Opinions on taxable brokerage & ER

[ATXFIRE2034]

Hi all! I'm in need of some opinions on whether or not I should start contributing to a taxable brokerage account as I think about ER. First, some context. Me and my wife recently both returned to megacorp this year and that is why our 401k balances are so low. We had both moved our prior balances to Fidelity Roth and tIRAs. Our employer provides a 100% match on your first 6% of contributions or up to $7,500 total. We are both essentially maxing contributions to our 401ks now utilizing the Roth contribution option. I contribute $26,105 per year total including the $7,500 from employer and my wife contributes $25,029 per year total including $5,952 from employer. We exceed income limits for Roth contributions and I haven't started considering a backdoor strategy yet. We get no tax benefits if we contribute to tIRAs. Outside of what we're putting into HSAs and the little I am contributing each month to a small crypto allocation, our 401ks are currently the only accounts we're actively contributing to for retirement. Considering the latest I want to pull the plug is right after I turn 55 (in case we need to access 401ks via rule of 55), should we be contributing just enough to take advantage of our full match from our employers and investing the rest in our taxable brokerage at this point? This would mean $26,788 per year going into 401ks including employer contributions and the remaining $24,346 going into our taxable brokerage. I am 40 and my wife is 37. Detailed retirement specific investable asset breakdown below.

tIRAs = $361,130
Roth IRAs = $204,994
401ks = $38,069 (71% is Roth)

What would you do? Thoughts? Sorry for the long post. TIA!

 

[pb4uski]

It sounds like you have strong income and are probably in a high tax bracket. Assuming that is the case, I would maximize tax-deferred and then also save in brokerage.

 

[ATXFIRE2034]

It sounds like you have strong income and are probably in a high tax bracket. Assuming that is the case, I would maximize tax-deferred and then also save in brokerage.

Thanks pb4uski. Yes, combined we gross ~$300k per year depending on company performance and bonuses. There's also additional upside through long-term incentives (RSUs). So is your suggestion to contribute enough to take advantage of employer match for 401ks, then max out tIRAs and what's left contribute to brokerage?

 

[captain3d]

Max out all tax advantaged accounts. Then also taxable

 

[FlaGator]

Thanks pb4uski. Yes, combined we gross ~$300k per year depending on company performance and bonuses. There's also additional upside through long-term incentives (RSUs). So is your suggestion to contribute enough to take advantage of employer match for 401ks, then max out tIRAs and what's left contribute to brokerage?

It sounds like you have strong income and are probably in a high tax bracket. Assuming that is the case, I would maximize tax-deferred and then also save in brokerage.

Max out all tax advantaged accounts. Then also taxable

If your goal is to RE, then yes, max the tax-deferred opportunities and pump everything you can, even it hurts, into a taxable brokerage account. You'll need it for living expenses before 59.5.

 

[Scuba]

Hi all! I'm in need of some opinions on whether or not I should start contributing to a taxable brokerage account as I think about ER. First, some context. Me and my wife recently both returned to megacorp this year and that is why our 401k balances are so low. We had both moved our prior balances to Fidelity Roth and tIRAs. Our employer provides a 100% match on your first 6% of contributions or up to $7,500 total. We are both essentially maxing contributions to our 401ks now utilizing the Roth contribution option. I contribute $26,105 per year total including the $7,500 from employer and my wife contributes $25,029 per year total including $5,952 from employer. We exceed income limits for Roth contributions and I haven't started considering a backdoor strategy yet. We get no tax benefits if we contribute to tIRAs. Outside of what we're putting into HSAs and the little I am contributing each month to a small crypto allocation, our 401ks are currently the only accounts we're actively contributing to for retirement. Considering the latest I want to pull the plug is right after I turn 55 (in case we need to access 401ks via rule of 55), should we be contributing just enough to take advantage of our full match from our employers and investing the rest in our taxable brokerage at this point? This would mean $26,788 per year going into 401ks including employer contributions and the remaining $24,346 going into our taxable brokerage. I am 40 and my wife is 37. Detailed retirement specific investable asset breakdown below.



tIRAs = $361,130

Roth IRAs = $204,994

401ks = $38,069 (71% is Roth)



What would you do? Thoughts? Sorry for the long post. TIA!

This is what I did. Took advantage of tax deferred plans to the extent I got a match, then invested the rest in taxable brokerage. We retired 5 years ago in our mid 50’s and it’s really been nice having a sizable taxable portfolio to draw on. We are in our early 60’s now and haven’t touched any IRA’s.

 

[pb4uski]

Thanks pb4uski. Yes, combined we gross ~$300k per year depending on company performance and bonuses. There's also additional upside through long-term incentives (RSUs). So is your suggestion to contribute enough to take advantage of employer match for 401ks, then max out tIRAs and what's left contribute to brokerage?

No, since 401ks allow much higher annual contributions than tIRAs ($20,500 each in 2022 vs $6,000 each for a tIRA), I would max out the 401ks for the tax benefits (assumes that your tax rate between when you ER at 55 and any pensions, SS and RMDs start will be low and you can withdraw then and pay much lower taxes on that income.... then taxable savngs in the brokerage for any retirement savings above the 401k contribution maximums.

Taxable savings could be in international equities if you invest in international equities to take advantage of the foreign tax credit which goes wasted in tax-deferred or tax-free accounts or domestic equities to take advantage or lower tax rates for qualified dividends or LTCG or tax-free municipal bonds.

 

[FLSUnFIRE]

Agree, take advantage of tax advantaged accounts first but you will want some funds easily (from a tax perspective) available if you plan to retire "early" so definitely keep some outside of those accounts. Be careful not to let the tax tail wag the dog though.


I feel like pb4uski's comment on international in taxable should have a caveat... if you plan to use your taxable accounts to fund the early years of your ER, you may not want to be weighted in any one asset class too much. Absolutely, great for tax optimization but does add risk to that pot if it's the one you plan to draw from first.


I would start thinking now about how you will fund your retirement by year. I have a spreadsheet projecting my accounts out to age 100 showing my expected withdrawal from each account. Something similar may help you decide how to allocate.... you may actually not want to put all into tax advantaged if you'll want access to the funds before they are available without penalty (of course there are strategies to get to them sooner without penalty but those can be built into your projections).

 

[ATXFIRE2034]

Keep in mind, out of the ~$51k we're contributing to 401ks per year in total, our contributions of ~$38k are roth so no tax benefit there either. So basically, max 401ks, then max tIRAs, then max HSAs(?) and then contribute something to brokerage. Does that sound about right?

Again, if I retire in the year right after I turn 55 I can tap into my 401k via 'Rule of 55'. That is confirmed. The problem is that I think I am going to want to go before that when my kids go off to college. I like FLSUnFIRE's idea about mapping out withdrawals. I do project for all accounts out into the future but never thought about mapping my withdrawals that way. I think that will provide the clarity I need based on different scenarios, thanks for the suggestion.

 

[PaunchyPirate]

I would not contribute to your Traditional IRA. That contribution is not tax deductible. Maximize the 401k contributions up to your allowable limits. Max your HSA if you qualify with a High Deductible Health Plan. Then push the rest into your taxable brokerage.

I retired at 56 with my taxable account 3x the value of my 401k/tIRA. I also did not qualify for Roths and never did backdoor Roths. I've got all sorts of flexibility with that taxable account in early retirement.

 

[bingybear]

In my case I would fund roths or taxable with equities based on tax treatment. I use TIRAs for bonds if not using them as a stepping stone to roths. as change.
Note this could change if tax laws change

 

[chassis]

Hi all! I'm in need of some opinions on whether or not I should start contributing to a taxable brokerage account as I think about ER. First, some context. Me and my wife recently both returned to megacorp this year and that is why our 401k balances are so low. We had both moved our prior balances to Fidelity Roth and tIRAs. Our employer provides a 100% match on your first 6% of contributions or up to $7,500 total. We are both essentially maxing contributions to our 401ks now utilizing the Roth contribution option. I contribute $26,105 per year total including the $7,500 from employer and my wife contributes $25,029 per year total including $5,952 from employer. We exceed income limits for Roth contributions and I haven't started considering a backdoor strategy yet. We get no tax benefits if we contribute to tIRAs. Outside of what we're putting into HSAs and the little I am contributing each month to a small crypto allocation, our 401ks are currently the only accounts we're actively contributing to for retirement. Considering the latest I want to pull the plug is right after I turn 55 (in case we need to access 401ks via rule of 55), should we be contributing just enough to take advantage of our full match from our employers and investing the rest in our taxable brokerage at this point? This would mean $26,788 per year going into 401ks including employer contributions and the remaining $24,346 going into our taxable brokerage. I am 40 and my wife is 37. Detailed retirement specific investable asset breakdown below.

tIRAs = $361,130
Roth IRAs = $204,994
401ks = $38,069 (71% is Roth)

What would you do? Thoughts? Sorry for the long post. TIA!

@ATXFIRE2034

Agree with maximizing tax advantaged (401k) avenues, up to the max employer match, but no further.

Then maximize deferred compensation programs, if available.

The main purpose of a taxable account in my view is to provide liquidity if you choose to fully retire, in other words stop receiving wage compensation. The taxable account is your liquidity source until age 59.5 when tax advantaged assets become available.

 

[pb4uski]

I would do the max on the tax-deferred 401k rather than just the emaployer match for the tax benefits... to limit yourself to the employer match is probably leaving $$$ on the table if the tax savings today is a lot more than the tax that you'll pay when you withdraw the money.

Ditto for using all tax deferred 401k rather than Roth 401k at this point since your marginal tax rate is so high... and presumably much higher than it will be when you're 59 1/2 - 67.

 

[VanWinkle]

It sounds like you have strong income and are probably in a high tax bracket. Assuming that is the case, I would maximize tax-deferred and then also save in brokerage.

+1

 

[RetiredHappy]

We both had always put in to the maximum allowable by law into 401K. Having said that, we have more in our taxable accounts than tax deferred accounts. We are spenders but also managed to save some along the way.

Using up the maximum allowable by law into 401K is top priority because money grows, including dividends, without incurring taxes until withdrawal.

 

[ATXFIRE2034]

I would do the max on the tax-deferred 401k rather than just the emaployer match for the tax benefits... to limit yourself to the employer match is probably leaving $$$ on the table if the tax savings today is a lot more than the tax that you'll pay when you withdraw the money.

Ditto for using all tax deferred 401k rather than Roth 401k at this point since your marginal tax rate is so high... and presumably much higher than it will be when you're 59 1/2 - 67.

I’ve always struggled with the decision on tax deferred versus Roth contributions for 401k. I understand the tax advantage on tax deferred but you also never know what the future holds and Roth has always been more appealing knowing it is all tax free.

 

[Dash man]

I’ve always struggled with the decision on tax deferred versus Roth contributions for 401k. I understand the tax advantage on tax deferred but you also never know what the future holds and Roth has always been more appealing knowing it is all tax free.

We struggled too, so decided to split between the two. I was also allowed to put after tax money into my 401k, that I later rolled into my Roth IRA after I retired. That helped my Roth to grow a lot.
We have a large taxable brokerage account too, so at 65 for both of us, we’re doing large Roth conversions for a few more years and paying taxes from the taxable accounts.
It all gets so complicated trying to determine the best way to handle all this. A good problem to have.

 

[EastWest Gal]

Max you 401K. You can put a lot more in that than a tIRA, and you get the corporate match. Definitely start a traditional brokerage account. This will provide low or no tax cash before tapping your tax-deferred accounts.

Having a large after-tax account is a good problem to have.

 

[pb4uski]

I’ve always struggled with the decision on tax deferred versus Roth contributions for 401k. I understand the tax advantage on tax deferred but you also never know what the future holds and Roth has always been more appealing knowing it is all tax free.

I never struggled with that decision when I was in the 28% and higher tax brackets just for federal and then ha state income tax on top ot that... easy decision for me.

 

[COcheesehead]

The OP makes too much for a Roth.
Max out deferred, then pile everything you can into tax efficient investments in a brokerage account. So stay away from managed funds or anything with churn. Index ETFs, maybe muni’s.

 

[pb4uski]

The OP makes too much for a Roth. ...

He says that he contributes to a Roth 401k through work.

.... We are both essentially maxing contributions to our 401ks now utilizing the Roth contribution option. I contribute $26,105 per year total including the $7,500 from employer and my wife contributes $25,029 per year total including $5,952 from employer....

401ks = $38,069 (71% is Roth)...

 

[COcheesehead]

He says that he contributes to a Roth 401k through work.

I missed that. Thanks.

 

[Aerides]

Max out the 401k, not just the match, the actual limit every year. But yes then also go taxable as much as you can. Youre 40/37, so chances are good you'll be able to retire before 59.5, or even before 55 if your mega allows for rule of 55.

I'm always surprised when someone posts here, a year or so from the total amount they need to retire, but hardly any taxable savings.

On salaries of 300k, after you both fully load your 401ks you should still have plenty of money left to save, so it's not an either/or situation.