Is it a good idea not to max-out your 401k?

Question

I'm thinking just putting 5% of the 15,500.00, into my 401k which will give me the full matching funds from my employer and then putting the rest of the into a tax-efficient mutual fund. I know that when I start to withdrawal from my 401k, I will owe regular income tax on any withdrawals. I'm just trying to lessen my tax bill when I'm in retirement.

If I was to retire now, my pension alone will put me into the 25% tax bracket...now adding my 401k, I will be in the 35% bracket. Just trying to lessen that tax bite.

Answer 1

Max your contribution, if you can. It's always better to do that. But at least put in what your employer will match. By the way, many employers mandate that if you want to take money from your 401k -- a distribution, not a loan -- you have to take it all. So you'd roll that over to your IRA and defer the taxes again.

Answer 2

For most people, putting the max into a 401K is a good idea - in your case, with a high tax liability in retirement, your alternate strategy might make more sense.

But check your numbers carefully. You say the 401K would put you into the 35% bracket - even for single, that doesn't start until $336,550 of taxable income, higher for married. You're only taxed on what you take OUT of your 401K each year - that sounds like quite a jump from the 25% bracket for pension only.

Lessening the tax bite by any legal means is a good idea.

Answer 3

Not a bad deal unless you're in the 35% tax bracket now. In which case you're just postponing the inevitable.

One thing you can do is use the 401k as a stop gap between the time you retire and the time you begin to draw your pension. This allows your pension to accumulate a little longer and provide for a larger distribution amount.

But, tax free municipal bonds or the like are not a bad retirement asset. Obviously, they aren't a good part of a 401k portfolio. Thus, investing in those outside your retirement plans isn't a bad thing.

Answer 4

I need a bit more information-how old are you now? You mentioned a statement with a possibility if you were to retire now, you'd be in the 25% bracket. Does your employer offer a Roth 401(k)? You may want to check with your benefits manager about that. That would provide a good tax solution to your 401(k) issue.

Anyway, I can't really give too much advice on this without knowing your current age. Remember, you should think about your current tax savings with the 401(k), too. If you're currently in the 25% bracket, you'll have some current tax savings, too. Theoretically, you could invest that tax savings into a Roth as well. This answer could literally go on and on, working through scenarios. You may want to talk to your tax advisor and ask her to run through some tax planning numbers for you.

Answer 5

Maximize the 401K and get the reduced tax now. By the way, you said 25% and 35% brackets---don't forget about state tax, unless you live in a rare state with ZERO

Answer 6

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