Taxable Investing? How much is too much?

[Shaw5_28]

Hello,

I am concerned that I am putting too much savings taxable investments for my age. I am 27 and my wife and I have about 65k in non-taxable accounts via 401k and IRA. Total income is about 112k a year with about 20.5k in contributions to retirement accounts per year. Over the past three years or so I have accumulated about 70k in a Vanguard taxable account, mostly in index funds. The main reason is I just want this money accessible if need be.

Should I be more focused on our 401k's and IRA's? I think my contribution's will likely slow down for the taxable account quit a bit over the next few years because we are planning to have kids.

 

[GrayHare]

Note that you can also defer tax outside IRA and 401k by investing in growth stocks. If the stocks do not pay dividends, you pay no tax until you sell. By picking a company now that will grow during the next 40 years, you create your own tax-deferred instrument.

 

[MichaelB]

Sounds to me like you and DW are doing quite well, so congratulations on saving so much.

A couple of thoughts. You might want to set aside some taxable money to an emergency fund. That wouldn't be the same as money invested in equity funds. A couple of months salary is common among many here. Same for money you plan to spend in the next few years.

The decision to save in taxable or deferred isn't easy, because no matter which you choose, at some point in your life you will wish you had some something different. Still, your marginal tax rate is an important factor. While it is low you are better off paying the tax now and saving in taxable. When it is high it usually is better to lower it by deferring the income.

Later in life, having substantial assets in taxable accounts is an advantage, because it gives you greater control over your taxable income. Tax deferred income accounts are subject to minimum distributions, and this is particularly troublesome to people that do not need or want the entire distribution.

 

[RunningBum]

Taxable accounts are also great to tap in ER, before you can start getting money from IRAs, pensions, and social security.

I think it's clear to max out a Roth (backdoor if needed) and get the full 401K company match if you have one. After that it's muddier whether to max out the 401K or invest in taxable. Marginal rate is indeed an important factor, and so is having a bridge before you hit 59.5.

I also agree that you ought to at least think about the money for other things separately, though I'm in the camp where I never had a dedicated emergency fund, figuring I could always tap my taxable funds if needed.

 

[gocurrycracker]

We have about 80% of our funds in taxable accounts. After maxing out 401k the rest just went into the taxable brokerage account

Where to put the money partially depends on your target date. If its in your 50's or later, aim for the 401k. If its a lot earlier, do it in the taxable accounts after getting the 401k match. We were targeting retirement in our 30's so needed a sizable chunk in the taxable account, which is what we are drawing from now. We'll start to pull out of the 401k in 20 years or so

Depending on what you invest in you may pay no tax anyway, as GrayHare mentioned. As an example, we have some Berkshire Hathaway stock. Unless we sell there is no tax due since there is no income from it

Of course having "too much savings" is a good problem to have