Maxing i401k - where to put extra cash?

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msterrr
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Maxing i401k - where to put extra cash?

Post by msterrr »

My SO & I are extreme savers who have been maxing our solo 401k limits for a few years now - typically saving 60-80% of our incomes. We target an AGI ~150% FPL for max ACA subsidies and "gold plated silver" plans.

Our business income has increased a lot though and this is becoming harder to do - at $39000 income for 2 you can invest 100% of your income into a solo 401k, at $70000 you can invest 64%, then at $100000 you can only invest 51% and it declines even further from there. We could hit 160-200k this year so we've exited our familiar savings territory.

Are there other tax advantaged savings vehicles we can use to keep our AGI down and our ACA subsidies up?

How should we adjust our savings strategy as our income increases to maximize the value of our high savings rate?
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MP123
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Re: Maxing i401k - where to put extra cash?

Post by MP123 »

An HSA account would help reduce your AGI modestly if your health insurance qualifies.

You're likely close to phased out of IRA and direct Roth contributions but consider the "Backdoor Roth".
sc9182
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Re: Maxing i401k - where to put extra cash?

Post by sc9182 »

Section-179 deduction ?? Go buy that long-awaited Tesla SUV for business-use with 179-deduction ..
I don't think ACA asks for what car/vehicle you are driving for business ..
Last edited by sc9182 on Tue Aug 16, 2022 6:28 am, edited 1 time in total.
HomeStretch
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Re: Maxing i401k - where to put extra cash?

Post by HomeStretch »

The interest earned on I-Bonds may be tax deferred until redemption.
Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

MP123 wrote: Fri Aug 12, 2022 10:59 pm An HSA account would help reduce your AGI modestly if your health insurance qualifies.
The Health insurance that we purchase through the marketplace does not have an HSA option.
sc9182 wrote: Fri Aug 12, 2022 11:02 pm Section-179 deduction ?? Go buy that long-awaited Tesla SVU on business deduction .. I don't think ACA asks for what car/vehicle you are driving for business ..
We do not own a car - it would be very hard to hit our savings goals with car payment(s), insurance, gas, maintenance etc - are there other big business purchases people commonly make like that which don't have so much overhead / lose value so quickly?

We already bought new laptops and office furniture this year.
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jello_nailer
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Re: Maxing i401k - where to put extra cash?

Post by jello_nailer »

sc9182 wrote: Fri Aug 12, 2022 11:02 pm Section-179 deduction ?? Go buy that long-awaited Tesla SVU on business deduction ..
I don't think ACA asks for what car/vehicle you are driving for business ..
^ This. What I am planning on doing later this year. Even easier with a 6 ft. bed Tundra or an F250.
Last edited by jello_nailer on Sat Aug 13, 2022 9:25 pm, edited 1 time in total.
Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

jello_nailer wrote: Sat Aug 13, 2022 7:12 am^ This. What I am planning on doing later this year. Even easier with a 6 ft. bed Tundra of F250.
What is the logic here? That you can safely deduct a luxury car (or truck) purchase well beyond what would actually be warranted for the business? Including if a car / truck that provides zero actual utility for the business and is in reality primarily used for personal use (ie. not >50% business use)? Or do you have to justify the extravagant cost & business utility somehow?

I'm interested in maximizing the efficiency / benefits of my high savings rate - not looking for up front discounts on lifestyle inflation that will eat into my future savings rate.
Last edited by msterrr on Sat Aug 13, 2022 7:43 am, edited 1 time in total.
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jello_nailer
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Re: Maxing i401k - where to put extra cash?

Post by jello_nailer »

msterrr wrote: Sat Aug 13, 2022 7:35 am
jello_nailer wrote: Sat Aug 13, 2022 7:12 am^ This. What I am planning on doing later this year. Even easier with a 6 ft. bed Tundra of F250.
What is the logic here? That you can safely deduct a luxury car (or truck) purchase you don't actually need for the business? Or do you have to justify the extravagant cost & business utility somehow?

I'm interested in maximizing the efficiency / benefits of my high savings rate - not looking for up front discounts on lifestyle inflation that will eat into my future savings rate.
If you can meet the 50% business use rule then the other rules are pretty easy. They have a few restrictions - I think new legislation was called the "Hummer Law" or something like that. Now in the end it doesn't get you past the $61k individual cap (if in catch-up phase) it lowers your taxable income.

You have a first world problem of plenty.
Malum Prohibitum
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Re: Maxing i401k - where to put extra cash?

Post by Malum Prohibitum »

msterrr wrote: Fri Aug 12, 2022 8:55 pm My SO & I are extreme savers who have been maxing our solo 401k limits for a few years now - typically saving 60-80% of our incomes. We target an AGI ~150% FPL for max ACA subsidies and "gold plated silver" plans.

Our business income has increased a lot though and this is becoming harder to do - at $39000 income for 2 you can invest 100% of your income into a solo 401k, at $70000 you can invest 64%, then at $100000 you can only invest 51% and it declines even further from there. We could hit 160-200k this year so we've exited our familiar savings territory.

Are there other tax advantaged savings vehicles we can use to keep our AGI down and our ACA subsidies up?

How should we adjust our savings strategy as our income increases to maximize the value of our high savings rate?
So there are two of you in the business, but you have only one solo 401(k)?

Why not set up a regular 401(k) for each of you that has a company match that maxes out based on whatever salary you are paying. Assuming you are under 50, you have $20,500 employee contribution each plus a company contribution of $40,500, for a total of $61,000 each. That's potentially $122,000, and at $160k income there would not be enough money to max them both out. If 50 or over, you get an additional $6500 apiece, for an additional $13,000.

With the QBI deduction from the TCJA in 2018 and $122,000 in deduction for the 401(k), your income taxes will be very low, too.
HomeStretch
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Re: Maxing i401k - where to put extra cash?

Post by HomeStretch »

With higher business income, in reality there is not a lot more you can do to continue to keep your income at 150% FPL for higher ACA subsidies. Even at your higher income, your ACA premiums will luckily still be subsidized to no more than 8.5% of MAGI for 2022 and possibly though 2025. At your income level, you will still be getting health insurance for a reasonable amount considering what unsubsidized premiums are.

Some other options are to keep your income lower by declining business or semi-retiring.
tashnewbie
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Re: Maxing i401k - where to put extra cash?

Post by tashnewbie »

There are other places to save to maintain your savings rate but most of them aren’t going to be tax-deferred (meaning reduce your annual AGI).

HSA eligible plan which you said you don’t use.

That’s the only option I’m aware of that would reduce AGI, based on your current solo 401k setup. Someone else mentioned the idea of setting up a regular 401k. Something to explore. I presume there’d be higher financial and administrative costs.

Check out the prioritizing investments wiki for other savings vehicle ideas. Example: backdoor Roth and taxable brokerage account.
sc9182
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Re: Maxing i401k - where to put extra cash?

Post by sc9182 »

msterrr wrote: Sat Aug 13, 2022 7:35 am
jello_nailer wrote: Sat Aug 13, 2022 7:12 am^ This. What I am planning on doing later this year. Even easier with a 6 ft. bed Tundra of F250.
What is the logic here? That you can safely deduct a luxury car (or truck) purchase well beyond what would actually be warranted for the business? Including if a car / truck that provides zero actual utility for the business and is in reality primarily used for personal use (ie. not >50% business use)? Or do you have to justify the extravagant cost & business utility somehow?

I'm interested in maximizing the efficiency / benefits of my high savings rate - not looking for up front discounts on lifestyle inflation that will eat into my future savings rate.
Heh - like that you not wanting to inflate your lifestyle. But, how "else" are you going to reduce business (and pass-thru to personal) income, and continue to fully enjoy max ACA subsidies --
msterrr wrote: Fri Aug 12, 2022 8:55 pm We target an AGI ~150% FPL for max ACA subsidies and "gold plated silver" plans.
Like some one mentioned - you've got first-world problem (more income) this year ..

Someone enlighten us ..
Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

Malum Prohibitum wrote: Sat Aug 13, 2022 7:43 amSo there are two of you in the business, but you have only one solo 401(k)?
It's one solo 401k with 2 participants so $39000 (19500*2) + % of compensation.
Malum Prohibitum wrote: Sat Aug 13, 2022 7:43 amWhy not set up a regular 401(k) for each of you that has a company match that maxes out based on whatever salary you are paying. Assuming you are under 50, you have $20,500 employee contribution each plus a company contribution of $40,500, for a total of $61,000 each. That's potentially $122,000, and at $160k income there would not be enough money to max them both out. If 50 or over, you get an additional $6500 apiece, for an additional $13,000.
I'm not following how this is different than a solo 401k and I believe the limits would be shared across account types? Are you saying there's a different type of retirement account available to small business owners that would be less constrained by the % of compensation employer contribution limit on a solo 401k, but would still have access to the solo 401ks high $61,000 per participant (for 2022) yearly max? Can you provide a bit more detail about this approach as I've never heard of this kind of approach before?
Malum Prohibitum wrote: Sat Aug 13, 2022 7:43 amWith the QBI deduction from the TCJA in 2018 and $122,000 in deduction for the 401(k), your income taxes will be very low, too.
QBI deduction definitely helps.
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Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

HomeStretch wrote: Sat Aug 13, 2022 7:53 am With higher business income, in reality there is not a lot more you can do to continue to keep your income at 150% FPL for higher ACA subsidies.
This was my expectation prior to posting - just wanted to check with a more knowledgeable crowd to confirm my suspicions.
HomeStretch wrote: Sat Aug 13, 2022 7:53 amEven at your higher income, your ACA premiums will luckily still be subsidized to no more than 8.5% of MAGI for 2022 and possibly though 2025. At your income level, you will still be getting health insurance for a reasonable amount considering what unsubsidized premiums are. Some other options are to keep your income lower by declining business or semi-retiring.
Yes, the ACA subsidy cliff has been removed, possibly through 2025 and this lowers my effective tax rate in the window from $73240 AGI (400% '22 FPL) to the point at which an ACA plan costs < 8.5% AGI. Not complaining about paying taxes that are unavoidable, just looking for efficiency.
HomeStretch wrote: Sat Aug 13, 2022 7:53 amSome other options are to keep your income lower by declining business or semi-retiring.
This is an excellent suggestion. We've been raising rates thinking that might lighten our client load a bit, but to date it has simply resulted in more income.
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Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

tashnewbie wrote: Sat Aug 13, 2022 9:56 am There are other places to save to maintain your savings rate but most of them aren’t going to be tax-deferred (meaning reduce your annual AGI). HSA eligible plan which you said you don’t use. That’s the only option I’m aware of that would reduce AGI, based on your current solo 401k setup. Someone else mentioned the idea of setting up a regular 401k. Something to explore. I presume there’d be higher financial and administrative costs.
I'm intrigued by the regular 401k option, but can't quite follow what the advantage would be. We have at least 5-10 years left on our savings journey so if something like this was a big win the switch would probably be worth the overhead.
tashnewbie wrote: Sat Aug 13, 2022 9:56 amCheck out the prioritizing investments wiki for other savings vehicle ideas. Example: backdoor Roth and taxable brokerage account.
Looking at the prioritizing investments wiki - we have zero debt (other than some low interest student loans I haven't had to make payments on for years at 150% FPL, but might have to start paying on next year) and we max both our solo 401k contribs so the only applicable option would be investing in taxable accounts.
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tashnewbie
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Re: Maxing i401k - where to put extra cash?

Post by tashnewbie »

msterrr wrote: Sun Aug 14, 2022 3:17 pm
tashnewbie wrote: Sat Aug 13, 2022 9:56 am There are other places to save to maintain your savings rate but most of them aren’t going to be tax-deferred (meaning reduce your annual AGI). HSA eligible plan which you said you don’t use. That’s the only option I’m aware of that would reduce AGI, based on your current solo 401k setup. Someone else mentioned the idea of setting up a regular 401k. Something to explore. I presume there’d be higher financial and administrative costs.
I'm intrigued by the regular 401k option, but can't quite follow what the advantage would be. We have at least 5-10 years left on our savings journey so if something like this was a big win the switch would probably be worth the overhead.
tashnewbie wrote: Sat Aug 13, 2022 9:56 amCheck out the prioritizing investments wiki for other savings vehicle ideas. Example: backdoor Roth and taxable brokerage account.
Looking at the prioritizing investments wiki - we have zero debt (other than some low interest student loans I haven't had to make payments on for years at 150% FPL, but might have to start paying on next year) and we max both our solo 401k contribs so the only applicable option would be investing in taxable accounts.
I’m not sure if a regular 401k would increase the amount you could defer in a 401k. Might be worth exploring, but if you only plan to work 5 more years, may not be.

Definitely consider backdoor Roth if you’re not already doing that. In general, Roth is better than taxable.
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Re: Maxing i401k - where to put extra cash?

Post by placeholder »

To clarify when you say max out do you mean the full 401k contribution limit of $61k plus applicable catch up for each of you?
Topic Author
msterrr
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Re: Maxing i401k - where to put extra cash?

Post by msterrr »

placeholder wrote: Sun Aug 14, 2022 4:56 pm To clarify when you say max out do you mean the full 401k contribution limit of $61k plus applicable catch up for each of you?
I mean max out like $19500 each + % income as necessary to hit 150% FPL. Some previous years it hasn't been necessary to contribute the full possible amount to hit 150% FPL (eg. 30-50k was enough, but not the "max" possible).

This year and in future years we plan to just contribute the max allowable - it's unlikely that we'll find ourselves looking at enough income to be eligible to contribute anything close to 61k each though and we are +/- 40 so no catch up contributions.
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Re: Maxing i401k - where to put extra cash?

Post by placeholder »

Given that the other option is to find a solo 401k setup that allows after tax contributions which would allow you to directly add more to the plan to get it up to the full amount then convert those amounts to roth in some fashion.
relativeratio
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Re: Maxing i401k - where to put extra cash?

Post by relativeratio »

OP,

I regret having maxed out my 401k over the years. I am now in a position where my social security will be taxed due to future 401k distributions. I think one needs to diversify between account types with a TIRA/401k, Roth and brokerage account. Always max the Roth out first. Do projections on the 401k so that the amount you have will cover income between age 55 (if your plan is early retirement) to 65 to show income for ACA. Live on 401k income (55 year rule) and brokerage income or savings until age 59 1/2, then make an income sandwich of say $19,500 (or what ever that number will be at the time) minus dividends/interest from your brokerage account and add Roth money to satisfy your income goals. Start taking more cash out of your 401k/TIRA at age 65 to spend and/or convert to a Roth.

Ideally, for me, my 401k/IRA balance would cover enough for ACA for years 55 to 65 with the remaining balance covering standard deductions until age 70 when I plan to take SS. This way you avoid taxes on your SS. By age 70, you got your Roth, SS, and brokerage account. And, hopefully, your brokerage account is all long term capital gains income that you can control the withdrawal and tax consequences of better than being forced to take RMDs.

Make sure you understand the 401k 55 year rule. You have to be working when your 55 or older. You can't quit work at 54 and expect to apply the rule when you are 55. Don't transfer 401k funds to a TIRA if you want to use that money for early retirement because then your back to age 59 1/2 for the TIRA.

I am going with the ACA subsidies instead of large Roth conversions in early retirement. I'll have a window to convert between 65 and 70 to avoid taxation of my SS but it will be difficult to convert without paying much higher taxes and maybe even Medicare premiums. If I had known what I know now, I would have been less aggressive with the 401k and had a long term brokerage account with buy and hold stocks. Fortunately, as soon as I learned about Roth IRAs, I maxed out almost every year since its inception. The 401k in my opinion is a trap. It might make sense to contribute with low/to moderate contributions for future needs as mentioned but the brokerage account is a better choice for that extra money. And, of course, the Roth is King.

Just my two bits,

RelativeRatio
relativeratio
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Re: Maxing i401k - where to put extra cash?

Post by relativeratio »

My last post was probably not a good answer for the OP. It was too long and focused on my own goals and situation.

I'll make this one simpler: Don't always max out the 401k because it can be a tax trap, diversify amongst account types, and put that extra money in a regular brokerage account with a buy and hold strategy. You'll have more control on when to generate taxable income for the ACA this way.
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