Most of us wish we had known more or better when younger. It's the exceptional person, including investors, who didn't learn things the hard way through mistakes.Interesting conversation for someone starting out on their journey. Personally, I wish I knew more when I was younger. All I was told was max out your tax deferred 401K and get the company match. I am thankful, no matter what, for that advice!
At 50 and with good fortune, my tax deferred 401K could be a challenge from a tax perspective when I retire. Now that I'm in peak earnings, I feel stuck (not a great word) putting more into tax deferred because of my tax bracket. In hindsight, would it have been better to put money into a Roth when I was younger but at what tax bracket would it make sense with so many future unknowns including job security? Maybe the answer lies in the middle, a little here and a little there.
In the end I feel blessed and would never second guess choices unless they were reckless and uneducated. I'm thankful for this forum to help make sure I don't do anything stupid going forward.
FYI. From a finance perspective, I know about as much that can fit in a thimble, so just thinking out loud.
Maxing out a company match is always the right way to go, and I think Roth is almost always best especially with longer investment horizons. Beyond that, whether and how much to save in tax-deferred versus taxable can get complicated and uncertain depending on your circumstances. Klangfool is right that if you're confident, as many might be, that your retirement tax rate will be lower, then tax-deferred now is a good way to go if you can. Probably the most important factor, however, is to save as much as you comfortably can now, especially given that you're in your peak earnings years. You are absolutely correct not to second guess decisions on the type of account in which you have saved.
The future (e.g., tax rates) is unknown and taking a middle road, whatever that might be, is not a bad approach. With retirement accounts, the middle road can mean a mix of tax-deferred and tax-free Roth. For example, tax-deferred accounts can be useful if you have tax-deductible long term care expenses later in life and/or if you're charitably inclined and use QCDs to satisfy at least some of your future RMDs. All of our retirement accounts were tax-deferred until tcja, but we've been doing large Roth conversions since then, especially before RMDs kicked in. Despite those conversions we'll still have a majority of assets in tax-deferred. The RMDs raise our taxable income, expose us to NIIT, and push us into higher IRMAA tiers, but there are much worse problems to have. In fact, tax burdens are more of a blessing than a problem.
You probably already know more than you think you know about finances, but the forum is a great place to learn. I've lost track of the many insights I've gotten here, and I continue to learn and refine my approach. In the end, it's not about getting things perfect, just "good enough."
Statistics: Posted by Rocinante Rider — Fri Jul 19, 2024 12:11 pm — Replies 44 — Views 3162