When to prioritize taxable over retirement accounts

[2029FIREaway]

I don't understand how $100k can be 20x your annual expenses. There's a typo or miscompute somewhere.

Most people will be fine investing up to $1M in tax-deferred prior to retirement; I had almost double that in 2013.

Additionally, put $8000 per year per person into your Roth IRA. Then in retirement from age 59-1/2 to 70, and then to age 75, withdraw a certain amount every year from tax-deferred for both living expenses and Roth conversions.

Focus on tax-deferred funds as DEFERRED COMPENSATION and start withdrawing early. You'll be in fine shape once RMDs start...

Sorry, I meant we’re saving $100k annually across pre tax and Roth. 20X represents the total amount saved in these retirement accounts (roughly: $2.4M pre tax 401k and $600k in Roth accounts). My taxable account is a paltry $900k (6X), hence my original question

 

[Diogenes]

Sorry, I meant we’re saving $100k annually across pre tax and Roth. 20X represents the total amount saved in these retirement accounts (roughly: $2.4M pre tax 401k and $600k in Roth accounts). My taxable account is a paltry $900k (6X), hence my original question

Evidently, some folks have (or had) employers who offered generous matching, and the "mega" option. Also we have the ubiquitous advantage of married couples vs. singles. That explains the large percentage in tax-deferred vs. straight-up taxable.

We also note that tax-deferred vehicles really burgeoned over the past 20 years or so. Older folks might remember the Tax Reform Act of 1986, which really limited IRA contributions for a broad class of employees. Roths didn't start until 1998. So, for the latter half of the 1980s, and most of the 1990s, a whole generation of folks "grew up" either with skepticism towards tax-deferred options, or didn't have them. That was also the overlap period, when defined-benefit pensions started going way... but that's a topic for another thread.

To the OP's point, I'd maximize the backdoor Roth to the extent possible, ignore traditional IRAs (other than holding tank for the annual Roth back-door) and only contribute to the 401K to garner all possible matching. The annual remainder goes into taxable.

 

[2029FIREaway]

Evidently, some folks have (or had) employers who offered generous matching, and the "mega" option. Also we have the ubiquitous advantage of married couples vs. singles. That explains the large percentage in tax-deferred vs. straight-up taxable.

We also note that tax-deferred vehicles really burgeoned over the past 20 years or so. Older folks might remember the Tax Reform Act of 1986, which really limited IRA contributions for a broad class of employees. Roths didn't start until 1998. So, for the latter half of the 1980s, and most of the 1990s, a whole generation of folks "grew up" either with skepticism towards tax-deferred options, or didn't have them. That was also the overlap period, when defined-benefit pensions started going way... but that's a topic for another thread.

To the OP's point, I'd maximize the backdoor Roth to the extent possible, ignore traditional IRAs (other than holding tank for the annual Roth back-door) and only contribute to the 401K to garner all possible matching. The annual remainder goes into taxable.

Thanks. I like your thinking on this.

Essentially, I think you’re first saying I shouldn’t add to my pre tax accounts (beyond free money/match) cos they are large enough right now & will grow.

Second, continue Roth (in favor of pre tax), which would mean backdoor roth and/or MBDR with my work plan.

Third, invest in taxable with the remainder.

My back of envelope calc would have say $10k going into pre tax to get the match, then up to $30k ish going into Roth and then the remainder (roughly $40-50k) going into taxable.

Did I get this roughly right? I get these are all long term tax planning topics. I appreciate your input!! Cheers.

 

[TheWizard]

Thanks. I like your thinking on this.

Essentially, I think you’re first saying I shouldn’t add to my pre tax accounts (beyond free money/match) cos they are large enough right now & will grow.

Second, continue Roth (in favor of pre tax), which would mean backdoor roth and/or MBDR with my work plan.

Third, invest in taxable with the remainder.

My back of envelope calc would have say $10k going into pre tax to get the match, then up to $30k ish going into Roth and then the remainder (roughly $40-50k) going into taxable.

Did I get this roughly right? I get these are all long term tax planning topics. I appreciate your input!! Cheers.

Yes, that sounds right.
Welcome to early retirement before long ..

 

[pb4uski]

Thanks. This makes 100% sense for pre tax 401k. My marginal rates are high right now.

It’s the Roth accounts that I continue to debate. One question/concern: how easy is it to withdraw contributions?

Very easy. Just keep good records of your contributions and withdrawals until you are 59-1/2.

 

[NgineER]

Thanks. I like your thinking on this.

Essentially, I think you’re first saying I shouldn’t add to my pre tax accounts (beyond free money/match) cos they are large enough right now & will grow.

Second, continue Roth (in favor of pre tax), which would mean backdoor roth and/or MBDR with my work plan.

Third, invest in taxable with the remainder.

My back of envelope calc would have say $10k going into pre tax to get the match, then up to $30k ish going into Roth and then the remainder (roughly $40-50k) going into taxable.

Did I get this roughly right? I get these are all long term tax planning topics. I appreciate your input!! Cheers.

You should also be able to get the employer match with a $10k Roth contribution.

 

[bonvoyage]

I maximized contributions into my 401K account when I was working. I wasn't eligible for Roth contribution. Since I was "highly" compensated, I also managed to save earnings into taxable account. By the time I retired, I had more in my taxable than my tax deferred account.

On the other hand, if I had to choose between taxable vs. tax deferred, it would boil down to tax rate while working vs. retired. Deferring taxes when taxed at a higher rate would usually mean that you are better off contributing to tax deferred account.

If you can make it to 55 yo before running out of money in your taxable account, you can always use 72t/SEPP to pull money out of your deferred contribution account.

Wife and I are in a similar situation. Roth IRAs did not even exist when we started working and our salaries were over the threshold for contributing to one anyway. We always put away as much as we could in our respective 401Ks but still had a lot of left over. Consequently we saved a lot in our regular brokerage account. Now, we have so much in our regular brokerage account that we don't even really need the tax deferred accounts for retirement spending!

 

[tulak]

I like pb4uski’s answer to look at tax rates now vs retirement. That’s what I’m doing.

Last year, I was able to save 76.5k in retirement accounts, since I have access to a mega-backdoor roth. This means I could choose between saving 76.5k in the roth, using after-tax contributions, or I could save up to 30.5k + employer contributions with the remainder in the roth.

I chose the latter, because I’m currently in a high tax bracket (32%+). I don’t need any more savings in tax-deferred accounts and I’m planning on aggressively drawing down my tax-deferred accounts once I retire, for living expenses and roth conversions, likely up to the current 24% single tax bracket. This will depend on where future rates will be, but I’m hoping they stay low. Either way, I would be surprised if they’re not lower than what I pay now, which is why I max tax-deferred contributions.

Someday I might have an RMD problem, but I figure that’s a good problem to have if it happens.

As for accessing funds, I’m counting on rule of 55, but if that wasn’t an option, then I’d setup a 72t to access the tax-deferred accounts before 59.5.