Is it Time to Reduce My 401(k) Contributions?

How do you know if you are saving too much in tax deferred accounts? I have been maxing out my 401(k) for the past 5 years to the annual contribution limits. I feel like I have been playing a bit of catch up with my peers since I spent an extra couple years in graduate school instead of working. I felt it was important to put as much as possible in my 401(k) to catch up from those early years in school.

My account balance is now over $100k. Is that alot? Not really, but I think it puts me closer to the range I should be for my age given my $2million net worth goal. After all, I figure my 401(k) should have at most $750,000-$1,000,000 of my $2 million net worth goal and I am within 10-15% of my target 401(k) balance. Given I will at minimum contribute 6% of my salary for as long as I am working with my employer (to take advantage of the employer matches) should I begin to tone down my contributions closer to 6%?

Its pretty clear to me from my monthly net worth statements that I am trending in the wrong direction. I have healthy increases in my "Pre-tax Retirement Accounts", however my cash and taxable stock investments have not kept pace. This is over even bigger concern when you factor in the major expenditures I have coming in the next couple years - namely a wedding, a home purchase and a replacement car in the not too distant future.

I am going to reduce my 401(k) contribution rate from 20% to 10% over the next couple of weeks. This will hurt my near term performance as I will be paying taxes on this income, but I think its a better move for the long term.

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Comments (15)

I would recommend against this approach. The advantage of compounded growth of the tax deferred portion is impressive.

Also there are several ways you can access that money. It is likely you'll change jobs several times over your career. In these events, you could take the opportunity to roll your 401K account to a Rollover IRA and then to a Roth IRA which has more flexibility.

Additionally, you can take withdrawls from an IRA at any time, by taking mostly equal payments intended to last over your life expectency (once you start though you cannot stop until you turn 55).

These laws may change, but Uncle Sam likes anything that provides him with immediate revenue, so I expect the Roth IRA conversion will be around for a while.

I think you're making the right move by reducing your contributions--higher tax bill now... better tax bill later.

If you need to buy a house, down payment is your first priority 'cause it's hard to take $ out from your 401k/ira... (penalty and limit)

I saved enough for my down payment before maximizing my 401k...

I have the same concerns -- my wife and I have both been maxing out our tax-advantaged accounts for 10 years, and they have grown to a very healthy size.

We've also been saving a lot in a taxable account, but when you figure that we'll want to be retiring well ahead of a 'typical' age, that taxable savings has to get us through quite a few years.

At some point, it seems reasonable to say that one's 401K is "fully funded". I.e. it should continue to grow, on its own, quickly enough that you really don't need to continue contributing to have enough available once you reach retirement age.

Once you reach that point, I suppose it might make sense to cut back on 401k savings substantially in favor of taxable savings. I'm loathe to do this, because of the nice tax benefit that comes from the 401K.

I would recommend focusing more on the actual retirement goals and timeline, rather than the amount you are building in taxable and tax-advantaged accounts. The ratio to tax-advantaged accounts is always going to go that way, particularly because you don't have to pay taxes on gains.

If you take your age and time to retirement, you should be able to figure out roughly how much you should be saving in your 401k each year.

I have some posts on my blog on the topic, particularly some data from the recent Ben Stein book.


I went the other way and recently started maxing out the tax deferred accounts once I was happy with the growth rate in the "taxable accounts" - I do plan to do a Roth rollover at some point. This is a way of getting more money into a Roth account. The rolled over money can come out penalty free after a few years.

I've thought a LOT about this. It all depends on where you are in your goal and how early you want to retire. I'm planning on hanging it up at age 40, which means I have a huge gap to fill between age 40 and 59 1/2. Therefore, although i am maxing out my 401k, I am focusing on my taxable accounts for the time being instead of putting post tax money into the 401k. Not sure I would reduce my 401k, but take my approach for what it's worth...

My natural reaction is to be against reducing your 401k contribution. You're only given X amount a year that you can contribute a year to a tax deferred/tax deudcitble account a year. Use it or lose it. It's not like you can later make excess contributions to make up for that lost contribution. I had a similar problem a few years back, and forgone a contributing to my Roth that year (a much bigger sin), and have been kicking myself ever since. Obviously you need to look at your situation and think about what your cash flow will be in a couple years, but I'd suggest the route of contributing the max to the 401k and then borrowing against it if you need it for particular expenses. I did that not so long ago, and paid the loan off early when my cash situation improved.

I max out my 401K despite the fact that I have a healthy sum in it already. Being in the mid-40's, I have greater net worth than most people in my age and salary range. But saving 39K in between a couple (15.5 X 2 401K, and 4K X 2 IRA) is an easy way to not worry about other accounts. Another 10% of after tax 401K contributions helps save up for the kids education. I probably will need to cut back in the years that my kids are in college but not now when I can save pre-tax money.

2million, what do you think of Ron Paul?

I think you max as long as you are in the 25% fed tax bracket or higher with all of your deductions. If you are in the 15%, then it is debatable depending on what you plan on doing with the money.

I would suggest that you try to get about half of your money in pretax savings accounts (401k, traditional IRA, etc.) and about half in a post tax savings accounts (Roth IRA). The idea is that down the road you can pull money from which everyone gives you the best tax advantage for that year. If you have a year where you make a lot more money after retirement than you anticipated, you can pull money out of the Roth without pushing yourself into a higher tax bracket. If you have a year where you make a lot less money, you can pull as much as possible out of the 401k, traditional IRA type accounts.

I would never purposely save less than I currently do, unless the money was needed for an emergency.

If for some reason you have to par back, you should do so in this order.

First, put in at least what you get in a match from your company.

Second, max out your Roth IRA.

Third, go back and put as much money in your 401K as you can afford.

What I do, every year is I up my 401K, which is almost maxed out and my Roth IRA is already maxed out. When I eventually max out my 401K which is next year I will put the remainder into my taxable brokerage account or into the new HSA, which can now be used similar to a ROTH IRA and you can save even more money.

One thing I cannot see doing is ever going back in the savings game. You should be getting some sort of increase in salary per year, and you should use part of that raise to increase your savings account by X percentage a year. Assuming a 3% raise, put away 2% more each year into savings. If you never see it in your paycheck you should never spend it!

Good Luck

SEPP (Substantially Equal Periodic Payments). You are allowed to withdraw from your 401k penalty-free if you retire early. This basically invalidates this entire post and all the comments to it.

If you really are concerned about taxes then GET MARRIED and file taxes jointly!! Your girlfriend just quit her job and you could use her to widen your tax bracket. Also, I would still max out your 401k as long as you can. If you really needed the money quickly, you already have options such as borrowing the contributions from your ROTH IRA.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,938,393


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