Max out tax advantage or open taxable brokerage for easy access?

Investing
#1

I remember reading a post by Jeremy that said something along the lines of how he’s never seen anyone able to retire early with enough invested ONLY in tax-advantaged accounts. I’ve been running our numbers quite a bit lately, and because we both started investing with our work companies early, along with very generous matches, we actually WOULD be able to hit our FI number in only our Roth IRAs/401K/403b accounts by age 44ish if we start maxing them out within the next year (if markets stay ok). We currently aren’t maxing them out, but have the flexibility to do so this year if we choose not to pay extra to our mortgage.

So here’s my question: I know about starting the Roth ladder conversions 5 years before we’d want to access the money, but should we also be diverting some to a non-tax advantaged brokerage account just for easy access before we hit the “Acceptable” retirement age? In that case we would have to choose between maxing out tax advantaged or contributing to brokerage, as we don’t have enough right now to do BOTH. Or just ramp up our savings instead? Any advice/thoughts?

My fear is that we get to age 44 and have plenty in retirement accounts, but can’t access enough of it each year without paying crazy penalties.

Thanks!

#2

Retiring, or stop working, at age 44 means you and your partner must survive for roughly 16 years before you can access your 401k/IRA/403b without penalty. You should calculate how much money you need to have to survive comfortably during those 16 years, then ask yourself some considerations below:

  • Will the Roth ladder conversion alone be enough for you to survive those 16 years? If yes, great. If no, how can you make that happen?
  • Is the Roth conversion amounts that you’re planning to ladder evey year around 4% of your FI number? Rule of thumb is you should withdraw only 4% of your FI balance every year in retirement. Converting to Roth is similar to withdrawing in a way because your goal of converting is so that you can withdraw 5 years later.
  • Will you still have enough money to last until death after you convert to Roth and withdraw all those 16 years?
  • Do you have an emergency fund for at least 6 months of expenses? If yes, cool. If no, it’s time to create one; it will be especially important in retirement if the rest of you money is in retirement plans that you can’t access without penalty, and the market may crash and you don’t want to be forced to sell your stock investments at that time. The emergency fund should not be invested in stock, keep it in a liquidable form like High Yield Savings Account or Money Market Account.

Personally, I have money invested in a brokerage account in addition to 401k/IRA. You have more flexibility and access to the money in a brokerage. Long term capital gains tax rate in a brokerage is much lower than ordinary income tax anyway. 401k/IRA are taxed as ordinary income while brokerage account is taxed as capital gains. Roth conversions are taxed as ordinary income too. So there is a tax advantage to investing long term in a brokerage account too.

But this is for educational purposes only, not to give you personal financial advice. If you’re still confused, hire a financial advisor who is a fiduciary to help map out your retirement plan.

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