Advice: Roth IRA, Traditional or Brokerage Account

[shoefly]

Hi there,

I'm trying to figure out what the next best investment move for me might be.  I am 33yrs old, would like to retire by 50.  I have a 401k with about $90k, a brokerage account with about 55k, a whole life insurance account, that i contribute $5k/yr that pays a guaranteed dividend of 4% + and can be paid out as an annuity to myself once I reach a certain age. It has about $20k.  I own a home with about 100K in equity and I have a savings account with about 70k.

I'm looking to do something with about $35k from the savings account, and leave the other $35k as a cushion.  I'm wondering if I should do a Traditional Ira or a Roth, or fund a brokerage account or both? My tax bracket is at 28% currently. 

Is it better to max out the 401k first and then look to IRA's?  Also, wondering about the whole life insurance account, it was presented to me as an investment, but i'm wondering if that $5000/ yr would be better allocated into an IRA.   Any feedback would be greatly appreciated.

Thanks for the advice!

[seattlecyclone]

I think it's generally better to max out the 401(k) first. The reason is that an early retiree should generally have a higher tax bracket while working than when retired, so it makes sense to defer as much income as possible until retirement. After you do that, fund an IRA. Traditional if your income is low enough to qualify for the tax deduction (again, deferring income to retirement is a good thing), Roth otherwise. After you've maxed out both of these, then invest any other money into a taxable account.

I'm generally wary of whole life insurance. It's a single product that tries to be two things (insurance and savings) at once, but usually does them both badly. Buy term life insurance if you think you need life insurance, and invest your savings elsewhere.

[Kira]

I agree, max out your 401k first and then a traditional IRA because your current tax bracket is so high. You will almost certainly have lower taxes in retirement than you do now.

Then when you are retired, and in a lower tax bracket, you can roll over some of your traditional IRA money to a Roth bit by bit and not pay taxes on it ever: http://www.madfientist.com/traditional_ira_vs_roth_ira/

[TrulyStashin]

If you don't have any dependents, the only life insurance you need is enough to close out your estate and bury or cremate you.  That could be as low as $20k which should cost you just a few dollars a month, freeing up that allocation to go elsewhere.

[Cromacster]

I agree, max out your 401k first and then a traditional IRA because your current tax bracket is so high. You will almost certainly have lower taxes in retirement than you do now.

Then when you are retired, and in a lower tax bracket, you can roll over some of your traditional IRA money to a Roth bit by bit and not pay taxes on it ever: http://www.madfientist.com/traditional_ira_vs_roth_ira/

He has to pay taxes on it when it is earned.  He cannot deduct the amount he contributes to the traditonal IRA due to the his income and employer retirement plan.  But yes, doing this method he will not have to pay taxes on the earnings.  But if he meets the income requirements, he should just be using the Roth to begin with.

[Kira]

I agree, max out your 401k first and then a traditional IRA because your current tax bracket is so high. You will almost certainly have lower taxes in retirement than you do now.

Then when you are retired, and in a lower tax bracket, you can roll over some of your traditional IRA money to a Roth bit by bit and not pay taxes on it ever: http://www.madfientist.com/traditional_ira_vs_roth_ira/

He has to pay taxes on it when it is earned.  He cannot deduct the amount he contributes to the traditonal IRA due to the his income and employer retirement plan.  But yes, doing this method he will not have to pay taxes on the earnings.  But if he meets the income requirements, he should just be using the Roth to begin with.

He doesn't say what his income is, but you are correct, if he is in the 28% tax bracket he probably cannot deduct the contributions to a traditional IRA and should use a Roth for excess money. Should have clarified - I meant he would roll over his 401k to a traditional IRA and then convert to Roth slowly. Definitely should max out the 401k first though before doing Roth or a taxable brokerage account.

Why do you have the life insurance? You don't mention if you are married or have children - are you in it for the investment angle? If so, I would get rid of that post haste.

[Petunia 100]

Life insurance is a horrible investment.  If you need life insurance, buy term.