Should you fill up tax deferred space before taxable?

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uthendo
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Should you fill up tax deferred space before taxable?

Post by uthendo »

Suppose you're going to contribute the maximum in tax deferred space, so will have to also contribute to a taxable account. Let's say 50/50 ratio. Contributions will be monthly. Does it matter what order the contributions are made? For example, since it's 50/50, do you spend the first half of the year contributing to tax deferred accounts, then spend the second half funding taxable accounts? It would seem to make the most sense, but I'd guess that some people would contribute in a 50/50 ratio so that contributions would be the same every month. Is there a meaningful difference either way?
broncocountry25
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Re: Should you fill up tax deferred space before taxable?

Post by broncocountry25 »

You need to make sure you space out your tax deferred space for the entire year. Some employers won't match if you front load.
sailaway
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Re: Should you fill up tax deferred space before taxable?

Post by sailaway »

Many employer matching plans only match on a per paycheck basis and front loading would cause you to miss out on the match.

The lists we have are order of priority, not necessarily order in which it should actually occur. Many of us contribute to Roth IRA the following year, once we have confirmed that we are within the income limits.

(We do choose to front load DH's 401k since it does not affect his match so we get their money as soon as possible, then he can leave, they can lay him off or the money can just have a bit more time in the market.)
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Re: Should you fill up tax deferred space before taxable?

Post by steadyosmosis »

uthendo wrote: Sat May 27, 2023 6:47 pm Suppose you're going to contribute the maximum in tax deferred space, so will have to also contribute to a taxable account. Let's say 50/50 ratio. Contributions will be monthly. Does it matter what order the contributions are made? For example, since it's 50/50, do you spend the first half of the year contributing to tax deferred accounts, then spend the second half funding taxable accounts? It would seem to make the most sense, but I'd guess that some people would contribute in a 50/50 ratio so that contributions would be the same every month. Is there a meaningful difference either way?
When working, I front-loaded pretax 401k as much as possible.
But before doing that, one needs to make sure their 401k has a true-up provision.
Age < 59.5. Early-retired. AA ~55/45. Taxable account and Roth IRA and HSA ... all 100% equities. 100% fixed income in tax-deferred. I spend from taxable and re-balance in tax-deferred.
8301
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Re: Should you fill up tax deferred space before taxable?

Post by 8301 »

sailaway wrote: Sat May 27, 2023 7:08 pm (We do choose to front load DH's 401k since it does not affect his match so we get their money as soon as possible, then he can leave, they can lay him off or the money can just have a bit more time in the market.)
I fill up 401k, but leave some room for the future 401k to get the next employer match in case I change jobs in the current calendar year.
DVMResident
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Re: Should you fill up tax deferred space before taxable?

Post by DVMResident »

Ask your HR if the 401(k) provides a “true up” on the match. If yes, front load followed by taxables. If not, spread the contributions over the year.
cacophony
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Re: Should you fill up tax deferred space before taxable?

Post by cacophony »

I would just divide it evenly over the course of the year. Often true ups only occur at a certain time in the year, so you may be waiting 6 or more months for it, which would be frustrating if you were laid off or wanted to switch companies.
FIRWYW
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Re: Should you fill up tax deferred space before taxable?

Post by FIRWYW »

I posted a similar question before. No one answered so I ran the numbers myself and they are in the post below.

viewtopic.php?p=6909254#p6909254

However summarizing my conclusions. If your company doesn’t true-up, don’t front load. If they DO true-up, you still MAY be better not front loading. The difference is small. I think that starting next year I will not front load for 4 reasons. 1) the differences of returns of front loading vs spreading evenly throughout year is small. 2) by putting in over the year to all accounts it simplifies keeping the asset allocation I want across them. 3) i tax lost harvest and will start donating appreciated shares this year after I have held them for 12 months (would be donating that amount anyway and just saves taxes) and FINALLY 4) even though my company does true-up, they keep messing that up and I have had to correct them 2 years in a row now. Took months to get things corrected :(

(Aside for previous post, I assumed too high of tax drag so results for contributing to all accounts throughout the year would actually be better)
MathWizard
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Re: Should you fill up tax deferred space before taxable?

Post by MathWizard »

I front loaded the last 3 years because I thought I might just retire if the internal politics got too bad .
My employer did not penalize for this

I'm retiring next month, with tax deferred all maxed out for the year except for IRA, for which I do not need to decide until tax time next year.
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Re: Should you fill up tax deferred space before taxable?

Post by Wiggums »

I have always spread out my contributions throughout the year.
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Artsdoctor
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Re: Should you fill up tax deferred space before taxable?

Post by Artsdoctor »

uthendo wrote: Sat May 27, 2023 6:47 pm Suppose you're going to contribute the maximum in tax deferred space, so will have to also contribute to a taxable account. Let's say 50/50 ratio. Contributions will be monthly. Does it matter what order the contributions are made? For example, since it's 50/50, do you spend the first half of the year contributing to tax deferred accounts, then spend the second half funding taxable accounts? It would seem to make the most sense, but I'd guess that some people would contribute in a 50/50 ratio so that contributions would be the same every month. Is there a meaningful difference either way?
The timing all depends on your plan so you'll need those details--the variations are nearly endless. Your first priority would be to do whatever it takes to get your employer's maximum match. Everything else is secondary.
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Re: Should you fill up tax deferred space before taxable?

Post by placeholder »

At megacorp we also had after tax contributions available and could do the mega backdoor roth so I put my contributions on the max of 30% then when the deferral limit was reached the plan would switch to after tax but they also matched after tax so I didn't miss any.
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rob
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Re: Should you fill up tax deferred space before taxable?

Post by rob »

DVMResident wrote: Sat May 27, 2023 8:21 pm Ask your HR if the 401(k) provides a “true up” on the match. If yes, front load followed by taxables.
A lot is made of the true-up here.... Keep in mind that you still must be employed for that to happen. Last layoff I missed a chunk of match because I front-loaded and did not make it to the true-up date early the following year.
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Re: Should you fill up tax deferred space before taxable?

Post by White Coat Investor »

uthendo wrote: Sat May 27, 2023 6:47 pm Suppose you're going to contribute the maximum in tax deferred space, so will have to also contribute to a taxable account. Let's say 50/50 ratio. Contributions will be monthly. Does it matter what order the contributions are made? For example, since it's 50/50, do you spend the first half of the year contributing to tax deferred accounts, then spend the second half funding taxable accounts? It would seem to make the most sense, but I'd guess that some people would contribute in a 50/50 ratio so that contributions would be the same every month. Is there a meaningful difference either way?
Yes, as a general rule max out tax protected space before taxable. While this won't be beneficial in some years (i.e. years when the market goes down), over time it should provide a slight overall advantage.

I max out HSA, Roth IRAs, 401(k)s, DBP and some years 529s and UTMAs all in January and spend the rest of the year investing in taxable. Takes a certain amount of income/savings to do that sort of thing though. If you're putting $22,500 in a 401(k), $6,500 in a Roth IRA, and $4,000 in a taxable account, you're probably going to spend 10+ months maxing out those tax protected accounts before you get to taxable. I wouldn't "save up" in order to max out stuff in January.

As someone else mentioned, make sure you're not losing employer matching dollars doing this. Some company 401(k)s won't "true up" matching contributions.
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Re: Should you fill up tax deferred space before taxable?

Post by dcabler »

sailaway wrote: Sat May 27, 2023 7:08 pm Many employer matching plans only match on a per paycheck basis and front loading would cause you to miss out on the match.

The lists we have are order of priority, not necessarily order in which it should actually occur. Many of us contribute to Roth IRA the following year, once we have confirmed that we are within the income limits.

(We do choose to front load DH's 401k since it does not affect his match so we get their money as soon as possible, then he can leave, they can lay him off or the money can just have a bit more time in the market.)
Yep - definitely check your employer's plan documents regarding whether they perform a "true-up". I also have always front loaded, primarily because I've worked in an industry with frequent layoffs which most often happen in the second half of the year. The "true-up" to complete the matching at my current employer happens in June the following year. Previous employers were in the April timeframe.

Once I started working for an employer with an HSA, I did likewise at least until this year when my employer started using an external provider for managing withholdings - they have no concept of how to handle front loading.

Cheers
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Re: Should you fill up tax deferred space before taxable?

Post by DVMResident »

rob wrote: Sun May 28, 2023 9:43 pm
DVMResident wrote: Sat May 27, 2023 8:21 pm Ask your HR if the 401(k) provides a “true up” on the match. If yes, front load followed by taxables.
A lot is made of the true-up here.... Keep in mind that you still must be employed for that to happen. Last layoff I missed a chunk of match because I front-loaded and did not make it to the true-up date early the following year.
And? If the OP still employed at the end of the year (which is most likely) = you got the match.

If you’re not = you wouldn’t have gotten the match anyways. Now, you have the annual maxed 401(k), which is the position BH’s generally want to be in (provided the OP has liquidity/ER fund to survive a layoff).
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Re: Should you fill up tax deferred space before taxable?

Post by Hacksawdave »

I would review the Summary Plan Description (SPD) document to make sure there is a true-up provision on the company match. When I worked, I would have automatic investment plans for both, increasing them annually. As I would be eligible for an annual bonus in the first quarter, I would defer extra to the 401k and some to taxable. I would say if both got maximum funding, slight preference to tax deferred. Roth IRA is different and I had mine funded before end of first quarter.

We had a true-up provision that the 401k match was pro-rated over the year. Once I hit the employee contribution limit around September-October timeframe, that is where my holiday spending Christmas Club fund came from while the match would still populate into my 401k.

For the last decade of working, I would hit the SS annual limit in November and transfer the difference to my taxable account.
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Re: Should you fill up tax deferred space before taxable?

Post by cacophony »

DVMResident wrote: Mon May 29, 2023 9:14 am
rob wrote: Sun May 28, 2023 9:43 pm
DVMResident wrote: Sat May 27, 2023 8:21 pm Ask your HR if the 401(k) provides a “true up” on the match. If yes, front load followed by taxables.
A lot is made of the true-up here.... Keep in mind that you still must be employed for that to happen. Last layoff I missed a chunk of match because I front-loaded and did not make it to the true-up date early the following year.
And? If the OP still employed at the end of the year (which is most likely) = you got the match.

If you’re not = you wouldn’t have gotten the match anyways. Now, you have the annual maxed 401(k), which is the position BH’s generally want to be in (provided the OP has liquidity/ER fund to survive a layoff).
Someone that front loads, reaches the max, and is then laid off mid year would be prevented from receiving additional match from a new employer for that year.
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Re: Should you fill up tax deferred space before taxable?

Post by DVMResident »

cacophony wrote: Mon May 29, 2023 12:15 pm
DVMResident wrote: Mon May 29, 2023 9:14 am
rob wrote: Sun May 28, 2023 9:43 pm
DVMResident wrote: Sat May 27, 2023 8:21 pm Ask your HR if the 401(k) provides a “true up” on the match. If yes, front load followed by taxables.
A lot is made of the true-up here.... Keep in mind that you still must be employed for that to happen. Last layoff I missed a chunk of match because I front-loaded and did not make it to the true-up date early the following year.
And? If the OP still employed at the end of the year (which is most likely) = you got the match.

If you’re not = you wouldn’t have gotten the match anyways. Now, you have the annual maxed 401(k), which is the position BH’s generally want to be in (provided the OP has liquidity/ER fund to survive a layoff).
Someone that front loads, reaches the max, and is then laid off mid year would be prevented from receiving additional match from a new employer for that year.
Just do an excess contribution to get the second match :wink: . You will then do one of the thee actions: #1 excess contribution withdrawal on the first employer (YMMV on how helpful they will be), #2 make the second contributions an after tax mega-MBR if the plans allows/matches, or #3 (default option) pay double tax on the excess contributions (taxes < match value + tax deferred growth). There are so many choices.
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uthendo
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Re: Should you fill up tax deferred space before taxable?

Post by uthendo »

Thanks, everyone, for the insights. Aside from match issues, it seems best to max out tax deferred accounts first.
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Re: Should you fill up tax deferred space before taxable?

Post by pizzy »

White Coat Investor wrote: Mon May 29, 2023 5:13 am
I max out HSA, Roth IRAs, 401(k)s, DBP and some years 529s and UTMAs all in January
What does this add up to?
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Re: Should you fill up tax deferred space before taxable?

Post by White Coat Investor »

pizzy wrote: Tue May 30, 2023 3:27 pm
White Coat Investor wrote: Mon May 29, 2023 5:13 am
I max out HSA, Roth IRAs, 401(k)s, DBP and some years 529s and UTMAs all in January
What does this add up to?
A lot.

This year it was
HSA: $7,750
His IRA: $6,500
Her IRA: $6,500
His 401(k): $66,000
Her 401(k): $66,000
His other 401(k): $22,500 (just the employee contribution, the employer contribution goes in in April for the prior year as I don't make enough there to max it out any more)
DBP: $17,500

$192,750 or so if the math in my head is right. Didn't do the 529s (and may never again) or the UTMAs yet this year, but for four kids that would be another $136K ($17K * 2 * 4)
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Rob Relyea
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Re: Should you fill up tax deferred space before taxable?

Post by Rob Relyea »

Prioritizing investments wiki page is a good guide on which investments to do before doing taxable. In External Links on that page, it links to bogle.tools/saving as a tool that helps you apply that guide to your situation.
Last edited by Rob Relyea on Tue May 30, 2023 9:52 pm, edited 1 time in total.
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uthendo
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Re: Should you fill up tax deferred space before taxable?

Post by uthendo »

pizzy wrote: Tue May 30, 2023 3:27 pm
White Coat Investor wrote: Mon May 29, 2023 5:13 am
I max out HSA, Roth IRAs, 401(k)s, DBP and some years 529s and UTMAs all in January
What does this add up to?
You didn't ask me, but for another data point: HSA (family), Roth IRA x2, 401k X2, cash balance plan. So plenty of tax deferred space available, depending on your circumstances.
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uthendo
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Re: Should you fill up tax deferred space before taxable?

Post by uthendo »

Rob Relyea wrote: Tue May 30, 2023 6:37 pm Prioritizing investments wiki page is a good guide on which investments to do before doing taxable. In External Links on that page, it links to bogle.tools/savings as a tool that helps you apply that guide to your situation.
Thanks for the links. While the first link shows the order, it doesn't address whether it's optimal to break contributions into equal payments or singular payments, hence the question. As others have noted, due to match it may not make sense to fully fund the 401k if you have the max funds in one pay period. Thank you for the second link. FYI there's an extra "s" that leads you to a different page than you suggested.
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uthendo
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Re: Should you fill up tax deferred space before taxable?

Post by uthendo »

In my specific case, I'm self-employed with no match so a lot of the complexities that everyone mentioned doesn't apply to me. I've decided to fund, in order:

401k=cash balance plan: both are tax deferred. A 401k is tax deferred for the individual (me) while the cash balance plan is tax deferred for the business (I'm a S-corp). Both seem to equal out for tax purposes. Both will avoid OASDI. Cash balance plan seems preferable since the employer (still me) will avoid OASDI, while the 401k the employer will pay their share of OASDI.
HSA=in CA there's no state tax deduction, though there is a federal deduction.
Backdoor Roth=taxable but growth is tax=-free
Taxable=no current tax benefits.
miamivice
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Re: Should you fill up tax deferred space before taxable?

Post by miamivice »

As I have posted here, dual income families in many cases have significantly more amounts of tax deferred space available than single income families. Yet, dual income families don't necessarily need any more in retirement than single income families.

Thus, I would caution the idea that dual income families need to fill all tax deferred space prior to taxable, because doing so for most of a career may cause that family to have way more in retirement than needed, while not enjoying today enough.
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Re: Should you fill up tax deferred space before taxable?

Post by ryman554 »

miamivice wrote: Tue May 30, 2023 7:20 pm As I have posted here, dual income families in many cases have significantly more amounts of tax deferred space available than single income families. Yet, dual income families don't necessarily need any more in retirement than single income families.

Thus, I would caution the idea that dual income families need to fill all tax deferred space prior to taxable, because doing so for most of a career may cause that family to have way more in retirement than needed, while not enjoying today enough.
Dual income families also tend to have higher marginal rates. Egro, there is a ton of tax-advantaged leverage (defer at higher rate, collect at lower rate) that makes it harder to give up.

Certainly balance YOLO with retirement. But that's not the question of this thread -- will they save for the future in tax deferred vs. taxable. Not tax deferred vs. spend it now. Certainly taxable savings are easier to access before 55/59.5. Whether or not that is a good thing depends on your point of view and what the money is targeted for.

Note: one can always stop and coastFIRE when enough of a nestegg has built up. One can never recover the tax-advantaged space unused from the past.
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Re: Should you fill up tax deferred space before taxable?

Post by James.534 »

His other 401(k): $22,500 (just the employee contribution, the employer contribution goes in in April for the prior year as I don't make enough there to max it out any more)
I thought 401k has max employee deferral , even with multiple plans of 22500 per year.
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