Talk me through this decision...

[SmileAllDay]

Since I plan to retire early, is it smarter to invest in taxable index funds or max out my Roth IRA this year? Unfortunately I don't have the income to do both, as I have done over the past 3 years.

What are the main things I need to consider?

(I'm a business owner if that makes a difference in terms of tax implications.)

Right now, I feel it's smarter to get it in the market in my regular taxable account and take the tax hit on withdrawal-- since it gives me more autonomy when withdrawing.

Whatya think?

[Buffaloski Boris]

What I think: we don’t have enough information to say. One big item that hasn’t been brought up is what about traditional IRAs? 401k? Are those both maxed out? Kids?

The thought process for me is minimizing total taxes now and into the future. For most people their tax rates when working are higher than they expect to be in retirement so they want to minimize taxes now. Hence traditional 401ks and IRAs.

The “investment order” thread at the top of the investor alley section is very good. I haven’t seen much reason to deviate from that myself. Everyone’s situation is different though. Kids and state taxes can cause some different answers at the margins.

[RWTL]

I think it depends a lot on your income, your current savings in each type of account, and your expenses.  As the last poster mentioned, we don't have enough info right now.

[terran]

These should give you the information you need to answer this question as well as the question you didn't ask: should you contribute to Roth or Traditional IRA?

• https://forum.mrmoneymustache.com/investor-alley/investment-order/
• https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
• https://www.bogleheads.org/wiki/Traditional_versus_Roth

Also consider whether https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund would let you contribute more than you think you can. If so, and you find from the above links that you should contribute as much as you can to tax advantaged accounts before taxable accounts (as I think you will), consider opening a solo 401(k) if eligible (no other employees) and a SEP IRA or Simple IRA if not.

[Linea_Norway]

Paula from Afford Anything hasa podcast where she says that she hasn't invested in a pretax account and that it financially doesn't matter. Maybe that was episode #215. Check that out to understand the arguments.

[MDM]

...is it smarter to invest in taxable index funds or max out my Roth IRA this year?

The way the question is phrased seems to imply that index funds can be used in taxable but not in a Roth IRA.  That is not correct, so if that misunderstanding has been part of the decision process....

[terran]

Paula from Afford Anything hasa podcast where she says that she hasn't invested in a pretax account and that it financially doesn't matter. Maybe that was episode #215. Check that out to understand the arguments.

IMO she gives questionable advice about retirement accounts. I've caught some downright incorrect information (admittedly it was something on the obscure end about governmental 457(b)s, but still), and she is a little more pro-Roth than I think is justified. You might be able to make an argument that she's right for her particular situation which is heavy in real estate that will fill lower brackets in retirement, but if that's not you then you definitely want at least some tax deferred balances to fill those lower brackets.

[Telecaster]

While taxable accounts are a bit more flexible, you can withdraw your Roth contributions at any time without penalty.  For that reason, most people recommend maxing your Roth before taxable accounts. 

[Laura33]

Right now, I feel it's smarter to get it in the market in my regular taxable account and take the tax hit on withdrawal-- since it gives me more autonomy when withdrawing.

Alternatively, you could get it in the market in a Roth account and not pay any taxes on the withdrawal.  What autonomy do you need?  It is true that you need to have the Roth for at least 5 years to have full autonomy when withdrawing, but that's not much of a constraint when you're looking at a 30-40+ year retirement.

I'm not sure why taxable index funds would ever be better than those same index funds in a Roth, unless you were pretty sure you needed to cash everything out before the 5-year clock runs.  Neither one gives you a tax break up front, but you have to pay capital gains/dividends on the index fund distributions every year in the taxable account, and capital gains when you ultimately sell.  A Roth grows tax-free, and there are also no CG taxes when you sell.

[Chris Pascale]

How much will you either (a) sell the business for, or (b) earn from the business when you stop working?

Also, how old are you now, and how old when you retire?

Obviously, there are more factors, but if you feel very comfortable about your cash situation when you retire at [let's say] 50, then why not let it grow another 9.5 years in the Roth?

What are the assets that will fund retirement?