Taxable/Roth/Simple IRA???

[dmbfan4life20]

Hello everyone,

Currently my wife and I are contributing $700 a month to a taxable account at Fidelity. Currently it is actively managed and we are stopping all contributions to this account after the new year and dumping the Advisor (fees average 0.99%). We have about $27,000 and it makes up about 24% of our investment portfolio (My Pension, 457, her 401k and IRA make up the rest). Here is a quick breakdown of our other investment contributions..

My Pension- 7% contribution plus matching from County. I put in $140per pay, they put in $700 ish. I receive 2% a year of my high 3 year salary when I turn 50. Currently vested at 18% due to years of service. This is a state pension system and very stable. COLA adjustments also between 1-3% yearly.

My 457- Invested 75/25 with Vanguard S&P and Total Bond Market Index. I contribute $150 per pay with no match.

Her 401K- Contributes 9%of her salary with 6% match

Her IRA- $8,000 value with no contributions. AA is 90/10.

Cash- 6 months expenses and currently saving $1K a month after investing the $700.

I have been doing some reading and am curious if this is the best investment vehicle for us to use right now. I am not maxing out my 457 (due to having pension and leaving this job within 6-9 months). The IRA was from an old job and is 90/10 and just sitting there, we do not contribute to it. A few questions I have that maybe you could help me out with....

1.) We love the idea of a taxable account that we can draw from whenever we might need money. Unfortunately, the more I am reading the more I am thinking this might not make sense. Seems that you already pay fed/state taxes on the money before it is invested and then you will pay taxes again on the withdraw and capital gains. Is this correct?

2.) Since we are investing post tax money, should we open a ROTH IRA and invest in that? I know we won't be able to touch the money (minus contributions) until we are 59 1/2, but it seems like a better tax sheltered use for our money since it grows and can be withdrawn tax free as well be given to our heirs. Should we split the $700 and invest in both a ROTH and the Taxable?

3.) Should we take that $700 a month and start contributions back to her IRA and more to my 457 and her 401K?? She is pulling all the information on both accounts so we can see what funds she is in with ER to make a more educated decision.

Thanks for reading this and any insight you could provide would be helpful.

[Jack]

The IRA was from an old job

Traditional and Roth IRAs are not "from [a] job." If this account was associated with an employer, then it's either a SEP or a SIMPLE. You might have to roll it over into an actual Traditional IRA before you can make more contributions to it.

1.) We love the idea of a taxable account that we can draw from whenever we might need money. Unfortunately, the more I am reading the more I am thinking this might not make sense. Seems that you already pay fed/state taxes on the money before it is invested and then you will pay taxes again on the withdraw and capital gains. Is this correct?

You pay taxes on each dollar only once. When you withdraw, you pay taxes only on the amount of money you've gained.

In other words, say you earn $100 that you want to invest in a taxable account. Assume income tax is 25%, so you invest $75. Then that investment grows to $90. If you withdraw it, you pay tax only on $90 - $75 = $15.

2.) Since we are investing post tax money, should we open a ROTH IRA and invest in that? I know we won't be able to touch the money (minus contributions) until we are 59 1/2, but it seems like a better tax sheltered use for our money since it grows and can be withdrawn tax free as well be given to our heirs. Should we split the $700 and invest in both a ROTH and the Taxable?

3.) Should we take that $700 a month and start contributions back to her IRA and more to my 457 and her 401K?? She is pulling all the information on both accounts so we can see what funds she is in with ER to make a more educated decision.

Under most early-retirement circumstances, it turns out that tax-deferred investing is better than either Roth or taxable.

[johnny847]

1.) We love the idea of a taxable account that we can draw from whenever we might need money. Unfortunately, the more I am reading the more I am thinking this might not make sense. Seems that you already pay fed/state taxes on the money before it is invested and then you will pay taxes again on the withdraw and capital gains. Is this correct?

Jack covered pretty much everything. I thought I'd chime in and say that if you have a governmental 457 (and it sounds like you do since you said the county matches your pension), you can withdraw that money penalty (but not tax) free once you leave your job. This provision doesn't apply if you rollover the 457 money to an IRA.

Unless your 457b charges tons of fees, I'd definitely max your 457 before putting any money in a taxable account.