Hacking My 401(k)

A Special Trick to Increase Cash Flow

Mr. Money Mustache says:

There really is no suffering here, in this highly frugal life. Just a lot of rewarding work and effort and accomplishment.


I am one of the lucky American’s that gets free money from my employer just for saving money for retirement! Whoever invented this system is a genius. Additionally the Company I work for gives me the option of paying taxes on those retirement savings now or in the future. I have the choice between a traditional 401(k) and a Roth 401(k).

For those of you who are unaware a Roth 401(k) allows me to save money into a 401(k) account after I pay my taxes. Traditionally people are able to save into a 401(k) before paying taxes. Under the traditional plan you are forced to pay taxes when you withdraw that money in retirement. For me that is over 30 years away. Under the Roth plan any qualified distributions in retirement are made tax free because you paid taxes on that money before you put it into the account.

I decided to go with the Roth option when I started my 401(k) because I am currently in the 25% federal tax bracket. While it is impossible to guess what the tax rates will be in 30 years I am absolutely convinced that taxes will never be as low as they are right now. Tax rates are generally at the lowest level they have been in the past few decades. However, the United States has a massive debt that sooner or later is going to have to be paid back and in the coming years millions of baby boomers will be retiring with little to no savings and ever rising health care costs. The burden will fall to the people still working to pick up this tab, that includes me. I am happy to pay the 25% now and avoid the coming higher rates. [1]

Recently though my financial goals have changed. The entire reason that this blog is here is to help me focus on my goal of being free from debt. As I mentioned in my planning post I have decided to continue to make 401(k) contributions and get my employer match. I could have cut the contributions and thrown an extra $266 per month at my loans, it is something I seriously considered. Ultimately I decided to keep making the contributions and getting free money. Yet I am still looking for ways to increase my take home pay so that I can make even larger extra payments on my student loans.

The other day it hit me; I found a simple way to increase my cash flow and still save the same amount of money each month. I just switched my contribution elections from a Roth 401(k) to a Traditional 401(k). It was as simple as signing onto my online retirement account and checking a box. The results are great for my bottom line. I will now be paying about $70 per month less to Uncle Sam and I will still get the full benefit of my employer match.

With some clever shuffling I have now increased my monthly cash flow without getting a raise or working an additional job. Obviously this is a very specific trick only applicable to my situation but it is something I never would have considered had I not started this debt pay down marathon. I would not have been examining every area of my finances to see if I could squeeze some extra cash into my loan payments.

Now I will be able to make regular extra student loan payments at $870 per month instead of my planned $800. This will actually move my payoff date up by about a month and it puts me within reach of my pay down goal. With just a few more cash flow increasing tricks I will be able to easily meet my goal and I can start working towards being debt free even earlier. It’s days like today that are helping me keep that enthusiasm for paying down debt.


1. My effective tax rate is less than 25% but you get the picture.

Photo by Krystal Pritchett

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