Tom’s Thoughts on Maximizing Investments
Katie Nealis:
I am in my early 50s, I am maxing out my 401k should I save it into an IRA or brokerage account? I make too much money for a Roth IRA, and I wouldn’t be able to deduct my, my contribution to my IRA?
Tom Vaughan:
That’s a great question. And one of the things that I think is interesting, at least for me, you know, I’ve done over 6000 financial plans, I’m working on my 36 year here, I, every six months, we go through a strategy session with clients. And I’ve been able to see all of these paths that people take. And one of the things that I would say, I would encourage people to look at, it’s just the structure like where is the money, the buckets of money that you kind of have. And so for those people that have everything in 401k, and IRAs and those types of things, there’s some advantages in the sense that, you know, we can make moves from one area to another in the market with no tax. In today’s world, we don’t even have commissions, which is kind of nice.
But there’s also some disadvantages. If you need some lump sum for something, I gotta do my foundation, I need, you know, $50,000 or $75,000, it can be very, you know, taxable, because now pulling that out of my IRAs is 100%, taxable at ordinary income rates, which can be quite high, versus having some money outside and kind of a regular brokerage account, where you got a capital gains tax rate instead of an ordinary capital rate. And then having that other money at the beginning of your retirement to live off of lowering your taxes, especially, you know, at the beginning, allows you if you’re so inclined to start converting some of your 401 K’s or IRAs into Roth IRA. And it gives you just some room within those lower tax brackets to move stuff over. And so I would think in your case, that I would be looking at trying to add to a non retirement account the brokerage, we call them taxable accounts, there’s different names for them, but really trying to get some assets into a different bucket. Now, if you’re thinking about retiring early, before 59 and a half, that’s even more important, because the money coming out of those retirement accounts are penalized before 59 1/2. So if you’re going to retire, if you’re 50, now you’re going to retire at 55 or hopeful, then you definitely want to build up some assets outside of those retirement accounts. So you have something to live off of, during that period of time, there are some ways to take money without penalty, or called a rule 72 T out of those retirement accounts. But given the choice of building up some assets outside when wouldn’t be a bad solution.
Easan Arulanantham:
So you talked about taxes, if I was to build a brokerage account outside, what some tax efficient ways I can do, you know, should I be just, you know, throwing all my money into an index fund and kind of forgetting about in a sense?
Tom Vaughan:
yeah, we actually develop specific portfolios for taxable accounts. And they’re designed for more broad market exposure, so that we don’t have to make changes very often. And so you’d want to be in kind of all of the areas Matter of fact, in my opinion, you want to be very broadly diversified. Maybe you have some targeted pieces that you might move around, but they should be fairly small and fairly infrequent. And you really need to hold on to those for more than a year. It’s a it’s a very different philosophy of investment, in my opinion, for those areas. But yeah, I actually would be looking at some index, you know, exchange traded funds like that Vanguard total stock market index, so we just looked at, it’s very tax efficient, you will pay taxes on dividends, you know, as they’re paid out. But the actual holding itself, the exchange traded fund does not pay a lot of taxes uncontrollably to us, so it allows you to pick when you want to get those and so I think that’s Yeah, that’s probably the right strategy, but you need to have a specific portfolio for that type of account in my opinion.