Great article, John! It was a much needed encouragement that slow and steady wins the wealth accumulation race. When listing the various ways one could max out their 401k account, I believe you left out a large additional source of tax-advantaged contributions: the in-place Roth conversion. Here's a quick personal example to illustrate this:
I'm currently saving $22,500 in pre-tax contributions to my 401k (which is the IRS tax-advantaged max).
My employer is matching my contributions 50% which works out to $11,250.
The IRS states that the combined employee and employer 401k contribution limit is $66,000. Thus, I can contribute an additional $32,250 to my 401k as an after-tax contribution (no pre-tax or Roth tax advantage).
My 401k plan administrator (Vanguard) allows me to enable in-place Roth conversions on any after-tax 401k contributions I make (see previous point). This means that the $32,250 in after-tax contributions I make are immediately converted to Roth contributions. (The caveat is that I have to pay taxes on any gains in between my initial contribution and the Roth conversation. However, since the conversion it taking place immediately after my contribution, there's effectively no gains.)
Now I know that not every 401k plan allows in-place Roth conversions, so this isn't an option for everyone. But I thought it's worth highlighting because it can allow one to effectively double the amount of money they're contributing to their 401k.
Thanks for sharing this perspective, Luke. My wife and I are also expecting our first kid (May) and we experienced an unexpected financial setback of a similar magnitude. I’ve been feeling pretty down about it even though the only lasting impact will be a slight reduction in our cash savings. Your article was an excellent, encouraging reminder to view money as a tool and not get so worried about hoarding every last dollar. Thank you =)
That's a great point! At the end of the day, we shouldn't be saving money just to save. Rather, we should be saving to enable experiences and opportunities that truly bring us joy. It sure sounds like that Porsche brought you joy for 12 years, which seems like a reasonable ROI to me!
Thanks for the additional perspective, Kevin! I agree that learning to find joy in a growing bank account can be a great habit (as long as you keep things in a healthy balance). I've actually got an article coming out next week related to tracking net worth that touches on this very point. Regarding trying to buy assets and rent liabilities, have you considered that it may be cheaper to buy an older car rather than lease a newer one? As I understand it, leases are only offered on relatively new cars. So, if you were trying to minimize the amount of money that depreciates, buying an older car that's already depreciated significantly may help with that. After all, the monthly cost you pay to lease a car already factors in the cost of deprecation (so you're not really avoiding the depreciation any more than if you bought it outright).
I completely agree about the ability to pass people. My wife and I often travel on two-lane roads when traveling around the midwest to visit extended family, and being able to minimize the time you spend in the opposing lane when passing is actually a really important "safety" feature... at least for those of us who like to pass!
It's a '16 Ford Focus RS. I debated mentioning it in the article but didn't want to distract from the main focus of it, especially for people who don't care about cars! It was the first grey RS in MN when I got it, which led to many fun conversations with fellow car enthusiasts. But after a few months peoples' attention always shifts to the next new thing. It'd be an expensive hobby to try and always have the latest and greatest!
Comments
Love the story Chris! My wife and I’s first jobs were at IBM too. =)
Post: How Far I’ve Come
Link to comment from May 23, 2023
Great article! Appreciated the shared experience since my wife and I are looking at a new vehicle purchase in the next year!
Post: Driving Me Crazy
Link to comment from March 15, 2023
Great article, John! It was a much needed encouragement that slow and steady wins the wealth accumulation race. When listing the various ways one could max out their 401k account, I believe you left out a large additional source of tax-advantaged contributions: the in-place Roth conversion. Here's a quick personal example to illustrate this:
- I'm currently saving $22,500 in pre-tax contributions to my 401k (which is the IRS tax-advantaged max).
- My employer is matching my contributions 50% which works out to $11,250.
- The IRS states that the combined employee and employer 401k contribution limit is $66,000. Thus, I can contribute an additional $32,250 to my 401k as an after-tax contribution (no pre-tax or Roth tax advantage).
- My 401k plan administrator (Vanguard) allows me to enable in-place Roth conversions on any after-tax 401k contributions I make (see previous point). This means that the $32,250 in after-tax contributions I make are immediately converted to Roth contributions. (The caveat is that I have to pay taxes on any gains in between my initial contribution and the Roth conversation. However, since the conversion it taking place immediately after my contribution, there's effectively no gains.)
Now I know that not every 401k plan allows in-place Roth conversions, so this isn't an option for everyone. But I thought it's worth highlighting because it can allow one to effectively double the amount of money they're contributing to their 401k.Post: A Path to $10 Million
Link to comment from February 14, 2023
Thanks for sharing this perspective, Luke. My wife and I are also expecting our first kid (May) and we experienced an unexpected financial setback of a similar magnitude. I’ve been feeling pretty down about it even though the only lasting impact will be a slight reduction in our cash savings. Your article was an excellent, encouraging reminder to view money as a tool and not get so worried about hoarding every last dollar. Thank you =)
Post: It’s Just a Tool
Link to comment from December 2, 2022
That's a great point! At the end of the day, we shouldn't be saving money just to save. Rather, we should be saving to enable experiences and opportunities that truly bring us joy. It sure sounds like that Porsche brought you joy for 12 years, which seems like a reasonable ROI to me!
Post: Just Another Car
Link to comment from November 10, 2022
Thanks for the additional perspective, Kevin! I agree that learning to find joy in a growing bank account can be a great habit (as long as you keep things in a healthy balance). I've actually got an article coming out next week related to tracking net worth that touches on this very point. Regarding trying to buy assets and rent liabilities, have you considered that it may be cheaper to buy an older car rather than lease a newer one? As I understand it, leases are only offered on relatively new cars. So, if you were trying to minimize the amount of money that depreciates, buying an older car that's already depreciated significantly may help with that. After all, the monthly cost you pay to lease a car already factors in the cost of deprecation (so you're not really avoiding the depreciation any more than if you bought it outright).
Post: Just Another Car
Link to comment from October 27, 2022
Peggy Lee was a bit before my time, so I appreciate you bringing up this reference. Truly a fitting chorus and a great reminder!
Post: Just Another Car
Link to comment from October 27, 2022
I completely agree about the ability to pass people. My wife and I often travel on two-lane roads when traveling around the midwest to visit extended family, and being able to minimize the time you spend in the opposing lane when passing is actually a really important "safety" feature... at least for those of us who like to pass!
Post: Just Another Car
Link to comment from October 27, 2022
It's a '16 Ford Focus RS. I debated mentioning it in the article but didn't want to distract from the main focus of it, especially for people who don't care about cars! It was the first grey RS in MN when I got it, which led to many fun conversations with fellow car enthusiasts. But after a few months peoples' attention always shifts to the next new thing. It'd be an expensive hobby to try and always have the latest and greatest!
Post: Just Another Car
Link to comment from October 27, 2022