Author Topic: 401k/IRA vs taxable investment  (Read 3916 times)

scfishy

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401k/IRA vs taxable investment
« on: August 19, 2013, 12:24:19 PM »
I know there are varying schools of thought on this. Currently, at 28, I have $86k between my 401k and IRA. If I left that alone, at 7% average growth per year, it should end up around $780k to $800k. I will, of course, continue to contribute the amount I need to get my max employer match.

Would it be more wise to focus on taxable investments now, after paying off student loans, in order to fund the first part of early retirement? Or do I max out my 401k and IRA because of the additional tax benefits?

matchewed

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Re: 401k/IRA vs taxable investment
« Reply #1 on: August 19, 2013, 12:36:54 PM »
Maxing your tax deferred options can get you to FIRE quicker assuming that the rules stay the same as they are today. http://www.madfientist.com/retire-even-earlier/

Post tax investments are not the only method to have money for an early retirement. Although they are a method. Having several different tax "buckets" to draw down from come the future will help you weather tax uncertainty in the future. But if your income is low enough from your buckets it won't matter much.

oldtoyota

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Re: 401k/IRA vs taxable investment
« Reply #2 on: August 19, 2013, 01:28:54 PM »
I read a few articles at the MadFientist website. He recommends using the HSA as an IRA if you have maxed out other avenues (401K and IRA). That seems nuts to me. I thought HSAs were a lose-it-or-lose situation.

xocotl

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Re: 401k/IRA vs taxable investment
« Reply #3 on: August 19, 2013, 01:33:06 PM »
I read a few articles at the MadFientist website. He recommends using the HSA as an IRA if you have maxed out other avenues (401K and IRA). That seems nuts to me. I thought HSAs were a lose-it-or-lose situation.

You may be thinking of FSAs, which are use-it-or-lose-it. HSAs you can keep as long as you want, and once you hit 65 apparently you can use them for things other than medical expenses.

dorkus619

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Re: 401k/IRA vs taxable investment
« Reply #4 on: August 19, 2013, 02:53:26 PM »
I also read a few articles on that site including the one you linked. This definitely helped me decide how to further invest my $$ now. I'm definitely going to work on increasing my 401k and HSA contributions.

Should I max out my 401k first or is there any benefit in having an IRA in addition to a 401k that I'm not making max contributions to?

Thanks! Lots of researching left to do!

GreenGuava

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Re: 401k/IRA vs taxable investment
« Reply #5 on: August 19, 2013, 05:17:15 PM »
I know there are varying schools of thought on this. Currently, at 28, I have $86k between my 401k and IRA. If I left that alone, at 7% average growth per year, it should end up around $780k to $800k. I will, of course, continue to contribute the amount I need to get my max employer match.

You should also consider how much you expect it to grow in terms of spending power, not in nominal terms.  If it has an average of 4% growth above inflation, you'll have the equivalent of a little more than $300,000 in there, or a sustainable $12,000/year income stream.  How much of your expected expenses will this cover?

Would it be more wise to focus on taxable investments now, after paying off student loans, in order to fund the first part of early retirement? Or do I max out my 401k and IRA because of the additional tax benefits?

I think it makes the most sense to deal with tax-advantaged accounts first;  there are enough ways to get at the money - 72(t) distributions and Roth pipelines being popular.


Should I max out my 401k first or is there any benefit in having an IRA in addition to a 401k that I'm not making max contributions to?

Depends on the fund availability in your 401(k), how long you intend to stay at your employer, and whether or not you want the tax diversification that a Roth IRA offers (you might also have Roth 401(k) as an option).  All other things being equal, the general advice is to max out the match from your employer, then an IRA, then go back to add more to the employer plan.

dorkus619

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Re: 401k/IRA vs taxable investment
« Reply #6 on: August 20, 2013, 07:56:49 AM »
Should I max out my 401k first or is there any benefit in having an IRA in addition to a 401k that I'm not making max contributions to?

Depends on the fund availability in your 401(k), how long you intend to stay at your employer, and whether or not you want the tax diversification that a Roth IRA offers (you might also have Roth 401(k) as an option).  All other things being equal, the general advice is to max out the match from your employer, then an IRA, then go back to add more to the employer plan.

I don't know, I don't know, and I don't know. [feeling pretty ignorant/n00b now]
Right now I am maxing the employer match. me:6%  -  employer: 3%

simonsez

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Re: 401k/IRA vs taxable investment
« Reply #7 on: August 20, 2013, 08:18:24 AM »
To the OP, I'd say buying property (or the lack of doing so in the future) could be pretty important to how you want to divvy up your investments as well.  I think maxing out 401k is usually best on aggregate on a site like this but depending on your goals/risk-tolerance and what you may be purchasing, that could change your allocation.

Good luck!

Freeyourchains2

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Re: 401k/IRA vs taxable investment
« Reply #8 on: August 20, 2013, 08:45:51 AM »
Maxing your tax deferred options can get you to FIRE quicker assuming that the rules stay the same as they are today. http://www.madfientist.com/retire-even-earlier/

Post tax investments are not the only method to have money for an early retirement. Although they are a method. Having several different tax "buckets" to draw down from come the future will help you weather tax uncertainty in the future. But if your income is low enough from your buckets it won't matter much.

Matchwed forgets to mention the restrictions on any and all of your IRA earnings this way. How they are locked up until age 59.5. So they can get you to live off of your contributions in a FIRE scenario only, if you worked for 10 years, then you can retire for ten years. It's a 1:1 ratio since your earnings from those contributions inside the IRA are locked up until old age.

If you get taxed first, then invest in businesses, real estate, and dividend growth companies, you'll be able to live off of the income at a much sooner age upon your success.


matchewed

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Re: 401k/IRA vs taxable investment
« Reply #9 on: August 20, 2013, 08:55:17 AM »
Maxing your tax deferred options can get you to FIRE quicker assuming that the rules stay the same as they are today. http://www.madfientist.com/retire-even-earlier/

Post tax investments are not the only method to have money for an early retirement. Although they are a method. Having several different tax "buckets" to draw down from come the future will help you weather tax uncertainty in the future. But if your income is low enough from your buckets it won't matter much.

Matchwed forgets to mention the restrictions on any and all of your IRA earnings this way. How they are locked up until age 59.5. So they can get you to live off of your contributions in a FIRE scenario only, if you worked for 10 years, then you can retire for ten years. It's a 1:1 ratio since your earnings from those contributions inside the IRA are locked up until old age.

If you get taxed first, then invest in businesses, real estate, and dividend growth companies, you'll be able to live off of the income at a much sooner age upon your success.

And this is why you get labeled as a troll. I didn't mention the restrictions about the IRA earnings because there are ways around it hence my point about assuming the rules stay the same.

I know you don't agree with me FYC2. And that's fine. Go ahead and promote all the other investment styles you want. However please refrain from spreading misinformation like saying that earnings are locked until old age. Earnings and contributions can be converted to Roth. In addition to that I never say not to do taxable investments, real estate, or entrepreneurship. Feel free to do other investments as well, in fact I encourage it for tax diversity.