Personal Finance

I already have almost $2 million saved for retirement - should I still max out my employer-offered 401k?

Kristin Hitchcock

Published: December 9, 2024 2:20 pm

Trying to decide how to finance a home is always difficult. When you have multiple investment accounts as an option, it becomes even more troublesome, especially when the house is in the neighborhood of $3M. Throw in trying to plan for your financial legacy, and things can quickly become complicated. 

That’s exactly what happened in a recent Reddit post I came across. There are a lot of moving parts involved, but the main question was how the 60-year-old poster should fund their new home purchase. 

There are three main options they could choose from:

Key Points from This Article

• Balancing goals is often challenging in finances, especially when those goals don’t line up. Sometimes, you must choose between two goals instead of trying to find a middling path that works for both. 
• It’s best to always have a “primary” goal to help make these decisions more streamlined. Otherwise, you risk being sucked into decision fatigue. 
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Option 1: Withdraw from a 401(k)

The first option is to withdraw the full amount of the home from the poster’s 401(k). However, this has significant tax implications. The funds would be treated as ordinary income, likely bumping the poster into the highest tax bracket. This option is very straightforward, but the high tax liability makes it less helpful than the other options. 

Learning about 401(k)s is very important before you start drawing money from them (or even investing in one). Learn the answers to these basic 401(k) questions first. 

Key Consideration:

• Immediate tax impact: The poster will need to pay federal income taxes on the full amount right away.

Option 2: Use Investment Accounts

Alternatively, the poster could use other investment account funds to pay for the house. The tax rate on these is typically lower, as the money isn’t counted as income. You only pay taxes on the gains, which will likely be taxed at a lower capital gains rate. 

That said, these assets are easier for heirs to inherit, as they typically receive a step-up in basis when inherited. This could potentially eliminate capital gains taxes on them. 

Key Consideration:

• Tax efficiency: Lower tax burden compared to pulling money from a 401(k).

Option 3: Take Out a Mortgage

A mortgage could allow the poster to preserve your existing assets while benefiting from current interest rates, which may still be relatively low. Paying off the mortgage over time would also leave more liquid assets for other investments or expenses.

Key Considerations:

• Liquidity: This option keeps all investments intact and growing. 
• Cash flow: A mortgage does require regular payments each month.
• Long-term costs: You’ll pay interest over time, which will add on to the total cost of the home. 

What’s the Right Choice?

The right choice depends largely on what the main goal of the poster is. In the post, they’ve mentioned two factors they’re keeping in mind: tax burdens and tax-efficient legacy. Sadly, in this case, these two goals do not work together well, and the Redditor will need to pick which one is most important:

• If minimizing their tax burden is the priority, using investment account funds or taking out a mortgage may be the best choice. 
• If the primary concern is leaving a tax-efficient legacy, preserving the investment accounts by withdrawing from the 401(k) could be ideal. 

I’d also recommend that they speak with a financial advisor since this is a bit of a complicated financial decision (and we do not have all the relevant information).