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Taxable investing before tax deferred?
Old 08-08-2009, 07:52 PM   #1
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Taxable investing before tax deferred?

I used to assumed that it was better to max your tax deferred before going taxable. However, after reading this thread (What proportion do you save after tax?) I realized that is't always the case.

A lot probably has to do with personal circumstances and preferences. For me, the three big tax deferred advantages are:
1. allows me to invest ~37% more
2. lowers my AGI allowing for more tax deductions and IRA contributions
3. it's still tax advantageous even if I have to pay the 10% early withdrawal penalty

I'm curious to hear how other members on here feel.

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Old 08-08-2009, 08:11 PM   #2
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For me tax-deferred has been the higher priority until it is maxed out, and any savings beyond that I invest in my taxable accounts. I am making the highest income of my career so the immediate tax advantages have been substantial. I am 61 so my withdrawals will not be held back by age restrictions. Overall, for me this is a no-brainer.

Three months from tomorrow I will retire, so I don't have much longer to save for retirement.

"You can never cross the ocean until you have the courage to lose sight of the shore." - - - C. Columbus
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Old 08-09-2009, 05:25 AM   #3
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bank5, I think the strategy of maximizing tax-deferred saving is, for most people, the correct one. The limits on such savings are such that it's hard to save enough that way for a really early retirement anyway. Assuming your ability to save grows as you grow older, you are likely to be able to save more that than the tax-deferred limits later in your working life, so you can naturally develop some after-tax savings.

It is anathema to me to voluntarily pay taxes when I can legally avoid them. Taxes paid are my money that I lose control of, forever.

I can imagine exceptions to my strategy -- perhaps very early, low-cost retirement is one -- but I think they are rare. I'd have to find a very convincing scenario to talk myself into paying taxes I can avoid or defer.

Back when IRAs first became available, I calculated that I would come out ahead after not too many years if I had to withdraw from my IRA and pay the penalty. That was before spreadsheet software had been invented so who knows how good my math was, but I sure am glad it convinced me to start my IRA.

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