Author Topic: Tax Sheltered vs. Taxable Account Situation  (Read 1794 times)


  • Bristles
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Tax Sheltered vs. Taxable Account Situation
« on: July 01, 2016, 07:35:50 PM »
I'm in my late 20's and have been in the work force for 6 years.  I have done a good job savings building up around $125k in the market between employer 401k, Roth 401k, Taxable Vanguard account.  The question I have is that I have around $30k in a taxable Vanguard account that I started because I had the misconception I wouldn't be able to access my 401k funds in an emergency.  I also want to note that I have 12 months expenses in a savings account.

My goal is to get the funds from my taxable account into tax sheltered account.  My income is temporarily lower than it has been in the past but I have a cushion to fall back on.  I want to ensure that I am not being too passive and want to maximize my gains.  My employer allows me to contribute 75% of my paycheck into my employer sponsored 401k & they match 4%.

What are your thoughts on increasing my percentage to input 75% of my paycheck into my employer 401k and to drain (live off of) my taxable account?

This would gradually move my taxable account funds into a tax sheltered fund.  Are there any numbers out there that show the difference in savings in a tax sheltered environment vs. a taxable one?

Mother Fussbudget

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Re: Tax Sheltered vs. Taxable Account Situation
« Reply #1 on: July 05, 2016, 11:16:07 AM »
Great job so far - keep up the saving!  Hopefully other forum contributors will see this, and add something... 

There are plenty of numbers / charts, etc that show how tax sheltered accounts win over taxable accounts in the long term - and at 25, you should have a long-term perspective.

As for having 12 months CASH EF on-hand in a savings account, you're losing 2%/year to inflation. 
Recommend cutting back to 6 months CASH EF, or put it in a money market account with Vanguard to give more flexibility.

Also, as your income increases over the years, you will find that you may be able to max out all your pre-tax accounts, and will need to have a taxable account to contribute to, so recommend you keep it around.  I recommend people attack their savings plans in a specific order (below).

In your case, you're already maxing your 401k.  So I'd recommend starting by funding a Roth IRA account at Vanguard (independent of your Roth 401K) by contributing $5,500/year from your taxable account.  As your income increases over the years, you may become ineligible to contribute fully and/or directly to a Roth IRA, so start it while you can, and the contributions + capital gains increase tax-free.

1) Max out your 401K contribution to get the dual benefit of saving pre-tax dollars, and reducing taxable income.
2) Max out your HSA account (must have a HDHP to have an HSA account).
3) Max out a T-IRA or ROTH IRA contribution.  Since your income is currently DOWN, start a Roth IRA independent of your Roth 401K. 
4) Invest in a taxable account.  (you already have one, and want to move $5,500 from this account into a Roth IRA)

Hope this helps!


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Re: Tax Sheltered vs. Taxable Account Situation
« Reply #2 on: July 05, 2016, 11:27:44 AM »
This sounds like a fine plan. You have a solid emergency fund, taxable investments that you would rather have in a 401(k), and a limited time window to contribute during the year. There's nothing wrong with spending down one bucket to save in a better bucket.

Do you have an IRA yet? If not, opening one would be a quick way to move $5,500 into a tax sheltered account right away.