Always enjoy Jeremy's blog posts.
Here are my thoughts on Roth vs Taxable:
If the saver in question is having to make this decision, their income has eclipsed the deductible tIRA limits. If they are mustachian type savers with this level of income they should have plenty to fund BOTH a ROTH and build a taxable portfolio sufficient to offer much of the loss harvesting benefits Jeremy points out. Funding the ROTH will also help avoid some of the 15% dividend tax someone at this income level will likely pay in the years leading up to ER.
Not necessarily. The saver in question could instead owe no tax, making tIRA contributions pointless. After 401k contributions, HSA, and standard deduction plus exemptions our taxable income is zero. Then we have several refundable credits (and state matches on those), so I use the refunds to fund Roths for both of us.
Jeremy does make good points, but we are also looking at FAFSA rules and EITC rules, both of which discourage taxable accounts. FAFSA may include taxable in calculations, and taxable income above $3350 can disqualify you from EITC. He hasn't included those in his analysis presumably because it isn't on his radar (yet).
If you owe no tax, loss harvesting, Jeremy's primary benefit of a taxable account, would be null anyway.
Hi So Close, good discussion
I view the loss harvesting as more of a secondary benefit, although a nice one. The primary benefit is unrestricted access to earnings.
Tax loss harvesting can still be of benefit with no tax liability. I can use it to increase my basis in another stock (sell stock A for a loss, harvest a gain in stock B of equal value) and I believe (but need to research further) use some of that loss to increase the speed at which we are doing Roth IRA Conversions at the 0% tax rate ($3k limit maybe?) This might be of use in the race against the RMD as we try to get all of our funds out of the 401k/IRA before Age 70.5. I think we may have to use every weapon in our arsenal to do so
I agree that the ROTH can be used to reduce taxes during the working years, and this is mostly a choice of whether to have both types of accounts, not an either/or decision
Assuming an asset like VTI / VTSAX and a 2% dividend, you might reduce the tax load on those funds by 0.3% of assets (15% tax on 2% yield) (You can also add state tax as a load, as well as potential reductions in ACA credits)
On a $5500 contribution, this is $16.50 in year one. I would just pay that out of work income. It will grow when projecting out one or two decades, and this will need to be weighed against having no access to dividends for the decades that follow.
teen persuasion is right, FAFSA hasn't been on our radar. And also Roths are ideal for that situation, already with 0 tax load
I don't see a situation where we ever qualify for the EITC. I also don't really like the idea of receiving subsidies for things when we don't need them
If the $'s available for student grants and aid in a given year is fixed, and we can pay full price for tuition without breaking a sweat but can legally hide assets and thus qualify, should we take the free money that would have otherwise gone to somebody that truly needed it?
Now I suppose I could argue that it is just a refund on taxes paid in previous years...