Hello,

My wife and I are early 30s.

Between my wife and I, we have several retirement accounts available to us:

401k, 403b, HSA, Roth IRAs, etc

The 401k and 403b offer a Roth option, and the 401k even offers the megabackdoor Roth option.

It seems like we can direct 100% of our investment savings into these retirement accounts if we followed the conventional financial order of operations.

That seems to make sense to me, but I recently had someone telling me that it might be a good idea to direct more of our savings into a taxable investment account as well, so we are not locking all of our money up for multiple decades before we can access it.

I do currently have a taxable account with a decent amount of money in it, but I figured it would make the most sense to try to be as aggressive with contributing to the retirement accounts as possible while we are young and that money has time to grow.

What is this board's thought on this? Is it usually better to prioritize retirement accounts over taxable accounts? Or is there some kind of rule-of-thumb for how much should be retirement vs taxable?

Thanks!

We also maxed out ESPs and RSUs were crazy a good five years before we retired. That forced us into a cash/stock savings pile and into an earlier retirement than we had anticipated. Working in semiconductors was like musical chairs. Timing is everything.

I don't understand this argument. I am self employed and have a solo 401k. Super easy to set up. Being self employed doesn't mean you can't have a retirement account. It's fine to choose not to do it of course, but it does not prevent you from doing so.

Do you match it?

I'd probably keep some in a brokerage account for large purchases you might make down the road before age 59.5 (home renovations, new cars, dream vacation, etc).

Once you are retired you will want to have all 3 types (after-tax, tax-differed and tax free). If you want to retire early you will need a plan to bridge the extra years before age 59.5 but as mentioned earlier you could pull the contributions to the Roth or take advantage of rule of 55.

Yes

Would do more taxable for early retirement if you are going that route.

Doing both. Also trying to have experiences with the family while still healthy enough do them. Hard balancing act. Watched family members put off living only to be physically incapable of doing the "dream trip".

I agree every situation is unique and since you mentioned you are self employed it's likely a great idea to have some capital ready to go if you find something you can put it towards if it will increase your income potential.

YouBet said:

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Would do more taxable for early retirement if you are going that route.

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This is why I contribute to my taxable brokerage. Gial is about 250k to help with the bridge between 55 to 59 and not have to rely on rule of 55 too much. Just enough to support my slow travel goals.

I take the employer match and put everything else in taxable accounts.

I did a lot of forecasting based on my income and savings rate, and determined the retirement accounts would only be about 2-5% difference in take home in retirement. Just didn't seem worth it to lock away for 30 years with risk of penalties or uncertainty that comes with life.

I also have more options for investment which may bring higher returns that may even do better in the long run than tax savings.

Taxable brokerage you actually get to withdraw 100K capital gains Tax free if you're married and have no other income.

And if you sell investment shares with the highest cost basis as you draw down, you're only paying tax on gains which might not be that much in the beginning as you draw down the account.

I'll also have a lot more money available for a home down payment, or some start up capital for a business.

And I feel pretty comfy having a big account to tap penalty free in case of job loss.

The statistics are pretty grim for 401ks, most people withdraw early and pay some penalties in their lifetime.

Now if you are very high earner or have some extremely high savings rate, and can max out your 401k and save a bunch in regular brokerage accounts too, sure, do that.

But I've already put enough away in my 401k just taking the company match that it will still be a decent size in retirement but I'll also have brokerage accounts to retire early if I can.

And the final reason that really sealed the deal for me is how the accounts are taxed when inherited.

If you want to leave the account to your children, you will leave your kids a lot more in a brokerage account than a 401k because the brokerage isn't taxed, and the 401k is taxed at income tax rates! So even if you save less in the brokerage, the lack of tax for your heirs leaves them with more.

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If you want to leave the account to your children, you will leave your kids a lot more in a brokerage account than a 401k because the brokerage isn't taxed, and the 401k is taxed at income tax rates! So even if you save less in the brokerage, the lack of tax for your heirs leaves them with more.

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This is an excellent point.

Some general rules of thumb on this topic, from my perspective:

• It virtually always makes mathematical/financial sense to contribute to a 401(k) up to the company match
• For additional contributions to a 401(k) or Roth IRAs, this should be the default position for most people, as this is money earmarked for retirement. It's too easy to raid it at random if in another type of account. This is a form of enforced discipline that benefits most people.
• Also as a general rule, people who would prefer the flexibility of after-tax "retirement savings" are typically non-risk-averse entrepreneurial types who are OK with having a shot at life-changing wealth (or freedom to be their own boss), even if it means they're living only on social security in their old age if things don't work out as planned.
• I think a mix of the above can make sense for some people, but for the majority, creating a tax-preferential secure source of retirement funding just makes good sense.

I bleed maroon said:

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Some general rules of thumb on this topic, from my perspective:

• It virtually always makes mathematical/financial sense to contribute to a 401(k) up to the company match
• For additional contributions to a 401(k) or Roth IRAs, this should be the default position for most people, as this is money earmarked for retirement. It's too easy to raid it at random if in another type of account. This is a form of enforced discipline that benefits most people.
• Also as a general rule, people who would prefer the flexibility of after-tax "retirement savings" are typically non-risk-averse entrepreneurial types who are OK with having a shot at life-changing wealth (or freedom to be their own boss), even if it means they're living only on social security in their old age if things don't work out as planned.
• I think a mix of the above can make sense for some people, but for the majority, creating a tax-preferential secure source of retirement funding just makes good sense.

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I think this a huge over generalization. In my experience, a lot of people including myself, prefer to have a larger taxable brokerage balance for a few reasons: the potential for early retirement, and to have a nice buffer for larger expenses that come up in life (home down payment, medical expenses, random emergencies etc). I don't want to have to wait later on in life or pay a penalty to access the majority of my wealth.

I had a cash crunch in May where I had a bunch of large surprise expenses come up all at once, and it was nice having the flexibility to withdraw from my taxable account to help pay for everything.

I have a friend who has $100k in his 401k and thats his entire life savings, he was hit with a large tax bill this year. He didnt have the money to pay for it, so he had to take a loan out against his 401k.

if you are planning on retiring before 59.5 years old

that is one reason to not put everything into corporate 401K.

I would guess your salary will soon take you out of Roth, but I have been doing "backdoor" Roth accounts the last few years.

also for me, I like that my Fidelity brokerage has a higher return and greater diversification than corporate accounts.

Brian Earl Spilner said:

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You should prioritize maxing your HSA, 401k, and Roth IRAs, and once those are maxed, you could consider doing mega backdoor Roth contributions.

Keep in mind you will always be able to access all of your Roth contributions tax-free, just not the earnings.

All that said, you should always have an emergency fund (6 months or more) available.

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We definitely have more than just an emergency fund in a taxable account and have found it beneficial....

Two years ago we used it to put a down payment on a new house (kept our old house to lease). Earlier this year we used it to pay for a remodel/room addition in our house.

LMCane said:

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if you are planning on retiring before 59.5 years old

that is one reason to not put everything into corporate 401K.

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counterpoint: Roth ladder

Also IRS rule 72(t)

these tax differed accounts aren't as hard to get into penalty free as people seem to think they are.

permabull said:

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Also IRS rule 72(t)

these tax differed accounts aren't as hard to get into penalty free as people seem to think they are.

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I know I can. But for me the reason of them is retirement. In my opinion, and for me, it's a slippery slope of tapping into it. So, in my head, that money is untouchable and for retirement.

Could I save some on taxes by doing differently? Sure, but this works for me.

Would be careful with the 72t as it locks you in for a time frame of taking withdrawals that will increase your AGI and if you are needing healthcare(obamacare) pre 65 could push you over the limit to get subsidies.

Thanks for the replies.

Prior to asking this question, I would have assumed that most on this board would have recommended maxing retirement accounts before doing anything else. But based on the replies so far, it sounds like there are some differing opinions on this. Something to think about…

Everyone's path is different. I have maxed everything since i was 19. I am 42 now and do 10% to company 401k, 7k to Roth and rest to taxable. All in ETFs a d index funds. Nothing complicated. Will retire by 55 and slow travel as long as I can.

side question, lets say one had more than enough in taxable to retire at least a decade early -say roughly 7 figures, plus about as much in retirement accts, and had the option to contribute megabackdoor with income/expenses giving you ability to max it if desired, would there be any hesitation to do that the rest of working years even if it meant taxable contributions would be greatly reduced?

For those of you choosing more taxable, do your companies offer ROTH 401k's and/or Mega Backdoor ROTH options? I can kind of get the point of flexibility gained with brokerage accounts, but it seems the ROTH 401k would be preferable with the tax free growth.

It is offered but limited in what you can invest in. Basically a mirror image of our 401k options.

I am kind of the same mindset and have the same question. I can definitely understand investing in taxable instead of a traditional 401k at times. However, the Roth option makes this more of a difficult decision to me.

Obviously no right or wrong answer...it will always be a "it depends".

Personally I try to have roughly equivalent amounts in taxable/pretax/tax free accounts to give flexibility and have options down the road and life can and will throw you curveballs when least expecting

OP: the principal you put in a Roth is not locked away. You can withdraw principal at any time, you just can't put it back.

In this order:
401k up to match
Roth max
HSA max
401 max