I'm sure this has been asked before, but I can't seem to find it. I'm probably not using the best search terms.
Both my wife and I are on board with MMM and badassity. We are doing our best to be as frugal as possible and save as much as possible. My question lies with where to put that money for right now. I have about $600 in a Roth IRA, and about $50 in a brokerage that I just funded. We just moved to a new (to us at least) rental home, and can be putting away about $2000 per month. I haven't gotten to *when* exactly we'd like to retire, but it will definitely be before the draw time for the IRA with no penalty.
Is dumping into the brokerage and taking the capital gains tax now so I'm not penalized later for drawing out of the IRA early when we do retire? I'm still new to a lot of this stuff, so use laymen's terms :D
Some tax concepts to consider:
There are two types of IRA, traditional and Roth - the former reduces your AGI now (and therefore reduces your tax bill now) but then when you start drawing from it in retirement it counts as income and is taxed. The latter (Roth) does not reduce your AGI now but when you withdraw from it in retirement you don't count it as income.
The capital gains tax you refer to is something different, and applies to the sales of assets. Therefore if you are trading (captial gains/losses only happen when you sell) in a taxable account you can get hit by cap gains tax.
If you trade within a tax advantaged account (traditional or roth IRA) you don't get the capital gains tax - but in a way you can still get taxed if it is a traditional since you will have more money in the account that will be taxed as you pull it out. The ROTH has no capital gains tax.
From a planning perspective it is likely that you will need a mix of several accounts, and most important would be a cash based emergency fund - it has to be in cash (checking/savings/money market/CDs) and probably should be 3-6 months of expenses depending on your risk profile.
After you have this, you should then focus on loading up your other options. Don't forget that ROTHs and Traditional IRAs also have caps ($5500 this year) on what you can put in, so if you are saving $2000 per month between two people you will max them out and have some left over. It is possible to funnel that in also, but probably not worth the hassle.
My advice would be:
Emergency Fund filled
Then
ROTH Contribution Maxed
Then
Taxable Brokerage for balance
I would say 'in that order' but you would also be wise to shuffle the order around if you are nearing tax deadlines (the next one to worry about for this is 12/31 so not really relevant)
After your EF is funded each year you will be able to put 11K into the ROTH and 13K into taxable brokerage.