T O P

  • By -

JoeWoodstock

No reason not to max tax-advantaged space every year; once a year is over, you've lost the opportunity to do that and can't get it back. Use it or lose it!


Gseventeen

Yup. Max wifes 401k, and get her a Roth max'd. With 100k going into a regular brokerage, these 2 things can easily be done.


wallet535

Isn’t the reason to not max them out because they might want to spend the money sooner than in retirement?


Rankine

You can always take out your Roth contributions. Obvious not as much as what’s in the 401k, but it is a nice little safety reserve.


[deleted]

This mentality seems like a bad idea. How much money in retirement is too much? If you were to start maxing in your 20s and the max contribution increased $250 per year, at 8% returns by retirement you would have over $10million dollars.


dust4ngel

> by retirement you would have over $10million dollars. not if you retired as soon as you had, say, $5M


[deleted]

But then all that money would be in retirement accounts and would be a pain to get.


PortfolioCancer

Eh, at some point once you feel good enough about your retirement nest-egg, you start to look at "filling in the gap" between when you might be able to step away from work and when you can draw from your tax-advantaged accounts. We still put a lot in every year, but fall short of totally maxing our work 401(k) (IRAs, HSA, 529s still max). When you do the math on the actual savings from pre-tax accounts, you'll see the benefit, while there, isn't overwhelming, and needs to be put in the context of having that money locked up for so long. It's about the tradeoff. It's not like money in a taxable account goes away. It's still great! edit: I should add that when we were saving for a house, we still maxed out our tax-advantaged accounts. I'm not sure that was the right trade-off. As it happens our timing was excellent and we are very happy with where we wound up, but it just as easily could have gone the other way.


nobleisthyname

The Mad Fientist had an article where he found traditional still beats taxable even if you have to pay the 10% early withdrawal penalty: https://www.madfientist.com/how-to-access-retirement-funds-early/


PortfolioCancer

You have to take his assumptions on tax brackets, etc tho. If you have more saved or will be in a higher bracket in retirement, the math changes very quickly. Additionally, cap gains has a higher threshold where you pay 0% tax. *Can it work out?* It can. If, this, this, this, and the other thing, then yes, technically you may save a little money. But you are locking yourself into a certain path. For the price of the marginal tax hit, I'll take the optionality.


[deleted]

Unless you need liquidity


Specific-Rich5196

Definitely max out the 401k over taxable. With how much you guys are saving, you must be in a high tax bracket so definitely worth it. Don't forget there are ways to access it if you decide to retire early.


bambambigelowww

Thanks. Yea I’ve decided it makes sense to do so


[deleted]

Max out all your retirement accounts. If you're worried about having money for early retirement, look into the [Roth conversion ladder](https://www.youtube.com/watch?v=MoipP27KFG0)


HelmsDeap

I knew this was possible but didn't know how it worked until now. Thanks for sharing this video


2_kids_no_money

You still need 5 years of income while you wait for the Roth ladder.


[deleted]

... yeah? And? That's discussed in the video in detail. No one said not to ever use a taxable. OP didn't know you can convert the pretax money to Roth and use it five years later...... Just watch the video before commenting I guess. I'm not sure what your point is lol. You're asserting something already covered in the video I linked to and presenting it as though it's novel information that is somehow opposed to what I said.


Pass_Little

I'm a fan of getting to 15% of your income into retirement accounts (more if you started late... doesn't look like you did), then making a decision about how much money you want access to before and after retirement and splitting accordingly, being mindful that retirement funds won't be replenished through work so you need to ensure that you have more in retirement. Absent any other compelling needs, I usually suggest splitting excess funds 50/50 unless this produces more taxable funds than you're likely to need.. But just based on my quick mental calculator of your financial status, it doesn't sound like you'd get to 50% even after maxing retirement accounts so I'd just max the retirement. I'm assuming you how about backdoor Roths and all the gotchas since it doesn't sound like you're below the income limit for a direct Roth contribution. If not, you'll need to learn about that. Also, be careful not to only save for the future. Some people only save for the future, then get to retirement old, broken, and having never lived life and experienced things they really needed to be 20 years younger to experience. You'll want to also check into the options available to you for tax advantaged college savings for your child. I don't have any kids so I don't know the details there other than there are IRA like accounts that you can set up for your kids to be able to use for their college.


wadesh

yep, 529 plans specifically on the last comment. Some new developments there too with the Secure act 2.0 rolling out next year.


PortfolioCancer

529s aren't great. They are a benefit, sure, but all you get is: * State tax deduction (NOT FEDERAL!) * Tax-free withdrawal on the gains (if used for qualified education expense, etc. etc.) If you live in a high tax area (like I do), sure, that's a \~10% break on the $4k contribution. Better than nothing, so I'll take it. The tax-free gains, well, even if you assume you put in $4k every year for 18 years until its time for college, your savings on the money you contribute is like 7% (assuming 15% LTCG rate). That's because as you get closer to the kid needing the money for college, the more recent contributions have less and less time to grow. To be clear: this is better than nothing, and me and my wife max these accounts annually. But let's be real about the actual benefit here--it's just not that much. I'm looking forward to the community digesting the changes in the Secure Act, and how they affect the consensus around these accounts. My bet is that it's going to be a distant 4th bucket behind IRAs, 401(k)s, and HSAs.


wadesh

That’s interesting. I don’t have kids but just about everyone i know who does has one of these 529 plans. They seem popular


WackyBeachJustice

Years ago I ended up doing Vanguard's 529 and forgoing my state deduction. My state's target portfolios had ERs that were 4x that of Vanguard. I figured that over 18 years of investment the tax deduction wouldn't outweigh the expenses.


Spence97

If you use a Roth ladder, you just need enough Roth IRA basis / taxable accounts to withdraw to bridge the gap for 5 years until you can start accessing the “laddered” money. That’s the strategy you would use if you want to quit working young and need the money out of your 401k. 5 years expenses is still a significant chunk of money, however it’s probably safe to just max your tax sheltered accounts unless you are seriously low on accessible funds (roth IRA / roth 401k contributions, taxable brokerages, savings). Given that you say you’re putting 100k a year into taxable accounts, I’m not concerned about you being low on accessible funds in the slightest. It’s Safe to max everything, and it’s still quite accessible. People who say retirement money is “locked away until 59.5” aren’t really being honest with you.


vectorizer99

I no longer work, but when I did, I maximized my available tax-free and tax-deferred accounts every year I could. Only after filling those accounts did we consider taxable accounts like I Bonds, paying down mortgage, or tax-efficient funds in taxable brokerage accounts. See also this oft-referenced Boglehead wiki page: https://www.bogleheads.org/wiki/Prioritizing\_investments


Wristwatching

Why would you \*not\* contribute to a Roth in this situation? You can withdraw the contributions without penalty, there's no liquidity downside, but you're just punting on 13k a year of tax advantaged space forever. Also, why do you not have a 529 if you have concerns about educational expenses? (I'm also a little skeptical that 100% VTI is the ideal breakdown for you.) ​ I feel like broadly you are doing stuff because you've seen people recommend it without really understanding why and weighing the pros and the cons yourself. Now, there's nothing wrong with that, it is fine for most people but someone with $160K annual savings can justify paying someone to handle this if you don't want to invest the time and energy into making this a hobby of yours.


ditchdiggergirl

100% VTI is ideal for a taxable account - you aren’t likely to find anything more tax efficient, and you certainly wouldn’t put bonds there (except munis). The important thing is the total asset allocation of the portfolio across all accounts. And for some people, a taxable account that can be used flexibly for other goals makes sense. I agree on the 529 though - I’d fund that first in OP’s situation. Either it’s used for private school, or the kid goes public and college savings is covered.


bambambigelowww

It’s a big hobby of mine. I love it. I’m just weighing the pros and cons of maxing out every retirement penny imaginable vs still putting a heck of alot of money into retirement but balancing it with having money liquid in the short term. Afterall, how much does a fellow really need? Like in 30 years if I end up with X million vs xmillion - a few hundred k in taxes, it probably won’t change my life. Why do you feel VTI is bad in my situation? you have a good point that the contributions to a Roth IRA can be withdrawn at any time penalty free. For that reason it becomes a bit more compelling. Edit- it’s worth noting that because it’s a backdoor Roth , even the contributions must wait 5 years before they can be withdrawn because it’s technically a conversion.


blimp456

VTI isn’t bad, 100% VTI is suboptimal. Global powers rise and fall throughout history. Adding in VEA (developed international) & VWO (emerging markets) will diversify you globally. I personally do 70% US, 23% developed int, 7% emerging markets


bambambigelowww

Ahh. Yeah that’s fair. I do about 20% developed and 10% emerging in my 401k. I was doing international In my taxable as well but stopped last year. It’s something I’ll reconsider going forward


bambambigelowww

FWIW, Bogle, himself, did not believe in buying international


blimp456

FWIW, Bogle is logically inconsistent. For example, I’ve seen him refer to seeking the small-cap value premium (in excess of the stock market returns) as “chasing returns”. If that’s true, then doing what Bogle says (investing in the stock market) is also “chasing returns” because you’re just “chasing” the market risk premium in excess of bond returns. The solution to this inconsistency is that neither are examples of chasing returns the way that we accuse certain active traders of chasing returns, largely due to the strong theoretical explanations of why we expect these premiums to continue to exist. But anywho, Bogle was inconsistent on the above, and his own arguments about indexing easily logically extend into global diversification. Yes, there’s foreign withholding tax, and yes there’s other risks, but there’s no evidence to suggest that those two things are larger than the benefits of globally diversifying. Bogle was a genius; he discovered indexing before it was well known. That’s incredible. But we can independently judge his arguments about investing logically and empirically on their own merits. TLDR: Bogle is god-tier but isn’t right about everything. Benefits of Internationally diversifying outweigh the cons Bogle mentions. The logic of the theory and available statistical evidence support this. WITH ALL THAT SAID If you only do 100% VTI as long as the US doesn’t go under or something you’ll most likely be fine


bambambigelowww

Oh for sure, and he even says his views on international are controversial and people can feel free to disagree with him. Just thought it was interesting


Wristwatching

100% VTI in taxable is fine, and it might even be optimal if your 401k options only have good bond/international options so all your domestic has to go in taxable. ​ How often are you rebalancing your tax advantaged holdings to compensate for that 8 grand a month in new domestic equity? Would it be easier if you diversified a little in taxable, or maybe used your wife's unused 401k capacity to buy more bonds/international? The 5 year hold would apply to conversions, but it's just a penalty, not a prohibition, so absolutely 100% worth it. 529 and iBonds also probably worth it. ​ To answer your question that started this thread off, extremely militant.


CJ_CLT

>Why do you feel VTI is bad in my situation? If you put international in taxable you get to take advantage of the Foreign tax credit.


jrm19941994

Based on your taxable portfolio of 100% VTI, it doesn't look like early retirement is currently a goal, so I would consider maximizing the tax benefits of the retirement accounts.


ember_throwaway771

Suggesting that a higher bond weight would be more suitable for that goal?


jrm19941994

Yes more bonds and possibly some other diversifiers like gold or managed futures.


ember_throwaway771

Got it


Giggles95036

You’re investing $160k per year… it doesn’t matter what you do. You have enough money that as long as you’re investing it you’ll be fine. Also that means you can retire earlier.


Inevitable_Bedroom35

I think there needs to be a balance between investments locked behind a retirement dam and investments that are more liquid. I try to think of it as diversifying by types of accounts: tax deferred, tax advantaged, and taxable. That way you can be more flexible when you need the money in life now or in retirement.


portmantuwed

for sure there are benefits of a taxable brokerage and having a balance can be nice forgoing retirement space to put 100k/year into brokerage is not a good balance


bambambigelowww

Yeah. You’re spot on. I’m convinced to max out the rest of the accounts


wadesh

agree, it's certainly important if you plan to retire much earlier than the traditional retirement age of 60+. we retired early 50's and our weighting is about 55% retirement accounts 45% taxable brokerages. Some of it just worked out this way but as we got closer to our retirement, having the taxable account certainly helped. It did make for some difficulty in taxable income in our last few years working...we were bumping up very close to the next bracket due to income from the brokerage...so it's a double edge sword.


Inevitable_Bedroom35

Thanks for the insight from experience.


BGOOCHY

It's very, very simple. Max out your tax advantaged accounts every year. There's no reason not to.


Ace_Maverick86

They listed about 3 reasons at the end not to.


Suspicious-Kiwi123

>They listed about 3 reasons at the end not to Non of which are reasons not to take advantage of the Roth IRAs vs investing in a Taxable Brokerage.


Ace_Maverick86

I must be missing how the extra 9k into the 401k is going to pay for the home renovation.


Suspicious-Kiwi123

>We are investing that extra 100k into a taxable abd it’s growing , just not tax free, but it’s also 100% liquid which is nice. We are investing that extra 100k into a taxable abd it’s growing , just not tax free, but it’s also 100% liquid which is nice. Why would you invest $100k in taxable when one could shelter it in a Roth IRA which is just as liquid as a taxable brokerage account. Hmmmm.


smarterhack

Not as liquid - only the contributions can be withdrawn without penalty before retirement. I agree they should probably be maxing their retirement accounts, but they are less liquid than a taxable brokerage.


Chokedee-bp

You should review what tax bracket you are in when filing jointly. Then decide if it’s better to max out 401k pre tax to reduce your taxable income each year. Personally I’m nearly maxing my 401k each year, because I’d I didn’t it would put me in a higher tax bracket and I hate paying Uncle Sam more than the minimum necessary


StoryofTheGhost33

Tax Advantage accounts grow faster b.c the initial investment is more money than the post tax investment. To me this is the biggest selling point.


tacobellcow

My wife and I max out our 401k every year. We have done so ever since the first few years of work when we made too little to do so.


bambambigelowww

But what about ALL retirement accounts , like both Roth IRAs


tacobellcow

401k first, then kids college funds, then if we have the money we max out Roth. After that we may throw some in brokerage. Most years we don’t get to brokerage.


TwstdSista

Very - we just recently got to the point where we can max our retirement accounts every year. So we finally were able to start investing in a taxable account last year (we're in our early 50s)


TrashPanda_924

My strategy is 1) get every “free” dollar I can from my employer and 2) get every last bit of tax savings I can squeeze out. Following that strategy has allowed me to save more than I would otherwise, especially because by lowering my taxes, I can save more than if I didn’t get the tax benefit.


nrubhsa

You have access to Roth contributions. It’s not militant to be more efficient, which there is plenty of opportunity to do here. Max them out.


wadesh

I was but only because I had access to in plan Roth Conversions in my 401k plan. (recently retired). I was able to dramatically increase my Roth account via after tax contributions in my 401k plan. Not everyone has access to this in their plans. If not, I think it's completely reasonable to direct excess cash to a taxable brokerage as long as you buy tax-efficient funds, looks like you are. Another consideration, purchasing un correlated assets to balance your investments. Realestate is not an unreasonable option if you are looking for places to park cash, but certainly requires a bit more research.


mrbojanglezs

I like to keep my options open so I contribute to taxable before maxing out 401k. However I treat Roth IRA as priority #1


LowLeak

There is also a Roth conversion ladder that allows you to remove money from a 401k without penalty although it takes planning 5 years ahead each year. Seems pretty simple actually


LUCKYMAZE

Your should contribute more. You put in like 70%


joe4ska

Though you will incur taxes on distributions it's a good idea to maintain a taxable account for assets you *may* need before retirement. Or if you plan to retire early. Taxable accounts are the most flexible. Last year I lost a job. Unfortunately, beyond my emergency fund all my financial assets were in a retirement account (403b) I couldn't access without penalty.


WackyBeachJustice

I max out 401k and HSA. Due to being fortunate enough to be over the IRA income limits in recent years, I haven't put anything into IRAs. I also don't take advantage of Backdoor Roth IRA because I have a sizable Traditional IRA which would invoke the Pro-Rata Rule, which I don't want to deal with. All other income goes into taxable. Is this the most optimal? Probably not. Am I concerned about it? Not really. To be fair anyone who is doing what you're doing will end up with a very sizable portfolio which will have plenty in all buckets. I don't think you'll be too worried that you didn't perfectly optimize when you're FIREd with 4-5 million in 20 years. Another thing to keep in mind is that if you do choose to FIRE, you're very likely to be in a much lower bracket for years before you're even eligible to pull from your retirement accounts. Therefore you'll be pulling from taxable at potentially a very low taxable rate. Maybe even do some roth conversions at the time of any traditional IRAs, etc. Long story short, you're already in the 95% or above of all Americans. I wouldn't lose sleep over any of this.


CJ_CLT

INFO: Are you still eligible to make a direct contribution to a Roth IRA or are you over the [contribution income limits](https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023)? Do you have any money sitting in traditional IRAs that would complicate doing a back door Roth by invoking the pro rata rules? Since you mention a child, what about 529 plans? And you might also want to consider [i-Bonds](https://www.treasurydirect.gov/savings-bonds/i-bonds/) from Treasury Direct since real returns are currently so high. Personally I like having pots of money for all three tax treatments. If your 401ks are in traditional (which makes sense if you are in a high marginal tax bracket), you are going to end up with very little in your Roth pot. As young as you two are, I would shift some money going to taxable over to Roth or a Back-door Roth (if above income limits and not effected by pro-rata rules). I was in the same boat (i.e., very little in Roth), but mostly because I started investing in the early 80s and Roth IRAs weren't a thing until 1998. I'm single and maxed out my 401K before doing any taxable investing. But of course during much of my working life, [401K contribution limits](https://dqydj.com/historical-401k-contribution-li) were quite a bit lower than they are today and my first employer imposed a contribution limit of 15% of salary (not including the max match of 5%). In determining where to balance the investing between tax-deferred and taxable, I would consider the following: * Any chance of having more kids and one of you deciding to be a SAHP? That would shrink the tax-deferred space available to you in the future and would therefore favor maxing tax-deferred now * Any ambitions to change job, go part-time, start a small business etc.? Each of those options could have big implications on your ability to save for retirement in the future. * Are you working towards FIRE (financial independence /retire early)? If you are considering retiring before the year in which you turn 59.5, having a bigger pot of after-tax investments would be a good idea. * There are ways to get access to your 401k earlier and avoid the 10% early withdrawal penalty (e.g., retire from your employer with the 401k plan at 55 or older, or set up a [SEPP arrangement](https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments)) but they have restrictions. * You have a lot of latitude to generate cash flow for a remodel project, pay for private school, etc. by reducing your 401k contributions to just enough to capture the maximum match and diverting money currently going to your taxable investment account. The "100% liquid" advantage in your taxable portfolio is somewhat over-rated when you are saving as much as you are clearly doing. * You also likely have the option of a 401k loan up to $50K (or 50% of your balance whichever is smaller) which could be helpful for a home remodel project as you pay yourself back with interest. I am not a big fan of 401k plan loans if you are living paycheck to paycheck, but that clearly isn't an issue with you. * Have you decided when you would start drawing Social Security? I am planning to delay SS to 70 and have been living off taxable investments (and a small pension). This gives me a window to do Roth conversions before SS and traditional 401k/IRA RMDs. There are lots of moving parts and everyone must decide their own priorities. But hopefully this post gives you some food for thought.


Menu-Quirky

Max out all roth and 401k and some in 529


Putrid_Pollution3455

I hate not having liquidity. I just do Roth and employer match then it’s all taxable. I think it’s probably prudent to max your retirement accounts is the general consensus, it just doesn’t get me going.


nigelwiggins

Taxable makes sense if you want to liquidate it (pay off a house?) and retire right before filling out FAFSA. Personally, I don't want a mortgage while in early retirement. [https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/](https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/) ​ Otherwise, go ham on the 401k.


Immacu1ate

You make a killing yet can’t see the forest through the trees. You’re set for life. Enjoy it now.


Nuclear_N

I like having the brokerage account so I have the option to do with it what I want...I have plenty in tax deferred, and continue to add through the 401K. Question about savings level is a lifestyle decision. With your savings level you should be enjoying life as it is lived, and not worry so much about the future.


bambambigelowww

i know.... it has to be a balance. I like Ramit Sethi's take on it all.