Author Topic: Roth IRA Maxed, 401k Matched, what next?  (Read 9020 times)

Stachsquatch

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Roth IRA Maxed, 401k Matched, what next?
« on: April 05, 2013, 10:08:21 AM »
I apologize that this question has undoubtedly been asked before, but the search function yielded few results that immediately pertained.

Here is the situation: I've maxed my Vanguard Roth IRA for 2013, and will receive my maximum 401k match of 5% from my employer. I am unsure of what to do next. Do I go to max my 401k after match, or do I invest in a taxable account? Given my current income / spending I am unlikely to be able to do both.

As I see it the decision hinges on liquidity / flexibility vs. tax efficiency. If I do NOT max my 401k and chose to go taxable, I will have greater access to my money and more flexibility to capitalize on opportunities that arise, but at a cost in taxes. How much drag on my portfolio does this actually cause, roughly speaking?

For full disclosure I am shooting for earliest retirement possible.

Any replies or resources on this topic would be a great help, thanks!

matchewed

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #1 on: April 05, 2013, 10:53:38 AM »
Hmmm... Seems like you've hit the major points on it. You've got the pro's and con's of the two decisions clearly understood. As far as drag on your portfolio... what do you mean?

It also depends on your plan and how you want to execute it. You say it is your goal to FIRE ASAP. Run some numbers and math out what is best with an understanding that you cannot predict the future tax implications so try to set your plan up to be flexible.

AJ

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #2 on: April 05, 2013, 11:33:36 AM »
If you don't have enough income to max out the 401k and invest in taxable accounts at the same time, then I'm guessing you are not in a tax bracket that would benefit greatly from the additional tax savings afforded by the 401k. But YMMV...a lot. What you should do will depend on your income, target RE date, and your best guess about what your taxes will be in RE.

Stachsquatch

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #3 on: April 05, 2013, 01:44:51 PM »
As far as drag on a taxable account goes, I am curious just how much it costs in taxes or where I can find some information about the taxation of those accounts so Ivan run my numbers and see which pans out. In a couple years I should be in a place to max my IRA, 401k, and have some left over for a taxable account, but even in that situation I am not entirely sure the rigidity of the 401k is desirable over the taxable. It all depends on the numbers and how they compare, but I have to learn more about the taxable accounts and how those taxes are calculated to run the numbers in any beneficial sense.

Any thoughts or resources?

the fixer

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #4 on: April 05, 2013, 02:06:20 PM »
How much you'll pay in taxes depends on your investments.

Let's say you purchase shares of the Vanguard S&P 500 index fund (VFINX) or Total Stock Market Index Fund (VTSMX). Both of these funds throw off quarterly dividends which you'll pay taxes on. If you buy-and-hold, those dividends will count as qualified, and therefore taxed at the lower capital gains tax rate (0% if your AGI is within the 15% tax bracket, 15% if it's higher than that, and a little more if you're making a TON of money). Take a look at the two funds' info pages and see what the dividend payouts were last year, and you'll get an idea of the taxes owed.

The only other taxes you'll have to pay is capital gains tax when you sell the shares. But capital gains are taxed at a lower rate than ordinary income, and when you take money out of a traditional 401(k) you'll have to pay ordinary income tax on that, so it's hard to say which of these will cost you more.

If you buy other investments in a taxable account like bonds or REITs, you'll be paying more taxes on the dividends, so you probably don't want to hold those types of assets there.

jpo

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #5 on: April 05, 2013, 02:37:08 PM »
I would think that maxing your 401k would be worthwhile, because it could help mitigate that you're in a higher tax bracket now than you will be in retirement.

the fixer

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #6 on: April 05, 2013, 05:47:27 PM »
I should have mentioned earlier, although it's kinda obvious, that with a taxable account you pay ordinary income taxes on your cost basis before you even purchase the investments, just like the rest of the money in your paycheck. For instance, you could save $400/month in a taxable account or an extra $500/month in a 401k, and still have the same money left over from each paycheck in either case because the tax withholdings would make up the difference. While it looks like you're saving more using the 401k, don't forget that you're just delaying the taxes you'll eventually have to pay on the whole amount, which will probably be at least 15%.

Taxable investments get effectively taxed upfront at whatever your current marginal tax rate is (25%, 28%, etc). You also will get taxed on the gains and dividends over time as my previous post described, probably at a 15% rate as long as you're still bringing in a decent income. You can offset some of these taxes in the short term with tax loss harvesting, but this operates a lot like an IRA; you get a discount on your taxes this year in exchange for an increase in some future year.

That should be enough info to let you do the math and see the difference. I think starting a small taxable account of about $5,000 is a good idea to get familiar with how managing taxable assets works in terms of capital gains and dividends. Experimenting with a small amount of money now can help you avoid making a big mistake later when you have a lot more assets you're trying to manage.

mm31

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #7 on: April 09, 2013, 12:20:28 PM »
I happen to think that you're almost always better off maxing your 401k, after the steps you've taken. Just go ahead and do it

Stachsquatch

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #8 on: April 11, 2013, 11:20:06 AM »
Being newly wed I hadn't considered it before, but what are the pros / cons of opening up anothe Roth IRA for my wife instead?

Zaga

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #9 on: April 14, 2013, 07:01:11 AM »
Being newly wed I hadn't considered it before, but what are the pros / cons of opening up anothe Roth IRA for my wife instead?
Definitely max out a Roth IRA for both of you before taxable investing!

matchewed

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Re: Roth IRA Maxed, 401k Matched, what next?
« Reply #10 on: April 14, 2013, 07:52:22 AM »
From what you've said I don't think there are any real cons other than what you've laid out in your OP. But take a browse through http://www.irs.gov/Retirement-Plans/Roth-IRAs as there may be contribution limits based on modified AGI.