Hi All,I spoke with a financial advisior a few days back. I'm currently maximizing my 401K and Roth. I was somewhat surprised that she recommended I consider reducing the 401K and starting a taxable IRA. Her logic was that capital gain taxes may end up been lower than either my current marginal tax rate (i.e what I'm paying on the ROTH) or my tax rate in retirement. A little back ground - I'm firmly in the 25% tax bracket at the moment. I investing fairly heavily for retirement and will benefit from a defined benefit plan with a result that my best guess is my income in retirement will be similar to that while working. Looking ahead (as much as one can) its likely that capital gains taxes will rise for those in the 28% bracket but the 25% bracket may remain 15% for now. The challenge is I'm relatively young (37) and tax rules could change many times between now and retirement.What do people think of the advice? I was thinking of a taxable IRA but only for any additional investments beyond my pension. I hadn't thought about potentially reducing my 401K (any reduction wouldn't be below the level of matching).I'll be honest in saying I quite like the idea that the bulk of my pension investments are relatively inaccessible. The final thought is I expect my income to rise over the next few years so perhaps that the time to start a taxable IRA? I do like the idea of having a variety of income sources in retirement so I can do as much as I can to keep my taxable income as low as possible (though thats some what difficult with a defined benefit plan, SS and 401K making the core with only a smaller portion been the ROTH.Any thoughts? Jonathan
I was somewhat surprised that she recommended I consider reducing the 401K and starting a taxable IRA. Let's start with a clarification. What exactly do you mean by a "taxable IRA"?From your description, it sounds like you might be talking about investing outside of IRA accounts. Or you do really mean putting money into a traditional IRA that is not deductible?--Peter
Sorry, I think I'm confusing my options. I should have said investing outside the IRA. I don't see much benefit for me for a traditional IRA.Jonathan
I few rules of thumb.If your company offers a match to 401k contributions, ALWAYS put enough money in to get the maximum match. Thats free money you're leaving on the table if you don't.As long as you qualify for a Roth IRA do it. If you no longer qualify, a nondeductable IRA is the next best thing. At least there your cap gains and dividends grow tax defered.After you've maxed out your tax advantaged plans, then open a regular brokerage account.All this is assuming you have an emergency fund of 3-6 months living expenses saved and all credit cards are paid off.Trying to guess what the tax brackets, etc., will be 30 years from now is futile. Having things in different tax treated accounts will not give you the best possible outcome but it will also not give you the worst possible outcome. And it gives you flexability.JLC
I spoke with a financial advisior a few days back. I'm currently maximizing my 401K and Roth. I was somewhat surprised that she recommended I consider reducing the 401K and starting a taxable [account]. Her logic was that capital gain taxes may ... Let me fix that for you. Her logic was that she doesn't get commissions on money going in to your 401k, but she does get a commission on whatever she can convince you to buy in a taxable account - opened up with her, of course. The more she can convince you to put into that taxable account, the larger her commission will be. Did she by chance suggest moving your Roth IRA account to her institution?I'd say her concept has possibilities. In a perfect world, I'd recommend going into retirement with some money in a Roth IRA, some money in a tax-deferred account (like a 401k or traditional IRA), and some money in an ordinary taxable account. This gives you the most flexibility in choosing where to draw funds from in retirement to take maximum advantage of whatever the tax laws happen to be when you retire. If you could correctly guess the tax laws when you retire, you could put all of your retirement money into the right kind of account for you. But, unfortunately, crystal balls are generally inaccurate and unreliable. So the next best thing to do is to hedge your bets and have some money available in all three kinds of accounts.Back to the issue - I wouldn't generally recommend reducing your 401k contributions just to get some after-tax investing started. It would be better to start that in addition to your current savings plan. If you already have a fair amount of money in your 401k plan, it might make sense to keep your contributions at your current level, and put any increases to your retirement savings into a taxable account. So if you get a raise, don't increase your 401k contribution (in dollar terms), but instead take that extra money and start funding your taxable savings. --Peter
I spoke with a financial advisior a few days back. I'm currently maximizing my 401K and Roth. I was somewhat surprised that she recommended I consider reducing the 401K and starting a taxable [account]. Her logic was that capital gain taxes may ...Let me fix that for you. Her logic was that she doesn't get commissions on money going in to your 401k, but she does get a commission on whatever she can convince you to buy in a taxable account - opened up with her, of course. The more she can convince you to put into that taxable account, the larger her commission will be. Did she by chance suggest moving your Roth IRA account to her institution?There is a good chance that ptheland is correct about your advisor's motives. However that doesn't necessarily make the advice bad.Some 401K plans have high fees and poor investment options. If that's what you have on offer, what probably makes the most sense is to put exactly enough into the plan to get the maximum match your employer offers - and no more. (You almost certainly want to put that much into the 401K, no matter how bad the plan is. Whether you want to put more than that in... variable.)Also, if you are a long-term investor - the sort that your 401K administrator wants you to be - you may find that it's better to invest OUTSIDE the plan, paying standard income tax rates on the amount of earnings you put into a taxable account and then long-term-cap-gains rates on profitable sales, than INSIDE the plan and then pay standard income tax rates on all withdrawals. The goal is not to pay the least tax; the goal is to have the highest level of sustainable after-tax withdrawals in retirement.(In my 401K I have a number of machinations to keep my trading under their threshold where they start imposing restrictions and penalties. I stay under their radar even though I am a short-term trader.)
To be fair, the financial advisor works at a credit union that doesn't offer any of the products (401K, IRA or ROTH IRA). I agree with you, her idea seems to make some sense. I was curious to see what people here recommended. In particular I was curious how people would decide how to prioritize and much money to place in each account. My current strategy is to get the 401K match, then ROTH, then max out the 401K before putting anything into other investments. Jonathan
Jonathan,You will probably find this helpful as it addresses your question. Fool. com's Robert Brokamp "pulled out the most important types and developed a general pecking order of where you should deposit your savings: * Employer plan with a match * Roth IRA * Employer plan without a match * Traditional IRA * Taxable investment * Annuity"For the most part that is the strategy that I use.See source here...http://www.fool.com/retirement/retirement02.htm?terms=ira+40...
"Any thoughts?Jonathan "^^^^^^^^^^^^^^^^^^^^^^^Do you have an emergency fund set aside?If not for my emergency fund and savings outside of my 401K and myDW's Roth IRA, we would be in great trouble after being laid off.Keep in mind that the funds are not necessarily accessible withouta penalty if they are in IRAs of either type or a 401K or equivalent.Howie52Balance in and out of tax-preferred accounts is a good thing.
To be fair, the financial advisor works at a credit union that doesn't offer any of the products (401K, IRA or ROTH IRA). I'm going to head down a side path with semantics again. Unfortunately, with written communication, it's important to get the terminology correct to avoid a lot of confusion. So bear with me.401k, IRA, and Roth IRA are not what most people would call products. They are types of accounts. I would be shocked if there were a credit union anywhere that did not offer an IRA or Roth IRA account. Those are very basic account types, and something that credit unions universally offer to their members. I would not be surprised, however, if a credit union did not offer a 401k account. Those are geared toward businesses rather than individuals. Credit unions tend to offer mainly accounts for individuals.Any of these accounts can hold many different investments - stocks, bonds, mutual funds, savings accounts, CDs, annuities, and so on. Many financial advisors get a commission when they sell one of these products, whether the account is a 401k plan, an IRA, or a taxable account. And because this commission is generally tied to getting new money into the account rather than how the account performs over time, the advisors motives and your motives are very different.So what was this credit union financial advisor suggesting you do with the money you divert from your 401k plan? I only keep harping on these issues because if you don't know what you're investing in, it is incredibly easy for a "financial advisor" to convince you to buy something that is far better for the advisor than it is for you. The only person with your best interest at heart is you. The next best thing is to find an advisor whose compensation is not tied to what you buy. That is generally a fee-only advisor, not a fee-based one. A fee-only advisor is paid only by you - they don't get any commission from the sale of products. A fee-based advisor gets some direct compensation from you and some from the sale of products. If you're not paying the advisor, the advice is much too often better for the advisor than it is for you. Bottom line - keep asking questions here. The more you learn, the better protected you will be from people who are more interested in their own financial future than yours.--Peter
One factor that you didn't mention is how much you have already saved for your retirement. If you already have a huge next egg then diversifying it to taxable accounts could make sense, but if you just really got started saving a few years ago and have a modest nest egg then I would have a hard time seeing how giving up the 25% deductible 401K contribution would be a good choice. Eventually having a combination of account types is very desirable to give you more flexibility in case your situation changes. you have a year with high expenses like buying a car, or the tax laws are very different in the future. Having some money n a taxable account may also allow you to reduce the taxes paid on your social security income.http://www.bogleheads.org/wiki/Taxation_of_Social_Security_b......I investing fairly heavily for retirement and will benefit from a defined benefit plan with a result that my best guess is my income in retirement will be similar to that while working..... Any thoughts? ...I would take a hard look at your assumption that you will need the same income in retirement as now. While you will have some additional expenses you will not have, some taxes(like social security), retirement savings, and possibly no mortgage payment if you have a paid off house by then. Just these could easily add up to a third or more of your current income that will not be needed in retirement. You also need to consider your income requirement throughout your retirement and not just the day you turn 65. By the time you are in your mid seventies you will naturally slow down and as long as you stay in relatively good health you may not spend all that much each month even if you have ample means. In addition there is a very significant chance that you won't live to retire or to be retired very long. Within about the last year a neighbor of mine and a co-worker died in their late 50's or early 60's just a few years before they would have retired. Here is a link to a very simplistic life expectancy calculator. You can search with Google for more complex ones. Do not just focus only our average life expectancy. Look the percentage chance that you will not live to be say 65, or 75.https://personal.vanguard.com/us/insights/retirement/plan-fo...You might want to recrunch the numbers to see if a more modest retirement income goal is reasonable and if you could plan for less and either retire early or spend and enjoy more now.Greg
The strategy you mention sounds like a good one to me.Elsewhere in this thread, it was said: I only keep harping on these issues because if you don't know what you're investing in, it is incredibly easy for a "financial advisor" to convince you to buy something that is far better for the advisor than it is for you. The only person with your best interest at heart is you.Why is financial advisor in quotes? Maybe because calling this person a financial advisor is a bit like calling a used car salesman a "transportation advisor."--SirTas
Why is financial advisor in quotes? Maybe because calling this person a financial advisor is a bit like calling a used car salesman a "transportation advisor."That was me.And you basically hit it on the head. While I'm sure there are lots of good financial advisors out there, there are also a lot of insurance salesman and stockbrokers who take on the title "financial advisor" just to help them sell their wares. You can't tell the difference between the two just by reading their titles.--Peter
I think you nailed it on the head. I have some retirement savings but giving up the 25% tax saving seems like a bad idea. I'm also thinking as my income rises and I can't shelter any more income in either 401K's or ROTH's then I'll be forced to investing outside my 401K / ROTH. I did look at my current expenses. Between pension (21%), Mortgage (23%) and a collage funds (6%) I'm spending about half my income on expenses that will disappear in retirement. I know I'll have some additional expenses but these are unlikely to make up the difference.I mostly enjoy my job, so my thought is that I'm more likely to go part time that retire early. Going part time also avoid taking a big hit of the defined benefit plan.Jonathan
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