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Traditional IRA vs Taxable Brokerage ...
Old 03-08-2015, 11:55 AM   #1
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Traditional IRA vs Taxable Brokerage ...

I'm putting this question out to the young dreamers, but am also looking for advice from those that may have already FIREd ...

I'm self employeed, have no 401k options, no pension options, make too much money to contribute to our current ROTH IRA, and plan to retire in the next 5-10 years (age 35-40)

If we go the traditional IRA route ~ that money will be locked up for close to 20-25 years after we actually retire. Granted, its $5,500/year ($11,000 w/ spouse) but I still feel it would be better served in a taxable brokerage.

If any of you plan to retire by 40 (or have retired by 40) .... Would you focus on a taxable brokerage over IRA's, or would you continue to contribute to an IRA although you will be retired long before distributions occur?

I guess $50k - $100k (total paid in to a traditional IRA over the next 5-10 years) is small pickings and won't be needed until atleast the age of 60, but I still can't help but wonder if those funds would be better used in a taxable brokerage account.

I'm thinking out loud here as I still have a month or so to decide on 2014 traditional IRA's ...

Any and all advice would be helpful Thank's y'all!
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Old 03-08-2015, 02:26 PM   #2
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Originally Posted by DROPOUT View Post
I'm putting this question out to the young dreamers, but am also looking for advice from those that may have already FIREd ...

I'm self employeed, have no 401k options, no pension options, make too much money to contribute to our current ROTH IRA, and plan to retire in the next 5-10 years (age 35-40)

Any and all advice would be helpful Thank's y'all!
If you are truly self-employed, have you looked into the other options you have available: SEP-IRA, SIMPLE IRA, solo 401(k)? They would allow you to have tax-deductible contributions ranging from roughly $17,500 up to 20% of your income. Then, after you are retired, if your tax rate drops considerably, you can do a ROTH conversion at a much lower tax bracket.
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Old 03-08-2015, 06:54 PM   #3
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I would suggest do everything tax advantaged as much as you can. You can backdoor it to add more if you want, but I prefer half in taxable, half out

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Old 03-08-2015, 09:22 PM   #4
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If you can't contribute to Roth due to high income, then you won't able able to deduct your contribution to TIRA either so unless you can do the backdoor Roth conversion, a taxable account might be better. Depends on what you want to use it for........for income-generation , a non-deductible TIRA might be ok since it will be sheltered until withdrawal but if intend to use it for growth, a taxable might be better since you get the benefit of CG rates instead of the ordinary rates from TIRA.
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Old 03-08-2015, 09:43 PM   #5
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Dropout, I'm not sure, but you should look into a solo 401K. I think MooreBonds has a really good answer. You can put in $18K in 2015, and an additional $6000 in catch up if over age 50, PLUS up to 25% of your compensation as your own employer. However, if you have employees, then a whole different set of rules applies. Check IRS rules. Then, if you want to contribute additional, definitely do a taxable account too. One of the problems with early retirement is what to for living expenses prior to age 59-1/2, and a taxable account solves that problem.
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Old 03-08-2015, 09:45 PM   #6
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A backdoor Roth contribution would be good. An Individual/Solo 401k would probably be better. You'll have to do the math to see how much you need until hitting 59.5 for IRA withdrawals. But surely you'd have to have some portfolio at that point. Put a small amount in now and let it grow to what you want by then. Keep in mind you may be saving 25% tax now with a deduction (Solo 401k) and paying 10 to 15% tax later if you pull 401k/IRA money out below the 15% tax bracket after 59.5. Of course, you may have other stuff already planned for that tax bracket. Got to do the tax math.
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Old 03-09-2015, 11:13 AM   #7
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Thanks for all the replies guys & gals!

Quote:
Originally Posted by MooreBonds View Post
If you are truly self-employed, have you looked into the other options you have available: SEP-IRA, SIMPLE IRA, solo 401(k)? They would allow you to have tax-deductible contributions ranging from roughly $17,500 up to 20% of your income. Then, after you are retired, if your tax rate drops considerably, you can do a ROTH conversion at a much lower tax bracket.
I've looked at each one of these options at length. I wouldn't be able to do any ... We do have employee's but are in an industry with many entry level with high turnover jobs, and providing 401k's and/or IRA contributions in our line of work would be unnecessary.

Which really leave's me with 3 options.

1) Backdoor Roth IRA which makes little sense since I'm in the top tax bracket as it is. (currently have but have not contributed to for 2014)

2) Traditional IRA (don't have)

3) Taxable Brokerage accounts. (currently have)

I think we'll go ahead and start up traditional IRA accounts this year, and continue to contribute heavy monthly contributions to the taxable brokerage accounts.

Thanks everyone! Any more feedback, and I'd love to hear it!
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Old 03-09-2015, 02:17 PM   #8
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...........................
I think we'll go ahead and start up traditional IRA accounts this year..........
What benefit do you expect from this?
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Old 03-09-2015, 02:52 PM   #9
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What benefit do you expect from this?
I'm asking myself the same question ....
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Old 03-09-2015, 04:18 PM   #10
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Thanks for all the replies guys & gals!



I've looked at each one of these options at length. I wouldn't be able to do any ... We do have employee's but are in an industry with many entry level with high turnover jobs, and providing 401k's and/or IRA contributions in our line of work would be unnecessary.

Which really leave's me with 3 options.

1) Backdoor Roth IRA which makes little sense since I'm in the top tax bracket as it is. (currently have but have not contributed to for 2014)

2) Traditional IRA (don't have)

3) Taxable Brokerage accounts. (currently have)

I think we'll go ahead and start up traditional IRA accounts this year, and continue to contribute heavy monthly contributions to the taxable brokerage accounts.

Thanks everyone! Any more feedback, and I'd love to hear it!
I think 1 and 2 above are essentially the same since you are in the top tax bracket. If you decide to do a traditional IRA it will be after tax, so you may as well immediately convert it to ROTH so that future earnings will be tax free, and your IRA contributions will be available for withdrawal tax free in 5 years.
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Old 03-09-2015, 06:13 PM   #11
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T
I've looked at each one of these options at length. I wouldn't be able to do any ... We do have employee's but are in an industry with many entry level with high turnover jobs, and providing 401k's and/or IRA contributions in our line of work would be unnecessary.
But did you exhaustively examine ALL options?

SEP-IRA - you can establish the rules such that you must be an employee for a minimum of 3 years before qualifying for contributions by the company. If 99% of your employees don't stay 3 years or longer, not much to worry about.

SIMPLE IRA- you can have the company contribute a matching of what each employee contributes, up to 3% of salary. If it's an entry-level job, I highly doubt many others (if any) would contribute.

DBP - you can always go the route of a defined benefit pension plan. Set it up such that you have to be an employee 5 years to vest in it. This could allow you to put away buku bucks, since your DBP can be written however you want to maximize your tax-deferral - you can have the DBP set up to give you an annual pension of up to $260,000/year at age 65, and requires you to contribute whatever premiums are required to buy that pension at age 65. The only "risk" is that you have to fund it for all employees. If they leave before they vest, then the pension account assets they forfeited are allocated to the other accounts and reduces future required contributions.

Also, if an older employee works for you and ends up vesting fully, you could end up having to have a large pension outlay to buy them their pension. The trick is to set up the equation such that you would benefit with your higher salary, while an entry level employee wouldn't require a huge pension.

When you end up retiring, you simply rolll over the pension value to a traditional IRA and do whatever with it.

Non-qualified Deferred Compensation Plan (NQDC) - there are some catches, but you can effectively put tax-deferred money away now, then withdraw it at a later time, and stretch out your withdrawals from the account for when you're in a lower tax bracket. However, there are some catches on when a company can deduct the money in a NQDC account as an employee expense.
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Old 03-09-2015, 06:22 PM   #12
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Thanks MooreBonds! I didn't exhaustively examine as much as I though I had!

Your post has really helped, and I'll dive in a bit deeper to see if any would work for me!

Thanks!
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