Should I max out my contributions to pre-tax retirement plans? Even if I want to retire early?

You have decided that you will grow a terminal beard because you want to be a supreme bad-ass. At the same time, you realize that every dollar you are able to save acts as a bad-ass multiplier, pushing you into the realm of the most bad-ass bearders of the world. You plan to multiply your bad-assness so much, that you realize that it would be very easy for you to retire in 10 years, by around your 45th birthday.

What if someone came by and told you that you could chop a couple of years off of your early retirement plan without having to save or earn one extra penny? By taking advantage of this one little idea, you could set your wealth generation on autopilot and protect your financial plan from that most devious foe: yourself. You could also stick it to the man by ensuring that you pay almost no taxes now, and even less when you retire. Sound good? If so, then all you have to do is pile every cent that you can into maxing out every pre-tax retirement vehicle you have available to you.


Pre-tax vs. post-tax saving

Recently, I’ve been trying to figure out exactly how Mrs. Beard and I will structure our savings for our 10 year plan. There is some excellent debate around the personal finance blogosphere about this question, especially when it comes to “extreme” early retirement.

Extreme early retirement is generally defined as retiring anytime before your 50th birthday. That, at least, is the definition I will use for the “extreme” qualifier. Retiring at 55 years of age is just early retirement here.

Retiring extremely early sets up what seem like some pretty big problems for those looking to utilize popular tax-advantaged retirement plans, like IRAs and 401(k)s. These types of plans have massive penalties if you draw from them before you reach 59.5 years old.

If you retire when you’re 45, how do you access your funds for the next 15 years? Should you accumulate your stash in an after-tax brokerage account and skip the 401(k)? Maybe split the difference? This was an important question for me, since I DO plan to retire around 45 years old, and I’d kinda like to eat for those intervening years before the tax-advantaged plans are accessible without penalty.

The Mad Fientist has an excellent article about the myriad benefits of taking maximum advantage of pre-tax retirement accounts. You can read the details on his blog, but here is the main take-away:

As you can see, it’s possible to retire over two years earlier, simply by taking advantage of common retirement incentives and tax-advantaged accounts! It’s pretty amazing that he can take years off of an already short working career without earning more, spending less, or taking on any additional risk!

Holy Beard Oil and Mustache Wax, Beard Man! Two years earlier? Is the power of shoving as many assets in before their taxed and letting them grow tax free that powerful? That’s some mighty Beard Magic, if so.

I wanted to see this for myself, but with MY numbers. We’ll get to the early access issue in a little bit.


Maxing out the 401(k)/403(b)

Here is what I did. First, I looked at how much we plan to save, and then divided that up into as many tax-advantaged vehicles as I possibly could within the letter of the law. I went through and calculated the tax burden by shoving damn near everything we save into tax-advantaged vehicles. Then, I calculated the tax burden with just the one employer-matched retirement account I already have and funneling everything else into a post-tax Vanguard brokerage account. I’m going to completely ignore taxes on the gains.


The table above shows the power of the pre-tax account. First, let me explain where I can put my money. I have some advantages being a state employee that many folks out there might not have.

First, I must contribute to a state-sponsored, defined contribution 401(a) plan. I pony up 8.16% of my income, while the state puts in 5%. I don’t include the state’s contribution, since it doesn’t affect my taxable income, but it is definitely included when I calculate my savings rate.

I cannot contribute any more to the 401(a) plan, but the university I work for does sponsor a 403(b) plan, which is like the public sector version of the 401(k). I can contribute a maximum of $18,000 per year, with that limit in no way affected by how much is contributed to the 401(a) plan. Bad. Ass.

Now, we’ve maxed out the 401(a) and the 403(b). Since my wife is a stay-at-home mother, we can contribute up to $5,500 per year into an IRA in her name. This is usually referred to as a Spousal IRA. I might be able to contribute even more to an IRA in my name, but we’re pretty close to the income limits for that, and we run out of savable money at this point. So it doesn’t really matter.

We would have about $5,200 left for saving, but there is some value to having easily liquidable funds, and I’m pretty sure we’ve tapped out the tax-advantaged contribution limits at this point.

Look what happens to the taxes. We save $3,525 per year in taxes, which is money that can go back into saving. Every penny Obama doesn’t get is a penny we get to save.

We’re also completely in the 15% tax bracket. Not bad with a $90k income.


Accelerated Retirement

By funneling as much of our saving as is allowed into tax-advantaged plans, we get an effective income raise of $3,525 per year. That’s a bigger raise than I was able to get paying off our credit card debt. How does an extra $3,525 per year affect our retirement plans?

By fiddling around with the Early Retirement Calculator at, something supremely satisfying emerged. Add that cash to our savings, and we bump up from a 62% savings rate to a 67% savings rate. That 5% change in saving rate could equal nearly 2 years shaved off of the early retirement plan.

Thank you Mad Fientist. You are a mutha-fukin’ genious.

But what if you need that money sooner?

I’ve always worried about piling too much money into these tax-advantaged plans, because that money I can’t get out easily without some serious long-term planning or some very real pain.

What happens if there is an emergency where you need to access your money? If it’s locked up, aren’t you screwed?

First, this all assumes we have a decent size cash emergency fund. Second, you can still get the money if you really need to. If something comes up where you need large stacks of cash, then you can still pull money out of your retirement account and just take the 10% penalty.

But there is a barrier, even if it is small, that makes it almost certain you’re going to only pull that money out if the world is on fire. This is a good thing.

Protecting me from me

That small activation energy required to get to my retirement accounts prevents me from doing something stupid, like blowing money on an “emergency” cruise.

A tax-advantaged retirement plan is a great vehicle to sock money in exactly because it’s harder to get at, which prevents you from easily getting at it. I don’t know about you, but I suffer from periodic episodes of stupidity. A retirement account that keeps me from doing dumb shit is really in my best interest.


But what about when you retire?

That’s great that it’s hard to get at when we’re not retired, but what about when we actually need it to, you know, eat?

Yeah, the Mad Fientist already thought of that, too:

Step 1: Contribute to a Traditional IRA During Your Working Years

While you are working, your tax rate will likely be higher than it will be after FI so it makes sense to shield as much of your income from the taxman as possible by contributing to a tax-free contribution account.

Step 2: Slowly Convert Traditional IRA to Roth IRA

Once you begin your early retirement, you will likely have less taxable income than you did when you were working so use this period to convert your Traditional IRA to a Roth IRA.

IRA conversions count as ordinary income so to obtain completely tax-free conversions, you should convert an amount equal to your deductions and exemptions (assuming you have no other ordinary income).

During this time, you can live off of your long-term capital gains and dividends, which will be taxed at 0% if you are in the 10% or 15% tax bracket.

Step 3: Enjoy Your Completely Tax Free Retirement Money

My god, is there anything the Mad Fientist can’t do?

In our particular situation, our first step would be to roll-over our 401(a) and 403(b) accounts into a traditional IRA. Then we can follow the other steps, but no real difference.

Let’s sit back and think about what we’re doing here for a moment. We’re not only getting access to our retirement funds during our pre-60s early retirement, but we’re also keeping ALL of our money tax-free.

The Beard approves.

So my mind is set. The specifics of our plan are coming together nicely. It looks like we might even be able to beat our timeline by a couple of years, too.

So, grow a bad-ass beard. Grow a big stack of cash. Fuck the government. Who’s with me?

Should I max out my contributions to pre-tax retirement plans? Even if I want to retire early?

9 thoughts on “Should I max out my contributions to pre-tax retirement plans? Even if I want to retire early?

  1. Heyo!

    Our situations are incredibly similar! I work at a state university, so I contribute 8% of my salary to a defined retirement plan just like you do. It certainly beats the hell out of paying into social security!

    Weirdly, though, my 5% match is actually not based on my entire salary. The school contributes somewhere around 27% of my salary to the pension plan administrators, even though I opted out of the pension plan, and my 5% match is actually a match only on that employer contribution >:( I hope your match is the real deal!

    Right now, I am at around 67% capacity for my 403(b), because I am building up a year’s supply of F-You money as well, but within the next year or so I will be maxing it out.

    Have you looked into whether or not you are eligible for a 457(b)? It is painful to use in my state because the process is so slow, but you get an additional $18,000 of space if you can utilize it! I plan to do this after I start maxing out the 403(b).

    Great blog Mr. Beard. I’m still getting mine started, feel free to give it a look if you have time!

    1. Dr. Beard says:

      I just looked, and we do have a 457(b) plan. That looks even better, since you can draw from it before 59.5 if you have separated from service. That said, it might be as painful to set-up as you’re describing it is at your university. I’ll look into that. I know the 403(b) is pretty straightforward, and I can use Vanguard as my contracted vendor.

      These state-run plans can be tricky. You usually only have a select number of vendors to choose from, which means you may be locking yourself into massive fees because some state legislator’s cousin runs Such-and-Such Financial. I know with the 403(b) I can dump everything into tiny expense Vanguard ETFs.

      1. Austin says:

        It’s funny. I’ve never met anyone else also with a 401(a), it’s pretty uncommon to hear about.
        I also have access to a 457b which is great because of the no early withdrawal penalty. The thing is with most 457s is that they have pretty crappy investment options……it’s still better than nothing though.

        By the way I just found the blog today through rockstar and love it!

        1. Dr. Beard says:

          I see people with 401(a)s all the time, since participation is required by my employer (if you don’t choose the old fashioned “defined benefit” plan). So many of my colleagues have a 401(a), though I doubt most of them know that that’s what it’s called.

      2. My 403(b) options are reasonable. I managed to get my preferred 3 fund portfolio with low expense ratios through Fidelity. My 401(a) on the other hand, I had to deviate a little from my asset allocation goals because the options were so damn terrible.

        I haven’t looked into my options for the 457(b), but my main problem with it is that it takes a whole month to change your contribution amount, whereas I can probably change my 403(b) contribution amount before my next check most times.

        I love the concept of the 457(b), but I want agility in my cash flow. Even if it doesn’t change often, I want the bigger chunk of it to be flexible. So, when I look into the fund options, if they are acceptable it will definitely be lower in precedence than the 403(b).

  2. Your math makes me want to contribute more to my 401(k) but I think you are missing one very important detail. Any money that is converted from a traditional IRA to a Roth IRA has to wait 5 years before it can be withdrawn. So if you waited until your first year of early retirement to start your conversions you would not be able to touch this money for a full 5 years. What are you planning on using for income during that time frame? Although I would love to save more money on taxes we are currently building up our taxable investment accounts so that we will have some money during that 5 year time frame.

    1. Dr. Beard says:

      I didn’t forget that detail, I just sort of ignored it in the post. Yes, you have to wait 5 years after the conversion to collect tax free. We are also building a post-tax account, as well, since we’ve pretty much used up the pre-tax plan limits. So, you have any post-tax savings plus the option to do Substantially Equal Periodic Payment (SEPP) distributions. Those combined should carry us through the first 5 years. You can also just take the 10% penalty hit. It’s not much different than being taxed at the 25% rate some of that income would have been hit with anyway if I had not placed it in the pre-tax plan.

      1. Dr. Beard says:

        Oh, and there is also the fact that I like my job, so I may keep working. Doing that means I don’t get to keep the tax-man’s hands off ALL my money, but if those are the problems I’m dealing with in 10 years, then I don’t think I’ll be wanting to complain too loudly. 😉

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