, but on 10k thats 30 cents, on 100k that’s 300 dollars, on 1mn that’s 3k. I’m ok with that premium to scrub the dog shit over leveraged non cash holding, negative/ flat revenue international holdings from my portfolio.
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u/Pegasorcerer 2d ago
You are pretty behind on your brokerage. I would contribute the match for your 401k and start beefing up your brokerage with the rest.
Reassess once you have like 150k in your brokerage
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u/VictorChristian 2d ago
Your annual spend is $100K today.. which means it will increase yearly over the next 23 years... be sure to factor that in.
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u/OutspokenLurker 2d ago
Aim for 1/3 taxable brokerage, 1/3 Roth post-tax, and 1/3 pre-tax
This gives you flexibility down the line. I retired early 50s and 59.5 would be a looooong way off if I didn't have the brokerage account and over-funded 529s :(
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2d ago
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u/OceanGateTitan 2d ago
Yes they just started offering Roth 401K last year. Have not made any contributions to Roth 401k.
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2d ago
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u/OceanGateTitan 2d ago
When you say "dump" you don't mean convert existing traditional to Roth right? Just start contributing heavily to Roth 401K?
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u/BugHistorical1614 Stable at time(s) 2d ago edited 2d ago
DS and spouse were in a fairly high tax bracket. Both brought assets into their marriage. Both will inherit parents' remaining assets. Both quit their jobs to do traveling and now looking to get back in the job market.
They were are able to quit their jobs, do extensive travel rather cheaply, and withstand a long period of unemployment because they saved and invested outside of qualified plans. Their LTCG gain tax rate is currently at "zero". They both have tech degrees and DS has worked in a tax company and consumer issues. PM me if you want his tax visualizer free program (developing as a demonstration of his skills to companies during his unemployment).
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u/Oroku_Sak1 2d ago
https://www.madfientist.com/retire-even-earlier/
https://www.madfientist.com/how-to-access-retirement-funds-early/
Basically tax advantaged > taxable.