I am making ~$145,000 per year and was wondering if it is wise to contribute 12% pre-tax to my 401k? Is this too much? Is there any disadvantage in contributing nothing? I am already well off (come from a affluent family) so is there a point in even contributing to my 401k?

  • "I am already well off (come from a affluent family)". And if your parents decide to give all they're wealth to charity instead of their children? Or a lawsuit or business reversal wipes them out? IOW, the platitudes are correct: don't count your eggs before they hatch, and in the end, you can only rely on yourself. – RonJohn Feb 14 '20 at 18:48
  • @RonJohn: I already have all that money in my account. My mom died. – Bob Feb 15 '20 at 16:18
  • You should have explicitly stated that you already have a high net worth, instead of muddying the waters with "come from a affluent family". – RonJohn Dec 21 '20 at 0:41

In my opinion it's not possible to contribute too much to a 401K. (Unless you don't have enough money left over to pay your bills.) The max you can contribute in 2020 is $19,500. The main reason to contribute to a 401K is because of the tax savings. You can choose to put money into a traditional 401K and pay less taxes this year by deferring that tax, and also the tax on all the growth, until after you are 59.5 years old. Or, you can not reduce your tax this year and put the money into a Roth 401K and then you'll never pay taxes on that money again; even its growth is tax free.

In your position, if you don't need the money now, then I'd recommend maxing out the Roth 401K with $19,500 this year, and investing it so that all of it and its growth will be tax free once you reach age 59 and a half.

The disadvantages to not contributing to a 401K are that you lose out on the tax savings just mentioned, and, if your company has some amount of matching, you would miss out on that too.

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    Yes, if he's already 'affluent', it's Roth all the way. – JTP - Apologise to Monica Feb 14 '20 at 16:54
  • @JTP-ApologisetoMonica why contribute to a Roth when in a high bracket? – RonJohn Feb 14 '20 at 18:45
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    @RonJohn - because whatever your tax rate is, you can put that much more into the Roth. For example, suppose you're in the 24% bracket and you have exactly $14820 in after tax money that you can afford to put into a 401K. You could put that amount into a Roth 401K, or you could put $19500 into a Trad 401K and it would only cost you $14820. Which one you should pick might depend on what your current tax bracket is, and what you guess your tax bracket might be when you retire. But if you can afford to max out the Roth, you're actually getting 24% more money into a tax advantaged account. – TTT Feb 14 '20 at 18:59
  • cont... Note in this example it's only definitely Roth if you can afford to put more than $14820 into the 401K. – TTT Feb 14 '20 at 19:01
  • @TTT: It's 0% Roth at $14280 and 100% Roth at $19500 and a smooth curve all the way in-between. Traditional and Roth 401(k) contributions are not mutually exclusive, you can divide the $19500 deferral limit as finely as your HR department will let you. – Ben Voigt Feb 14 '20 at 20:07

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