No. of Recommendations: 2
Hi all,
Manlobbi informed me of this board after I posted this as an OT post on the mechanical board. I hope it is not OT here!!
My son is 24 and an industrial operations engineer finishing his second year at a job where he makes close to $100K/year but can expect substantial pay increases in the next 5 years which could more than double his income.
His federal tax rate is 22% this year and possibly 24% in 2025, and his state tax rate is 5%
His employer matches the first $2150 in 401k contributions. The overall max my son can contribute to a 401K plan will be $23,500 in 2025.
I do not yet know the investment choices he has available in his company's 401K plan, but i assume it will be a few index funds, broad-type mutual funds and target retirement funds.
He has a taxable brokerage account(that I still manage with him). It was once an UTMA that became his at age 21. After using some of these funds for college, he still has over $500K in that account with a lot of unrealized long-term capital gains. My son's long-term capital gains tax rate is 15%.
He currently doesn't want to contribute more than the matching amount to his 401K because of cost of living expenses while making right about $100K per year. Note - He does max his annual Roth IRA contributions each year.
SOOooo - would it be wiser to max his 401K plan now, and pay himself that amount from his taxable account for the next 4-5 years, or just wait and plan to increase his annual 401K contributions as his salary increases? The former plan would represent about $6,670 not paid annually in state/federal taxes (until he retires), but he would be paying something less than $1000 in long-term capital gains each year.
I appreciate your thoughts - Smufty
No. of Recommendations: 2
Hi Smufty,
I would say that maxing out the 401k for 10 years or so makes a lot of sense. He would be drawing down the taxable account, but perhaps by a little less each year as his salary increases. Being so young, he has the opportunity to balance where his retirement savings are held, so he has flexibility in retirement. I was able to retire early with my funds split 40/30/30, taxable, tax-deferred,and tax free. This allowed the flexibility to take full advantage of ACA subsidies,while still having plenty to spend. The more options for income generation, the better.
Jim K
No. of Recommendations: 4
When my wife and I were relatively young, we lived on my salary, which was larger, and invested all of hers--at the time that was able to be 100% into a TIRA. We lived small, so of my salary we maxed out contributions to the 401(k) the company for which I worked had, and we maxed out my TIRA contributions. That was good for roughly 10 years with our combined income being in the neighborhood of $43k-$68k in today's dollars. When I changed jobs, and my wife drastically upgraded her employment, she had the larger salary, so we did the same thing, only living on her salary rather than mine.
When either of us got pay raises, we used half of the delta to increase our standard of living, and committed the rest to those retirement programs as their annual limits rose and to taxable investments after we'd maxed the contributions. When Roth IRAs, and then Roth 401(k)s, came available, we switched our contributions to those rather than TIRAs and regular 401(k)s. As we changed employers, we rolled those 401(k)s into our existing TIRAs or Roth IRAs, as appropriate, for the greater flexibility in investments and RMDs (they're long-range in TIRAs; they're plan-dependent in 401(k)s, which usually are very similar to IRS' TIRA requirements, but not always).
Your son doesn't have a wife, yet, but all of those techniques apply just as well to a single income. Since he's starting out with Roths available, my suggestion is that he use those rather than the traditional plans. So far, heirs get favorable tax treatment with Roths relative to the traditionals.
Eric Hines
