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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75338  
Subject: Re: 401K vs Roth vs Taxable investment Date: 4/20/2010 12:09 PM
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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
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