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Don't forget for the same price of entry a roth is never ever taxed. In both the taxable and the roth you pay it with the same pre-tax dollars.
One gets taxed and one doesn't. No brainer there.
Laws can always be changed. So for now, the Roth is a no-brainer, if the sums get large enough don't think for a minute the 545 in Congress aren't going to take notice.
Look, I may seem like a cheerleader for taxable, but I'm not saying it is better outright. Since conventional wisdom is already sold on tax deferred, to make my point I have to sell taxable harder. The smartest move is not to pick one or the other, but use both.
Example (all figures approximated): I help someone who has $3M in stocks in taxable accounts. She was a teacher of modest income. The stocks produce $120,000 in dividends, and her pension 1/4 of that. She reports her pension as ordinary and dividends as unearned, and pays 15% effective rates.
All else equal, if her $3M was in tax deferred accounts, she would report in excess of $150,000 as ordinary income and probably pay 25% effective rates. Call it $15,000 in tax savings per year.
Don't get caught up in what's better. Just know they both have their merits and used together can reap very powerful benefits.
That may be fine for someone who already has alot in taxable, however I'm talking about where to put my NEW money.
My point is to max out the 401(k) and ROTH like darrell and Mathjak suggested before adding to taxable.
Laws can always be changed. So for now, the Roth is a no-brainer, if the sums get large enough don't think for a minute the 545 in Congress aren't going to take notice.
With congress taking big advantage of the life insurance exclusion and roths to pass their wealth i think its a pretty good shot that it will not be fooled with.
That may be fine for someone who already has alot in taxable, however I'm talking about where to put my NEW money.
My point is to max out the 401(k) and ROTH like darrell and Mathjak suggested before adding to taxable.
Perhaps I misunderstood, but I thought you wanted an example of a retirement situation in which taxable's benefits are clear. Those shares didn't just appear out of thin air when she retired. She had consistently bought them with "new" money at the time for many, many years just like a retirement plan.
Perhaps I misunderstood, but I thought you wanted an example of a retirement situation in which taxable's benefits are clear. Those shares didn't just appear out of thin air when she retired. She had consistently bought them with "new" money at the time for many, many years just like a retirement plan.
I guess I wasnt clear. I meant what was/is the best way going forward (to invest in taxable or 401(k)/ROTH/Traditional...) to invest new money.
That's downright subjective. The mistake with conventional wisdom's "max out tax-deferred and leave taxable for last if you even have the time" is it doesn't account for the unique tax sensitivities of asset classes.
The closest to a rule I can give you is: equities work best in taxable, and yielding securities (bonds, REITs) work best in tax-deferred. So, depending on your strategy, you should at least consider both. And not think of it purely in terms of "do I have enough money to bother with taxable?"
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Laws can always be changed. So for now, the Roth is a no-brainer, if the sums get large enough don't think for a minute the 545 in Congress aren't going to take notice.
