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Message
Saving More for Retirement - Trad IRA vs Normal Brokerage Account
Posted on 5/9/24 at 12:32 pm
Posted on 5/9/24 at 12:32 pm
I'm trying to understand what would someone's logic be for opening a Traditional IRA versus just using a plain ole brokerage account for long term investing + saving for retirement in my situation. I'll preface with some pertinent information:
- Primary income is from W2 / salaried employee
- 401K through my company that I max out
- I have a Roth IRA but I make too much money (W2) to contribute going forward; AKA I'm over the contribution threshold
- I have a normal brokerage account with a modest amount of money ($50K) that I 'play' with (ex. usually these are L/T investments in individual companies I target, but sometimes I use it to take fliers (SLI))
- HYS account with about 4-5 months of living expenses
- Due to a long term and very expensive medication I am on, the HSA route will not work in my situation
So, if I want to save more for retirement over the top of my 401K and Roth IRA, what is the advantage for opening a personal / Traditional IRA versus just using my brokerage account for that? With a Traditional IRA, I'm still contributing after tax dollars, right? And then I'll get taxed again when I withdraw, whether it be voluntary or mandatory.
I understand some may say that Trad IRA contributions can be tax deductible. But since I have an employer-sponsored retirement plan, the tax-deductible portion of my IRA contribution is most likely going to be limited.
Any help is greatly appreciated!
TL/DR - what is the advantage for contributing to a Trad IRA instead of just using a normal brokerage account in order to save more for retirement.
- Primary income is from W2 / salaried employee
- 401K through my company that I max out
- I have a Roth IRA but I make too much money (W2) to contribute going forward; AKA I'm over the contribution threshold
- I have a normal brokerage account with a modest amount of money ($50K) that I 'play' with (ex. usually these are L/T investments in individual companies I target, but sometimes I use it to take fliers (SLI))
- HYS account with about 4-5 months of living expenses
- Due to a long term and very expensive medication I am on, the HSA route will not work in my situation
So, if I want to save more for retirement over the top of my 401K and Roth IRA, what is the advantage for opening a personal / Traditional IRA versus just using my brokerage account for that? With a Traditional IRA, I'm still contributing after tax dollars, right? And then I'll get taxed again when I withdraw, whether it be voluntary or mandatory.
I understand some may say that Trad IRA contributions can be tax deductible. But since I have an employer-sponsored retirement plan, the tax-deductible portion of my IRA contribution is most likely going to be limited.
Any help is greatly appreciated!
TL/DR - what is the advantage for contributing to a Trad IRA instead of just using a normal brokerage account in order to save more for retirement.
This post was edited on 5/9/24 at 12:33 pm
8
Posted on 5/9/24 at 12:34 pm to skewbs
Traditional ira for roth conversion. Brokerage after that maxes
Posted on 5/9/24 at 1:11 pm to skewbs
You wouldn't pay any taxes until retirement distributions on your IRA gains if you buy/sell. You could be hit with capital gains taxes on a brokerage account at any time if you are buying/selling, right?
This post was edited on 5/9/24 at 1:12 pm
Posted on 5/9/24 at 1:30 pm to skewbs
I agree with your logic. The limits on IRA contributions seriously hamstring your ability to build a sizeable nest egg.
I am over the Roth threshold as well, but I make a max contribution every January to a Traditional then do a backdoor Roth conversion.
I also have a brokerage account for my "savings." It is about 2.5 times bigger than my IRA, but I look at the combination of the 2 as my retirement savings.
I am over the Roth threshold as well, but I make a max contribution every January to a Traditional then do a backdoor Roth conversion.
I also have a brokerage account for my "savings." It is about 2.5 times bigger than my IRA, but I look at the combination of the 2 as my retirement savings.
Posted on 5/9/24 at 2:28 pm to notsince98
quote:
You could be hit with capital gains taxes on a brokerage account at any time if you are buying/selling, right?
This is a good point. So with the traditional IRA, I could be buying and selling without a tax hit, and then I am only hit on taxes as income when I withdraw, I think…
So no capital gains tax implications along the way to retirement.
Am I understanding that part correctly?
Posted on 5/9/24 at 2:33 pm to skewbs
I think you're correct. I also did the Roth then moved to traditional IRA before realizing I could do more with brokerage. I'm simply buying and holding so not subject to gains
Posted on 5/9/24 at 3:01 pm to skewbs
quote:
This is a good point. So with the traditional IRA, I could be buying and selling without a tax hit, and then I am only hit on taxes as income when I withdraw, I think…
Yep, you can buy/sell as much as you want, don’t have to worry about it til distribution when you cash out, then pay tax… unless you can convert to roth
This post was edited on 5/9/24 at 5:14 pm
Posted on 5/9/24 at 4:24 pm to DaBeerz
quote:
then just pay tax on gains
You mean on distributions.
Posted on 5/9/24 at 5:12 pm to Jag_Warrior
Yeah that’s what I meant
Posted on 5/9/24 at 5:43 pm to Jag_Warrior
If you are maxing out work 401k and make too much for any other contributions …. but want to fund after tax IRA for future Roth transfer, what’s the annual contribution limit?
Posted on 5/9/24 at 8:42 pm to SquatchDawg
quote:
want to fund after tax IRA for future Roth transfer, what’s the annual contribution limit
From FAQ on Schwabb - "Anyone with an earned income and their spouses, if married and filing jointly, can contribute to a Traditional IRA. There is no age limit. There are no income limitations to contribute to a non-deductible Traditional IRA, and the maximum contribution per year is $6,500 for tax year 2023 and $7,000 for tax year 2024 ($7,500 for tax year 2023 and $8,000 for tax year 2024 if you're age 50 or over)."
I believe the limit for 2024 is $7,000 combined for contributions to a Trad and Roth IRA.
Posted on 5/9/24 at 9:59 pm to skewbs
A brokerage account would be available to you penalty-free if you decide to retire before 59 years old. Sort of like a bridge account until you can safely access your IRA’s.
Posted on 5/9/24 at 11:33 pm to skewbs
quote:
ue to a long term and very expensive medication I am on, the HSA route will not work in my situation
I don’t understand why medical bills would make an HSA unattractive. You should pay medical bills out of pocket and let your HSA grow tax free. Maybe you mean you have a lower deductible plan and can’t qualify for HSA?
Should also do backdoor Roth contributions using the traditional IRA.
Then do a non-qualified brokerage. Both of the other two are top priorities though. Basically no brainer if I’m understanding your situation.
This post was edited on 5/10/24 at 6:29 am
Posted on 5/10/24 at 8:42 am to skewbs
How long do you have before you plan to retire? Are your 401k contributions traditional or Roth?
If it’s still a while, backdoor roth may be the way to go.
Also, depending on how your 401k is set up, your plan may allow you to make after tax contributions and roll those into a Roth IRA (mega backdoor). You just need to stay under the total employee + employer annual contribution limit of $69,000.
Also, I am on an expensive long term medication with a HDHP and haven’t had to pay a dime for it due to the manufacturer rebate. You might have already, but it’s worth looking into.
It’s hard to say what’s best for you without knowing what age you plan to retire and how long you have left to save.
I am by no means a financial expert. But these are some things you can talk to someone more knowledgeable about.
If it’s still a while, backdoor roth may be the way to go.
Also, depending on how your 401k is set up, your plan may allow you to make after tax contributions and roll those into a Roth IRA (mega backdoor). You just need to stay under the total employee + employer annual contribution limit of $69,000.
Also, I am on an expensive long term medication with a HDHP and haven’t had to pay a dime for it due to the manufacturer rebate. You might have already, but it’s worth looking into.
It’s hard to say what’s best for you without knowing what age you plan to retire and how long you have left to save.
I am by no means a financial expert. But these are some things you can talk to someone more knowledgeable about.
This post was edited on 5/10/24 at 8:45 am
Posted on 5/10/24 at 8:50 am to jacquespene8
quote:
account would be available to you penalty-free if you decide to retire before 59 years old. Sort of like a bridge account until you can safely access your IRA’s.
That’s the only downside I can see. I really like having cash I can get my hands on sometime before I’m 59 1/2 if I want it.
Posted on 5/10/24 at 11:38 am to skewbs
I think in your situation the brokerage makes the most sense …I just like the idea of the flexibility it brings.
Also as some posters pointed out , do yourself a huge favor and at least check to see if your company allows for back door Roth IRA.
That’s the winning ticket is your fortune enough to have it .
My company offers it and I am socking away close $30k into per year .
Also as some posters pointed out , do yourself a huge favor and at least check to see if your company allows for back door Roth IRA.
That’s the winning ticket is your fortune enough to have it .
My company offers it and I am socking away close $30k into per year .
Posted on 5/10/24 at 1:30 pm to slackster
quote:
I don’t understand why medical bills would make an HSA unattractive. You should pay medical bills out of pocket and let your HSA grow tax free. Maybe you mean you have a lower deductible plan and can’t qualify for HSA?
I'm on a monthly medication that would cost me $20K if I paid it out of pocket. My current health insurance plan pays 100% of the cost. So why would I give that up to start a HSA and also deal with the enormous cost of paying for this medication?
Posted on 5/10/24 at 1:34 pm to Theduckhunter
quote:
How long do you have before you plan to retire? Are your 401k contributions traditional or Roth?
Late 30's. So 25+ years easily until retirement.
quote:
Also, I am on an expensive long term medication with a HDHP and haven’t had to pay a dime for it due to the manufacturer rebate. You might have already, but it’s worth looking into.
I talked to my doctor (and her finance team) on what people do who have a HSA and are in my situation with this medicine. She reviewed my insurance plan and said she definitely recommends staying put with my current plan.
But to your point, I may also explore what sorts of manufacturer rebates there are and what would truly be an OOP cost to me minus any insurance plan. I have not done that yet... might be good to look into just in case.
Posted on 5/10/24 at 3:54 pm to skewbs
You should consider your top marginal income tax rate now and what you expect it to be in retirement. You don't know what the rates will be in the future, just use today's rates, or go back and use the Obama rates. It probably works the same.
Use a reasonable rate to project your tax deferred 401K/IRA balance when you retire. Add your expected Social Security benefit, and your wife's if you are married. Then look at where the tax rates break. At today's rates, the 12% Federal rate extends to $100K for a married couple. You also get a large standard deduction.
At that point, the Roth comes into play. If you are in a high income bracket now, like 34% +, it doesn't make sense to convert to a Roth if your top rate in retirement is 12% or 22%. Roth's are useful and more flexible, but not worth paying more taxes now to save less on taxes later.
If you are in a higher tax bracket, put some in a Roth, maybe 10% of your savings, but wait until after you retire, take smaller distributions to stay in a lower tax bracket, and try to do Roth conversions form your deferred assets at a lower tax bracket.
If you have extra money to invest, tax deferred is better if you are in a higher tax bracket. If your top marginal rate is going to be the same in retirement, then it really doesn't matter. 34% is 34% whether you are retired or not.
Use a reasonable rate to project your tax deferred 401K/IRA balance when you retire. Add your expected Social Security benefit, and your wife's if you are married. Then look at where the tax rates break. At today's rates, the 12% Federal rate extends to $100K for a married couple. You also get a large standard deduction.
At that point, the Roth comes into play. If you are in a high income bracket now, like 34% +, it doesn't make sense to convert to a Roth if your top rate in retirement is 12% or 22%. Roth's are useful and more flexible, but not worth paying more taxes now to save less on taxes later.
If you are in a higher tax bracket, put some in a Roth, maybe 10% of your savings, but wait until after you retire, take smaller distributions to stay in a lower tax bracket, and try to do Roth conversions form your deferred assets at a lower tax bracket.
If you have extra money to invest, tax deferred is better if you are in a higher tax bracket. If your top marginal rate is going to be the same in retirement, then it really doesn't matter. 34% is 34% whether you are retired or not.
This post was edited on 5/10/24 at 4:18 pm
Posted on 5/10/24 at 4:29 pm to skewbs
quote:
I'm on a monthly medication that would cost me $20K if I paid it out of pocket. My current health insurance plan pays 100% of the cost. So why would I give that up to start a HSA and also deal with the enormous cost of paying for this medication?
It’s not necessarily either or. Do you have a HSA-eligible health insurance plan or not is all that matters. There maybe be plans that cover your medication and also let you contribute to an HSA.
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