At what point do I really need a taxable account?

[meadowrue]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth. This is the first year I’ve been able to max my 401K (yay!) but I don’t have a Roth and I don’t have a taxable account. Technically, I know I could reduce my 401K contributions to make room for these investments but I’m actively trying to reduce AGI because this year’s tax return will be used to calculate financial aid for my DD who starts college in 2026. So prioritizing 401K (and HSA, which I max) makes sense to me.

But what if I never earn enough to reach the taxable account rung on the Bogleheads ladder? How bad would that be? Should I make sure to have some taxable investments before I retire? I am 20 years away.

Does anyone on this forum retire without a taxable account? I understand Roth conversions and will certainly do that when the time comes, but I don’t have excess cash to fund a taxable account … and might never have! I hope I’m wrong of course, just trying to be realistic. I’m currently saving 30% of my income for retirement, and still can’t afford to fund a taxable account.

[rob]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

[Sandtrap]

Some helpful data, not comprehensive, to help OP's question in context.
j

2024 retirement account contribution amounts

The IRS increased 2024 contribution limits for 401(k)s, 403(b)s, and IRAs. Some retirement plans have lower limits, so check the details of your allowable contributions. Generally, your human resources or benefits department is a good place to start.

Account 2024 contribution limit
401(k), 403(b), most 457 plans, Thrift Savings Plan $23,000
Individual retirement account (IRA) $7,000
Roth IRA $7,000
Catch-up contributions for 401(k)s and 403(b)s for people age 50 and older also increased to $7,500, but not for IRAs and Roth IRAs. Those remain at $1,000.

The IRS also increased health savings account (HSA) contribution limits for 2024 for both individuals and families (see below). As a reminder: The money you contribute to an HSA can be rolled over each year, it isn’t taxed, grows tax-free, and you’re not taxed when you withdraw funds for qualified medical expenses.

2024 HSA limit, self coverage: $4,150
2024 HSA limit, family coverage: $8,300

IRS.GOV

Total Contribution Limits:
Compensation limit for contributions
Remember that annual contributions to all of your accounts maintained by one employer (and any related employer) - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures, to your accounts, but not including catch-up contributions - may not exceed the lesser of 100% of your compensation or $69,000 for 2024 ($66,000 for 2023, $61,000 for 2022, $58,000 for 2021 and $57,000 for 2020). This limit increases to $76,500 for 2024 ($73,500 for 2023; $67,500 for 2022; $64,500 for 2021; and $63,500 for 2020 if you include catch-up contributions. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited to $345,000 for 2024 ($330,000 for 2023; $305,000 for 2022; $290,000 for 2021, $285,000 for 2020).

[avalpert1]

Tax advantaged is generally better than not tax advantaged (there may be rare exceptions). So don't sweat it if you haven't used up your tax advantaged space no need for a taxable account.

[blortchplop]

I'm in a similar place with tax advantaged accounts: maxing 401k for the first time this year.

Since contributing pre-tax is important to you from an AGI perspective, maxing the 401k first makes sense. I think the next thing, per the wiki on prioritizing investments https://www.bogleheads.org/wiki/Priorit ... nvestments, would be to fund a Roth IRA. If you can do all that and want to save more, then taxable.

Usually taxable savings are for people who want to retire before being able to access the 401k / Roth IRA at 59.5 years (or 55 if that's allowed). However, tax advantaged could still come out ahead even in those situations https://www.madfientist.com/how-to-acce ... nds-early/.

My company's 401k permits after-tax contributions with automatic in plan rollover to roth. The total limit for pre-tax, employer match, and after-tax is 69k this year. Between that and 7k to a Roth IRA, I can't max it all out, so no taxable for me. It's a great "problem" to have.

I do have part of my emergency fund in VUSXX in taxable, but that's not what you're asking.

[ruralavalon]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth. This is the first year I’ve been able to max my 401K (yay!) but I don’t have a Roth and I don’t have a taxable account. Technically, I know I could reduce my 401K contributions to make room for these investments but I’m actively trying to reduce AGI because this year’s tax return will be used to calculate financial aid for my DD who starts college in 2026. So prioritizing 401K (and HSA, which I max) makes sense to me.

But what if I never earn enough to reach the taxable account rung on the Bogleheads ladder? How bad would that be? Should I make sure to have some taxable investments before I retire? I am 20 years away.

Does anyone on this forum retire without a taxable account? I understand Roth conversions and will certainly do that when the time comes, but I don’t have excess cash to fund a taxable account … and might never have! I hope I’m wrong of course, just trying to be realistic. I’m currently saving 30% of my income for retirement, and still can’t afford to fund a taxable account.

If good funds with low expense ratios are available in your 401k plan, then it's reasonable to make maximum annual employee contributions as a priority ahead of both contributions to a Roth IRA and contributions to a taxable account.

Wiki article, Prioritizing investments, Choosing between an employer retirement plan and an IRA.

You may never have need for a taxable account. Investing strategy is very personal and fact-dependant. Is there some particlar reason that you believe that you will benefit from a taxable account , more than you will benefit from a tax-advantaged account?

[meadowrue]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

But what about lowering AGI? I’m pretty sure my tax bracket won’t be higher in retirement, though I could be wrong, so paying less tax now seems prudent. But again, I’m not an expert in these things!

[avalpert1]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

But what about lowering AGI? I’m pretty sure my tax bracket won’t be higher in retirement, though I could be wrong, so paying less tax now seems prudent. But again, I’m not an expert in these things!

You are right, for most people prioritizing pre-tax options over a Roth is preferrable.

[KlangFool]

https://www.madfientist.com/how-to-acce ... nds-early/

OP,

Check out above article. You do not need taxable account to retire early.

KlangFool

[arcticpineapplecorp.]

check out prioritizing investments at the wiki.

[cosmos]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

But what about lowering AGI? I’m pretty sure my tax bracket won’t be higher in retirement, though I could be wrong, so paying less tax now seems prudent. But again, I’m not an expert in these things!

This is my thinking and approach too. While I do have a taxable account it is very small. Nearly all of my wealth is in tax deferred space while maxing out 401k and the catch-ups since I am over 50.

Roth IRA came out in my late 20s and I never qualified for them due to higher income but not really sweating it either.

If my federal tax rate is still 32% after i retire then I am probably doing pretty well and not going to complain. Will likely do some roth conversions after retiring but before RMD kicks in.

For now the focus is just on plowing as much money away as possible and not getting sidetracked along the way. Keep up the great savings rate!

[learning30]

Cut back on the 401k enough to fund the Roth IRA. You can use the basis of the Roth IRA as a cashflow if you must access investments before 60. Not ideal, but a way to fund a tax-advantaged account and still give you the flexibility of accessing your money.

[meadowrue]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth. This is the first year I’ve been able to max my 401K (yay!) but I don’t have a Roth and I don’t have a taxable account. Technically, I know I could reduce my 401K contributions to make room for these investments but I’m actively trying to reduce AGI because this year’s tax return will be used to calculate financial aid for my DD who starts college in 2026. So prioritizing 401K (and HSA, which I max) makes sense to me.

But what if I never earn enough to reach the taxable account rung on the Bogleheads ladder? How bad would that be? Should I make sure to have some taxable investments before I retire? I am 20 years away.

Does anyone on this forum retire without a taxable account? I understand Roth conversions and will certainly do that when the time comes, but I don’t have excess cash to fund a taxable account … and might never have! I hope I’m wrong of course, just trying to be realistic. I’m currently saving 30% of my income for retirement, and still can’t afford to fund a taxable account.

If good funds with low expense ratios are available in your 401k plan, then it's reasonable to make maximum annual employee contributions as a priority ahead of both contributions to a Roth IRA and contributions to a taxable account.

Wiki article, Prioritizing investments, Choosing between an employer retirement plan and an IRA.

You may never have need for a taxable account. Investing strategy is very personal and fact-dependant. Is there some particlar reason that you believe that you will benefit from a taxable account , more than you will benefit from a tax-advantaged account?

I have great Vanguard funds with low expense ratios. Only reason I ask about taxable is because I’ve read so many portfolio reviews and Am I Ready To Retire? posts that all seem to include a mix of tax advantaged, Roth, and taxable accounts and I worry I’m missing something important related to withdrawal strategy. I only plan to retire at 65 so no need for a FIRE approach or anything. Maybe I’m ok to just keep funding my 401K and HSA?

[meadowrue]

Cut back on the 401k enough to fund the Roth IRA. You can use the basis of the Roth IRA as a cashflow if you must access investments before 60. Not ideal, but a way to fund a tax-advantaged account and still give you the flexibility of accessing your money.

That’s a great point. We have very little in liquid savings which is not ideal. I think I’ve become so focused on reducing AGI for FAFSA that I have perhaps not seen the forest for the trees. To be honest, there’s something about automatic payroll deductions that is so much easier than starting a Roth and funding it myself. I never see that money so it’s like I never had it.

[meadowrue]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

But what about lowering AGI? I’m pretty sure my tax bracket won’t be higher in retirement, though I could be wrong, so paying less tax now seems prudent. But again, I’m not an expert in these things!

This is my thinking and approach too. While I do have a taxable account it is very small. Nearly all of my wealth is in tax deferred space while maxing out 401k and the catch-ups since I am over 50.

Roth IRA came out in my late 20s and I never qualified for them due to higher income but not really sweating it either.

If my federal tax rate is still 32% after i retire then I am probably doing pretty well and not going to complain. Will likely do some roth conversions after retiring but before RMD kicks in.

For now the focus is just on plowing as much money away as possible and not getting sidetracked along the way. Keep up the great savings rate!

Thanks! I hope I will thank myself in 20 years

[EdNorton]

I would prioritize Roth IRA contributions over a 401K (either pre tax or roth) - especially if no match. Taxable after those when you have more income.

If you expect to be in a lower tax bracket in the future, I would maximize 401k first.

[suemarkp]

I had no taxable account except for my emergency fund until I was about 45 years old. What can cause it is if you make enough to max out your pretax but still want to save X% of your income. You may receive a windfall that can't go to a 401K or IRA (in my case I received some life insurance proceeds). When I retired, I received quite a bit of money for my unused sick leave and vacation. This could not go to an IRA or 401K. When your turn 75 and have to take RMDs, those will end up in a taxable account if you don't spend it all.

[whodidntante]

Don't do it. I have a lot in taxable accounts.

Once you have maxed out every tax advantaged account available, then it's time. Except, perhaps for a 529. That should be funded only up to an amount you are willing to contribute. Beyond that, your kids can pay for their own school. Just think! They'll be able to say they paid their own way through school!

When you do it, have equity index ETFs only in taxable accounts. Even then, planning on kissing 25% of your dividends goodbye, depending on where you live and whether you owe NIIT. Non-qualified dividends are worse.

[meadowrue]

I had no taxable account except for my emergency fund until I was about 45 years old. What can cause it is if you make enough to max out your pretax but still want to save X% of your income. You may receive a windfall that can't go to a 401K or IRA (in my case I received some life insurance proceeds). When I retired, I received quite a bit of money for my unused sick leave and vacation. This could not go to an IRA or 401K. When your turn 75 and have to take RMDs, those will end up in a taxable account if you don't spend it all.

Thank you for these examples. This is really helpful!

[meadowrue]

Don't do it. I have a lot in taxable accounts.

Once you have maxed out every tax advantaged account available, then it's time. Except, perhaps for a 529. That should be funded only up to an amount you are willing to contribute. Beyond that, your kids can pay for their own school. Just think! They'll be able to say they paid their own way through school!

When you do it, have equity index ETFs only in taxable accounts. Even then, planning on kissing 25% of your dividends goodbye, depending on where you live and whether you owe NIIT. Non-qualified dividends are worse.

I can’t afford to do it anyway so glad to hear I’m not committing an egregious financial sin! And yes, we have 529s that will fund the first two years of school for both kids, but that’s all we can afford, at least as things stand now. DH and I are actively working on increasing our income so who knows? But I do understand we have to put on our own oxygen masks first so I’m trying hard to sock away as much as possible for retirement as a priority. Thanks for the advice!

[breakfastinbed]

If you expect your tax bracket in retirement to be definitely higher than your current tax bracket, you should prioritize Roth.

If not, or if you aren't sure which will be higher, you should probably prioritize 401k.

If you still aren't sure which is better, 401k is likely the correct answer for probably 95% of investors.

There is no likely circumstance in which you would contribute to a taxable account over maximizing tax-advantaged accounts (with the exception of maintaining liquidity). The most realistic situation would be an individual in a relatively low tax bracket who will receive a very large lump sum, like a massive inheritance or winning the lottery, such that their future income will be multiple tax brackets higher.

What I would recommend is investing in a taxable account once everything else is accounted for - all tax-advantaged accounts, cost of living, emergency funds, savings, etc.

[FiveK]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth.

That looks correct.

Three different people have suggested the Prioritizing investments wiki article. How do the suggestions there look to you?

[meadowrue]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth.

That looks correct.

Three different people have suggested the Prioritizing investments wiki article. How do the suggestions there look to you?

I have read it, FiveK, but I already feel like I’m breaking the rules by maxing my 401K when, according to the wiki, I should only be contributing to the employer match at this time (I don’t actually have one but I do have a generous employer funded ESOP). I don’t think the wiki takes into account the need to lower AGI at certain times, e.g for FAFSA. If I follow the wiki and contribute less to my 401K now, I will jump into a higher tax bracket.

I do agree with the order of priorities theoretically but I’m finding it hard to justify putting away less in my 401K this year, which has thrown my order of priorities out of whack. Regardless, I’m not sure I will ever reach the taxable “rung” though another poster shared some insights about how this is possible, which I hadn’t considered - an inheritance (likely in 10-15 years, though we’re not counting on it), another windfall of some kind, RMDs, etc.

I guess I feel like diversification of accounts is mentioned here a lot, and that’s not something I’ve been able to achieve to the extent that many posters seem to have, based on Portfolio Reviews. The only way for me to create a taxable account now would be to reduce tax advantaged contributions. Consensus view seems to be that I should not do that, which I’m glad to hear!

[FiveK]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth.

That looks correct.

Three different people have suggested the Prioritizing investments wiki article. How do the suggestions there look to you?

I have read it, FiveK, but I already feel like I’m breaking the rules by maxing my 401K when, according to the wiki, I should only be contributing to the employer match at this time (I don’t actually have one but I do have a generous employer funded ESOP).

What do you think the wiki is suggesting, instead of maxing your 401k, that would not also lower your AGI?

I guess I feel like diversification of accounts is mentioned here a lot, and that’s not something I’ve been able to achieve to the extent that many posters seem to have, based on Portfolio Reviews. The only way for me to create a taxable account now would be to reduce tax advantaged contributions. Consensus view seems to be that I should not do that, which I’m glad to hear!

"Tax diversification" isn't nearly as important as "investment diversification". See Tax Diversification Limits And Roth Optimization Benefits for more. In other words, keep up the good work!

[ruralavalon]

I probably have things backwards, but my understanding is taxable is the last priority after maxing our tax deferred space and funding a Roth. This is the first year I’ve been able to max my 401K (yay!) but I don’t have a Roth and I don’t have a taxable account. Technically, I know I could reduce my 401K contributions to make room for these investments but I’m actively trying to reduce AGI because this year’s tax return will be used to calculate financial aid for my DD who starts college in 2026. So prioritizing 401K (and HSA, which I max) makes sense to me.

But what if I never earn enough to reach the taxable account rung on the Bogleheads ladder? How bad would that be? Should I make sure to have some taxable investments before I retire? I am 20 years away.

Does anyone on this forum retire without a taxable account? I understand Roth conversions and will certainly do that when the time comes, but I don’t have excess cash to fund a taxable account … and might never have! I hope I’m wrong of course, just trying to be realistic. I’m currently saving 30% of my income for retirement, and still can’t afford to fund a taxable account.

If good funds with low expense ratios are available in your 401k plan, then it's reasonable to make maximum annual employee contributions as a priority ahead of both contributions to a Roth IRA and contributions to a taxable account.

Wiki article, Prioritizing investments, Choosing between an employer retirement plan and an IRA.

You may never have need for a taxable account. Investing strategy is very personal and fact-dependant. Is there some particlar reason that you believe that you will benefit from a taxable account , more than you will benefit from a tax-advantaged account?

I have great Vanguard funds with low expense ratios. Only reason I ask about taxable is because I’ve read so many portfolio reviews and Am I Ready To Retire? posts that all seem to include a mix of tax advantaged, Roth, and taxable accounts and I worry I’m missing something important related to withdrawal strategy. I only plan to retire at 65 so no need for a FIRE approach or anything. Maybe I’m ok to just keep funding my 401K and HSA?

Probably yes.

I wonder about a future need for a Roth account.

Does your employer's plan permit Roth 401k contributions?

Will you be eligible for both a substantial pension and Social Security benefits? About how much do you currently have in traditional tax-deferred accounts? What is your current tax bracket, both federal and state? What is your profession or occupation?