Brokerage vs Retirement Account

[shawnhersh]

This is a tax question…
Is there any difference in a brokerage account vs an IRA, if I buy and never sell? I do not qualify for a Roth.
The reason I ask is I don’t like the idea of not having access to the money until 59, so if I buy index funds and plan to never sell, wouldn’t it be essentially the same thing. I realize once I do sell I will have tax obligations. Again, I don’t qualify for a Roth.
For reference, I put about $10k a month in my brokerage account which goes into VOO.

 

[mathjak107]

dividends are taxable in the brokerage account as well as capital gain distributions if any

 

[Qs Laptop]

dividends are taxable in the brokerage account as well as capital gain distributions if any

Yes, plus any interest earned on cash in the money market holding fund (if any) of the brokerage account.

 

[shawnhersh]

So I guess my question is, in my case, what is the advantage of parking money in an IRA? My employer offers a 401k so I don’t think any of my added contributions would be tax deductible anyway, correct? Plus in the unlikely event I would need to withdraw, my IRA would have fees.

 

[CardsFan]

So I guess my question is, in my case, what is the advantage of parking money in an IRA? Tax deference, just like the 401k

My employer offers a 401k so I don’t think any of my added contributions would be tax deductible anyway, correct? NO. They could be deductible. It depends on your income

Plus in the unlikely event I would need to withdraw, my IRA would have fees. Taxes and penalties, but so would the 401k. Taxable account would just have taxes on gains

There is room for all three (IRA, 401k and after tax investments) in most cases.

 

[shawnhersh]

Appreciate all the feedback. I max out my 401k right now and dump the rest in my brokerage account, I think I’m on the right track. Thanks!

 

[joesxm3]

The advice I give people

Contribute to 401k up to employer match

Fund an after tax IRA or ROTH. If after tax IRA make sure to track basis (ie after tax contributiins)

Continue until max of 401k

Further savings into taxable brokerage account

If early retired you have option of doing ROTH conversion

It is important to have tax diversification, especially cash in taxable that you can spend without triggering more tax.

Taxable IRA limit not large so won't cut much into your flow into taxable brokerage.

Of course you can also roll 401k into IRA after ER to use for ROTH conversions.

 

[PaunchyPirate]

Appreciate all the feedback. I max out my 401k right now and dump the rest in my brokerage account, I think I’m on the right track. Thanks!

I was never able to contribute to a Roth IRA while working due to my income level. I maxed out my 401k but never contributed to an IRA directly. My financial advisor at the time advised me just to pump my extra money into a regular taxable brokerage account. She said the flexibility it offers outweighed making non-deductible contributions to an IRA.

I did roll my 401k over to a rollover IRA as I changed employers and when I retired. So, today, 5 years into my early retirement, my taxable brokerage account makes up 2/3 of my portfolio and my IRA is 1/3.

The primary benefit of money in an IRA is tax-free growth.

Note: I never investigated doing Backdoor Roth Conversion. I should probably looked into doing that. The only money I have in a Roth is a tiny bit I converted post-retirement.

 

[Jerry1]

Appreciate all the feedback. I max out my 401k right now and dump the rest in my brokerage account, I think I’m on the right track. Thanks!

Having done that all my working years, I would modify my contributions to only contribute to max out the company match. Maxing out the 401K has not done me any great favors. I’d rather have more money in my brokerage accounts and have capital gains to use to manage my taxable income. Also, the tax difference between when I was working and what I’m experiencing now isn’t anywhere as great as I thought it would be.

 

[NgineER]

I’m a proponent of having a mix of all three types of accounts. Taxable (brokerage) tax deferred (401k-tIRA) and tax free (Roth IRA). Since you are putting away $10k per month into your brokerage above your 401k, that is really your only option to swallow that amount every month.

You should still evaluate if you are eligible for the mega back door Roth in addition to doing a back door Roth contribution.
The mega back door Roth contribution is an after tax 401k contribution that you roll over into a Roth IRA. My company allows up to 9% of my salary into a Roth IRA which far exceeds the $7k annual contribution to the back door Roth.

Roth contributions can always be withdrawn tax and penalty free, so you’d still have access to that money, but not the earnings.

I read here that someone’s company allowed for up to 75% of their salary. The limit is still the max allowable (combination of all contributions and match.

 

[pb4uski]

So I guess my question is, in my case, what is the advantage of parking money in an IRA? My employer offers a 401k so I don’t think any of my added contributions would be tax deductible anyway, correct? Plus in the unlikely event I would need to withdraw, my IRA would have fees.

The main reason for an IRA is tax arbitrage if your marginal tax rate when you are deferring income today is significantly higher than what you expect your marginal tax rate to be when you are in retirement and withdraw the money from the IRA.

For most people, this is the case. Many of the years that I saved in our 401k I was in the 28% marginal tax bracket so I avoided paying 28% on whatever income I deferred into the 401k. And about 6% state. Now that I'm retired and have fewer sources of income I can withdraw or Roth convert and pay about 10-12% federal and 0% state since we now live in an income tax free state. So I figure that I'm saving ~16-18% federal and 6% state.

Now for some forum members it hasn't worked out that way... see Jerry1's post above as an example. They ended up much more financially successful than they thought that they would be so there haven't been any savings and in some cases they are paying more on withdrawals than they saved when they deferred. Good for them. You make decisions based on what you know and think at the time and take your chances.