Should my SO and I both be maxing TSP/401k?

[yorkslad]

My SO and I (35 and 36) bring in ~$180k gross. We have no debt other than a mortgage covered fully by BAH. We have two children in childcare (covered easily with our income) whose college is covered through a transfer of post 9/11 GI Bill benefits and a state benefit I will receive after a term commitment that will take me to >20 years.

I am on the high 3 retirement plan and will do >20 years. I max the TSP (23% trad, 7% Roth) as a CW3. All C fund currently. We max (already done for the year) two ROTH IRAs. FZROX, FZILX for me. FNILX, FSSNX for her just to diversify and see what fairs better.

My SO is currently contributing 5% for a 5% match plus another 15% which works out to $16224/yr total contribution including match. All traditional in VIIIX (large cap) and VSCIX (small cap)

I worry about having too much in tax deferred accounts in retirement and have opted not to max her 401k this year or last, but have instead been investing into a taxable brokerage and a splash of crypto. We have cash left at the end of the month and budget very well.

My question is am I of sound judgement opting not to max her 401k? Is too much tax deferred actually a thing or am I making that up?
Am I missing something else I could be doing?

Thanks in advance.

 

[holywalk]

@yorkslad Too much tax deferred can theoretically be a problem, but it shouldn't be. There are plenty of ways to access your TSP money early.

What age do you plan on not working anymore and living off of retirement funds?

 

[yorkslad]

@holywalk I’m shooting for 62 for both of us, but whatever second career I fall into could impact that if I enjoy it.

 

[girl4god86]

@yorkslad At 62, you’ll have full access to all of your retirement accounts anyway. So you’re just losing out on the tax benefits by investing in a taxable account. If you plan to retire much before 59.5, it’s good (but not entirely necessary) to have a taxable account to draw from. That said, if either of you work until 55, when you stop working, you’ll have immediate access to that employer’s 401(k) balance (Rule of 55; you don’t have to wait until 59.5). There are other exceptions and strategies to access your retirement savings early as well.

All that said, having funds in a taxable account does give you the maximum flexibility. Retirement accounts give tax advantages at the cost of more restrictions. When it comes down to it, the most important thing is that you just do it. If you invest $100K in a 401(k) or $100K in a taxable account, the main thing is that you have $100K saved somewhere for future needs.

 

[lifos]

@yorkslad The only reason you shouldn’t max, if you have the means to max both, is if you have an immediate need for liquidity, which it doesn’t seem like you do from what you shared. Rarely, if ever, does the benefit of liquid cash now outweigh immense negative of taxes by foregoing 401k/TSP contributions.

It also sounds like you’re fearing some big tax bill down the line with the “too much tax deferred” comment, which, to directly answer your question, isn’t a thing.

 

[kitty346]

@yorkslad Hard to say. There are quite a few ways to access retirement funds early without penalty. There are even scenarios where you’re better off paying the penalty than you would be putting money in a taxable account.

How much do you already have saved? At your income level, I doubt this decision will be the difference between eating cat food and being comfortable in retirement. Crunch some numbers, then do what you think is best and don’t stress about it.

 

[dandan27]

@yorkslad You both will effectively retire millionaires. The extra won’t make a huge difference, but it’s enough that there’s not much reason not to max it. Unless you think an extra $250~ a month (mind you that’s pretax, so maybe $175) in your pocket will change your life, you may as well put it in the market.

That being said, it’s up to you to run the numbers and decide if putting more into a taxable brokerage now will help you retire early, if you so desire. Anyone can say they want to work until they’re x age, but sometimes things change.

 

[shineannette]

@yorkslad You could end up with too much on tax deferred accounts but if you have the means to maximize tax preferred accounts you will be greatly benefited. If you tilt more to Roth accounts you’re in a position that even at higher tax brackets now you could be in a better position once you hit retirement. Realize that the country as a while is at historically low tax rates with massive amounts of debt and raising interest rates. At some point tax rates will go up and depending on social policies it could be a large increase. Stop signing a check that says you’ll pay your taxes later and instead sign the check to penalty lower your taxes by paying now.

 

[sloanep]

@yorkslad Do you need some outside of that for real estate or other big expenses? If you’re in index funds that don’t produce much income the tax hit doesn’t have to be that great (taxed at capital gains rates). Might be worth carving out some.

 

[iguana02]

@yorkslad My wife and I are in similar financial situation. We both max ours. We are rolling Roth TSP to Roth IRA upon separation as we can access contributions penalty free before 59.5. After maxing TSP and IRA we also have a taxable taxable brokerage. Once we get closer to retirement I think we will know if the Roth contributions and taxable account will be sufficient to cover the gap between retirement and 59.5.

Additionally if we really needed we could do a SEPP to gain access early but I think we are on a good glide path to fund the gap.

 

[branpierce]

@yorkslad That’s what my spouse and I do, max traditional TSP/ 401k, plus max backdoor Roth IRA for both.

Everything else this year is going into HYSA, with the goal of home renovations. I think you’re on the right track, and as your combined incomes grow, you can start to invest more in a backdoor Roth IRA or even taxable accounts.

 

[yorkslad]

@branpierce Thanks for the data point.

We have quite a bit (too much?) in the HYSA right now for projects. I socked $20k into I bonds last year too as a just in case.

 

[resjudicata]

@yorkslad Maxing out 401ks comes down to 1 question.
Will taxes be lower or higher in the future.