OK, so next question: IRA distributions are taxed as income, but the brokerage account will be taxed as gains, which means 15% for long-term, right? So could it be beneficial to favor the brokerage account? Because it looks to me like it won’t be hard to have an AGI in retirement over the 22% marginal rate (understanding that one’s effective rate is less than one’s marginal rate). Or am I missing something?
Sorry, but I think there’s been a bit of a misunderstanding. Traditional IRAs are taxed not as capital gains but as ordinary income based on your tax bracket. You can still end up paying a high marginal rate if you are making a lot of income in retirement. The benefit is you aren’t taxed in the interim on a traditional IRA - tax free growth can add up pretty fast.
Also, something to factor in is expected tax brackets when you retire - these aren’t fixed over a lifetime.
The number one thing you need to do regarding strategy is to identify the purpose of the investment. If it is for retirement, you then need to figure out your time-horizon (time until need) and the amount you will likely need (based on your current or expected spending). You should aim for roughly 3-4% of your retirement savings to be spent each year in retirement (this should allow the growth to account for the spending over your retired lifetime).
Then, once you have your target number, you can determine what savings and growth rates are required to get there. This will drive both the amount you need to save and invest and how aggressive your investments need to be.
Personally I think it’s a good idea to literally write all of this down in an investment plan so you have something to refer to when you get the jitters based on short-term market performance.
I don’t have “favorite funds” - I tend to hold the index funds provided by the institution the investments are in (so Vanguard funds in my IRA and brokerage accounts and Fidelity funds in my 401k). I do tend to aim for the broadest index possible (so Total Market v. a sector fund like SCHG). I do keep a portion in REIT funds and some in international - again, according to a written investment plan.
I don’t think there is any benefit to a manager for the nuts-and-bolts of what to invest in. The benefit comes in behavior modification. Basically if you tell your manager to hold during downturns, or set up a rebalancing plan, the manager may be more likely to follow your plan than you yourself are.
Whether that is worth the cost depends on how likely you are to shoot your own foot off due to not following your plan.
Here is the today difference between a brokerage account and an IRA.
If I sell stock and buy new ones in my brokerage account, then I have to pay taxes on my gains in the tax year they were realized, even if I never pull the money out of my account. In my (Roth) IRA, I can make all the trades I want and there is no tax implication until I start withdrawing the money.
Yes, for high income individuals that also expect to have a high AGI in retirement a Traditional IRA can be worse than a brokerage account.
Personally I use the “backdoor method” to contribute to a Traditional IRA and then immediately convert it to a Roth IRA (which I am not allowed to directly contribute to). I believe there is likely some benefit to having a mix of pre-tax and post-tax money available in retirement to account for possible year-to-year changes in AGI or changes in tax law.
Of course it is very likely the backdoor will be closed in the near future.
Of course the counter-argument to this is that I can also harvest tax losses in a brokerage account which I can’t in an IRA, even offsetting some ordinary income.
And if the money is truly for retirement I shouldn’t be doing much selling at all, particularly if I have funds in tax-protected accounts that I can use to re-balance.
Anybody offering a strong opinion on whether an Traditional IRA or a brokerage account (or both) is the right approach for the OP needs more information. Specifically how the OP is doing with respect to retirement needs - if he’s like most Americans he is behind and will likely want to use both (especially if a 401k isn’t an option). Also we need to know current and expected tax brackets. And even then it’s largely a guess, since we have no idea what tax law will look like in 15 years.
I think it’s really a small issue compared to the big ones - how much are you saving and is your investment strategy matched to your need and ability to take risk?
Back to the OP, one option other than index funds is to look at high dividend stocks and then DRIP the dividends to compound the earnings. If in an IRA, it is taxed like a contribution and not income which is another difference from a brokerage account. Two things to be wary of are
- Some people’s definition of high-dividend is not high. I look for a 4.5% or higher yield.
- Beware of dividend traps.
I currently have 20% of my Roth in BP, IEP, IRM, LUMN, MO, NRZ, NYCB, and VZ.
It is very aggressive but I also have a pension when I retire so in actuality a small fraction of my overall retirement portfolio.
Absolutely but that is short-term trading rather than long-term planning
I disagree (for my situation), I re-evaluate the proportions of my Roth annually to adjust for the current market and that involves trading. But then again I like to be active in my retirement planning otherwise I would just pick 4 index and 1 bond fund and forget about it.
I think it would be gauche to discuss dollar amounts. I’ve been pretty successful, and frankly I’m a bit shy about that. With that said:
My wife and I are savers. We’ve been maxing out our 401ks for 20+ years (as said, I no longer have one, but that’s recent). We’ve got 1 year’s salary in cash. The brokerage account has about another year’s salary in it, and that’s what I’m currently contributing to. If we stay the course for 10 more years, and achieve a 7% average annual return, we should be in a place where the money will outlive us at our current spending levels. And while it should outlive us, we will be drawing it down. I’m using a 3.5% post-retirement annual return, assuming I will get more conservative. We have no heirs.
I’m too lazy to look up the exact fund names, but we’re in:
S&P 500 index
International index
Real estate index
NASDAQ index
Total Bond index
Fidelity Tax Free Bond Index
I have a fairly insignificant amount in XOM, BMY, and VZ. These are the only individual stocks I own, and I bought XOM and VZ for their dividend yields in March 2020. BMY is a former employer, and I didn’t per se buy that stock*, but again, the dividend on that relative to what it cost me and the tripling since I acquired it is why I hold it.
The tax free bond fund was a DIY effort to avoid taxes, but I’m not sure it was a good buy and I kinda regret it.
*kinda interesting. I got some in the form of bonuses, and I got some because for a while BMY was making you take your 401k match in the form of BMY stock, for which they were sued and I was part of the class.
This is very similar to my approach. The big difference is that I use a Total-Market fund for the US equity portion, for which I have to use a S&P 500 + Extended Market to approximate in my 401k. And I split my fixed-income between TIPS, Treasury Bonds, and some tax-free Bonds in my taxable accounts. And I do agree with your point re: tax-free bond funds - often it’s not really worth it vs. a bond fund that more closely aligns with your needs.
Oh, and I do have a small tilt into Small-Cap Value in a Roth on the hope that any outsized returns would end up there instead of in an account that would be taxed on withdrawal. That hasn’t really panned out but perhaps the Small/Value premium will return at some point.
Wait…I thought they weren’t any tax implications on a Roth assuming you’ve met the 59 1/2 Y.O./5 year requirements? From Schwab web-site:
" Over age 59½
Withdrawals from a Roth IRA you’ve had more than five years.
If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties."
Am I misreading or misunderstanding what you wrote?
You’re right. I originally said IRA, then thought I would distinguish Tradition (deferred tax implications) vs. Roth (no tax implications) and then a supervisor came in and it became a mess of a post.
I’m not making any hasty decisions, but am considering options for when things recover somewhat. I don’t like my retirement funds being at the mercy of fearful nitwits who push the stock market up 900+ points on the day when the Fed raises interest rates, then drive it down that much (or more) the very next day when they’ve had a chance to “think about it”.
Up against the wall, Panicky Investors.
You make your money during bear markets. You just don’t realize it until the subsequent bull market. Just keep buying with both hands as long as the sale is on. People in their 40s bragging about high stock valuations are like people bragging about high gasoline prices because they’ve already filled their tank this week. Don’t they realize that they’re still buying, not selling?
Ah, no. Once you invest in a Roth IRA any gains are tax free upon distribution.
Correct, as long as you’re over 59 1/2 and the account has been open for more than five years.
There are also no RMD requirements concerning Roth IRAs. Which makes it a very attractive investment vehicle if you can afford it.
Look up 3 posts. I acknowledged the error.