Is This a Good Way to Fund My 401(K)?

help with living expenses, to make up for the decline of take-home pay due to larger pre-tax 401(K) deferrals (maxing out on the catch-up amounts).

investments, is this a sound strategy?  It seems to me that the net effect is that I?m transferring non-retirement investments to retirement investments, which, in theory, would seem to be a good thing.  Am I wrong?

Going strictly by the math, this would make sense if you think your tax bracket in retirement will be lower than your current tax bracket. This might depend of course on where you choose to live (a tax-free state vs a state with high income tax).

There's another advantage to having the money in the 401(k) which is that it is protected in case one has a financial emergency causing one to file bankruptcy. The down side is that it does come with added restrictions -- no access to the money now, coming up with the plan for regular withdrawals when you finally retire.

First maximize on contributions to the Roth IRA. (I assume you are doing that anyway since that is a no-brainer, but thought I should mention it.)

In your situation, the only way that it would become a no-brainer to put the money into the 401(k) would be if you could find a way to lower your expenses.

(I am by no means an expert on this matter, but that's the way I would approach things if I were in your situation.)

Anoop

catch-up contributions to my 401(K), but my annual income has recently declined, from about $110K to about $90K.  I very much want to contribute as much pre-tax money as possible to the 401(K), but the reduction in income has made that exceedingly difficult.

help with living expenses, to make up for the decline of take-home pay due to larger pre-tax 401(K) deferrals (maxing out on the catch-up amounts).

investments, is this a sound strategy?  It seems to me that the net effect is that I?m transferring non-retirement investments to retirement investments, which, in theory, would seem to be a good thing.  Am I wrong?

Yes, it is a sound strategy as long as you retain an appreciable non- retirement investment. You need the non-retirement investment for emergency purposes and to pay taxes when you convert your 401(k) to a Roth IRA.

-- Ron

catch-up contributions to my 401(K), but my annual income has recently declined, from about $110K to about $90K. I very much want to contribute as much pre-tax money as possible to the 401(K), but the reduction in income has made that exceedingly difficult.

help with living expenses, to make up for the decline of take-home pay due to larger pre-tax 401(K) deferrals (maxing out on the catch-up amounts).

investments, is this a sound strategy? It seems to me that the net effect is that I?m transferring non-retirement investments to retirement investments, which, in theory, would seem to be a good thing. Am I wrong?

That is the net effect, but why do you want to? There may be some good reasons, but it is not automatically a good thing to do. You are allowed to save for retirement outside of 401Ks and IRAs.

This group generally recommends have a mix of retirement savings including taxable (normal savings and investments), tax deferred (IRA/401k), and tax exempt (ROTH). This will give some protection against tax law changes and flexibility in withdrawal in retirement.

Taxable savings are much more flexible than IRA/401k savings. You can use them when you want for what you want. What if you get laid off? At 50, it is much harder to find a job than when you are younger. If you invest in tax efficient vehicles, such as S&P 500 index funds, the tax savings for IRA/401k investments are not all that great.

On the other hand, if you will be getting a good employer match for the additional money, it might be an excellent idea to do as you propose.

-- Doug

help with living expenses, to make up for the decline of take-home pay due to larger pre-tax 401(K) deferrals (maxing out on the catch-up amounts).

I don't have a strong opinion either way. If you choose this strategy, I would liquidate the most tax-inefficient investments from your taxable account. You may also want to liquidate any investments that will result in a capital loss. These strategies may enhance the tax benefits of transferring some of you taxable account to your tax deferred account. Make sure you stay liquid enough in your taxable account for known needs (and maybe even unexpected ones).

Good luck.