Personal Finance

I'm 36 with a $5 million net worth, planning to retire in 6 years — should I put $19,000 of my bonus into my 401(k)?

Rich Duprey

Published: December 23, 2024 10:44 am

Because 401(k) retirement plans are so good in helping individuals accumulate wealth towards retirement, everyone should take advantage of the program, especially if your employer matches your contributions. There is no good reason to ever give up free money.

But can you ever be so wealthy that contributing to a 401(k) is superfluous? Can you reach a point where it just doesn’t matter?

That’s the question one Redditor asked on the r/fatFIRE subreddit. At 36 years old, he already has a new worth of $5 million and is planning to retire early over the next four to six years. He earns $500,000 annually and will be getting a bonus of $19,000 that he will be able to contribute to his company’s 401(k) plan. He’s thinking of not doing so.

First, his company doesn’t offer an employer match, and second, he likes the idea of having ready access to some cash. Not necessarily for spending (though that’s part of it), but also because he could invest the cash into alternative investments such as real estate, private equity funds, or even his primary taxable brokerage accounts.

Are those valid reasons or should he follow the traditional advice of maxing out the retirement program?

24/7 Wall St. Key Points:

• Maximizing contributions to your 401(k) is always the preferable option to keeping the cash readily accessible, even for wealthy individuals.
• The money will double in 10 years time if placed in an index fund and can grow 7.5x over 30 years.
• There are strategies available to gain access to the money penalty-free, though speaking with a planning or tax professional is advisable before taking any course of action.
• Also: Is your 401(k) optimized for your retirement plans? (Sponsored)

Why keeping cash is a suboptimal option

The maximum contribution to a 401(k) in 2024 is $23,000, which will be bumped another $500 higher in 2025. With an employer match, the maximum amount that can be put into a 401(k) is $69,000 (and there are slightly higher thresholds for when you are in your 50s and, starting next year, in your 60s).

Now I’m not a financial planner, so these are only my opinions, but even though the Redditor didn’t provide many details on his financial situation, such as how much of his net worth is currently in taxable accounts and other investments, a generalized answer is he should still max out the 401(k).

For one, 401(k)s offer legal protections to the cash that holding onto it or even putting it into a taxable account or other investment vehicle don’t have. Also, he’s earning half a million dollars a year so he likely will have ready access to cash for the next few years should he need it. And because contributions to a 401(k) are made with pre-tax dollars, it will also help him reduce tax bill.

But that $19,000 bonus could actually be worth $144,000 over the next 30 years if he simply invested it in an index fund that grew 7% annually (the market’s 10% historic rate of return minus inflation). Even with a $5 million net worth, that’s a lot of cash to give up, especially since he will eventually turn 59-1/2 and be able to begin accessing the money.

Alternatives for penalty-free access to 401(k) money exist

There are also strategies that can be utilized to make those 401(k) funds readily accessible. For example, the IRS allows for penalty-free early withdrawals under its 72(t) rules if they are done through substantially equal periodic payments. You will, however, need to make regular withdrawals monthly or quarterly and continue them for at least five years or until you reach 59-1/2, whichever is longer.

Converting a 401(k) to a Roth IRA, which would allow for tax-free withdrawals upon retirement, is also a possibility. You might also have more investment options in the Roth IRA, such as the alternative investments the Redditor seeks if he finds a plan administrator that offers them.

Key takeaways

Assuming you have maxed out contributions to Roth IRAs or Health Savings Accounts (HSA), maximizing your 401(k) plan is always the preferred option to simply keeping the cash accessible. 

Even for wealthy individuals, the benefits of continuing to the retirement program is a preferable alternative to not doing so as there are strategies available to make the money more accessible if you need it.