Author Topic: IRA vs Taxable account?  (Read 1873 times)

JackFrost

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IRA vs Taxable account?
« on: November 08, 2016, 09:55:23 AM »
First post on the forums!  A little about me for context:
Age 32, male, $25k in the 401k, $180k in savings, $90k/year salary.  My wife has a similar salary and considerably more in savings/401k.  We're both looking to start investing and seeking FIRE.  The only big anti-MMM/FIRE decision we might be making in the short term is buying a house.  The wife really wants a house.  Otherwise, I think we do a good job of cutting our costs really low and saving a large portion of our earnings.

I'm looking to go 100% into equities, probably VTSAX, to ensure the highest rate of growth and because I believe I have the fortitude to weather any downturns confident in the knowledge that it will rebound if I'm simply patient enough.  I'm putting away 15% into my 401k on top of that which is in a Vanguard target retirement fund which is roughly 90/10 stocks to bonds and seems to roughly mirror VTSAX's performance.  My question as the title implies is what type of account to hold all that VTSAX in? 

From what I understand, I couldn't dump all of that into an IRA even if I wanted to.  It has a set maximum amount I can add monthly.  Additions to it are tax deductible so in the long run it would save a lot of money.  The trade off being that I couldn't touch that money until I'm 59.5 without penalty unless I go through some fancy process (detailed at the top of this forum actually).  So I was thinking to just dump all the money into a taxable account with VTSAX (maybe 10% in VBTLX) and call it done, keep it simple.  Would I be shooting myself in the foot hard by doing this?

Spitfire

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Re: IRA vs Taxable account?
« Reply #1 on: November 08, 2016, 10:38:16 AM »
At that income level, if you have a 401k plan you will not be able to make deductible IRA contributions. Do you know what your AGI will be for 2016? The reason I ask is that at 90k/each you are very close to the roth IRA income limit as well, which is $184,000. Assuming you are under the $184k income number, I would start by putting in $5,500 each in a Roth IRA. The rest will have to go in a regular taxable account.

You may want to keep anything that is being held for the house out of the brokerage, maybe in an Ally 1% savings account or something.

seattlecyclone

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Re: IRA vs Taxable account?
« Reply #2 on: November 08, 2016, 12:03:19 PM »
Putting your money in a tax shelter like a 401(k) or an IRA can make a big difference over time. Max out your 401(k)s and IRAs, then save in taxable accounts.

JackFrost

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Re: IRA vs Taxable account?
« Reply #3 on: November 08, 2016, 01:02:58 PM »
At that income level, if you have a 401k plan you will not be able to make deductible IRA contributions. Do you know what your AGI will be for 2016? The reason I ask is that at 90k/each you are very close to the roth IRA income limit as well, which is $184,000. Assuming you are under the $184k income number, I would start by putting in $5,500 each in a Roth IRA. The rest will have to go in a regular taxable account.

You may want to keep anything that is being held for the house out of the brokerage, maybe in an Ally 1% savings account or something.
My finances are pretty straight forward so I think my AGI would just be my salary ($90k).  Interest is just what my bank gives me on the $180k I've got in there which isn't much.  I don't have any investments aside from my 401k so dividends, capital gains, ira distributions/contributions, etc are all zero.  I don't have any student loans or other things I could deduct.  Knowing that, would you still suggest maxing a Roth IRA (instead of a normal IRA) and having any remainder go into a regular taxable account?  (All VTSAX)

As for the house, yeah, that is the plan.  The wife and I plan to keep enough for a 20% down payment on a house in our savings most likely.

@bender and seattlecyclone: So in general what I'm getting is that I should max my 401k, max an IRA (Roth or IRA, not sure), and then put the remainder into a taxable account.  Good to know.  I was thinking that perhaps that conventional advice wouldn't hold true for FIRE plans but it seems it does.

I know this is slightly off topic but is 100% VTSAX still largely the way to go?  Assuming you can stomach the risk and have a long enough investment runway to ride out rough patches.

Thanks everyone!

MDM

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Re: IRA vs Taxable account?
« Reply #4 on: November 08, 2016, 02:44:31 PM »
...max my 401k, max an IRA (Roth or IRA, not sure), and then put the remainder into a taxable account.
That's pretty much it, unless you have access to either or both
1) HSAs
2) mega backdoor Roth

See the 'Investment Order' tab in the case study spreadsheet for more details.

Quote
I know this is slightly off topic but is 100% VTSAX still largely the way to go?  Assuming you can stomach the risk and have a long enough investment runway to ride out rough patches.
It, among others, is a defensible strategy.  Nobody knows for sure.  See Asset allocation - Bogleheads for more.

Practically speaking, you don't have a choice to use a traditional IRA: 2016 IRA Contribution and Deduction Limits.

Gatzbie

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Re: IRA vs Taxable account?
« Reply #5 on: November 08, 2016, 10:00:38 PM »
JackFrost, I don't want to take away from your thread too much here, but taxable accounts have no contribution limit compared to the IRA accounts right? I haven't utilized my taxable account yet but might.

JackFrost

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Re: IRA vs Taxable account?
« Reply #6 on: November 11, 2016, 09:32:50 AM »
JackFrost, I don't want to take away from your thread too much here, but taxable accounts have no contribution limit compared to the IRA accounts right? I haven't utilized my taxable account yet but might.
Hey Gatzbie, as far as I know there is no contribution limit for a taxable account.  It's effectively just buying stocks, which, like buying anything else, has no regulations.  Maybe if you were so rich that your purchases affected the market in a dramatic way.  lol