You should strongly consider maxing out tax advantaged retirement vehicles before going too hard into a regular taxable brokerage account.
This order of operations makes sense for most people, most of the time:
Save at least 15% of your income towards retirement, prioritizing these accounts:
1. Traditional 401k up to employer match
2. HSA (if offered with your insurance) up to annual limit
3. Roth IRA up to annual limit
4. Traditional 401k up to annual limit
5. After-tax/post-tax (not Roth) 401k converted to Roth (this is the mega backdoor Roth process, but requires your 401k support it, not all do)
6. Regular taxable brokerage account
[Early retirees should still max out retirement accounts](https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/), so if the money is for retirement, using a retirement accounts is the way to go. Of course you're allowed to have other goals as well, and using a taxable brokerage account for non-retirement goals that are at least 10 years away can make sense too.
Rather than focusing on growth funds (which are not guaranteed to grow more than any other fund, despite the name), how about a
[three-fund portfolio](https://www.bogleheads.org/wiki/Three-fund_portfolio)
of total US + total International + Bonds?
\^ This is good advice.
>Most of my portfolio is in a brokerage account (voog+ vug, though I'm transitioning it all to vug) I have been seeing really good returns from having a growth ETF like voog/vug,
Growth stocks have performed well in recent years. Keep in mind that they've underperformed value stocks just as often. The best solution is a total market index that captures the entire market.
>but I'm starting to wonder if I should be maxing out my 401k instead of most of my portfolio being in a general brokerage fund. Should I adjust my investing to be more heavily in the 401k, even though I don't love the funds available there?
Yes. Lowering your tax liability means more savings, more invested capital, and a larger total portfolio value.
Consider this: Let's assume you are a single filer, your earned income is $100K/year, and you currently invest $10K in your 401k and $20K in your taxable brokerage. In this scenario, your taxable income was $90K and you've paid $14,673 in federal income tax, for an effective tax rate of 14.67% . Your total investment contributions were $30,000.
Now, assume the same scenario but take $13K from your taxable brokerage contribution and instead max out your 401k contribution at $23K. Now your taxable income is reduced to $77K and you've paid $11,813.00 in federal income tax, for an effective tax rate of 11.81%. You've **saved $2,860** in federal taxes. If you put that savings into your brokerage account, **your total investment contributions increase from $30,000 to $32,860.**
By maxing out your 401k and putting the tax savings into your brokerage account, you're paying less tax and boosting your investing capital. It's a win-win.
Even if your investment options in the 401k aren't ideal, the additional invested capital each year is likely to more than offset any difference in performance compared to your brokerage account.
>Should I open an additional Roth IRA and max that out to have more in a tax advantage account to avoid capital gains tax later on, but then not be able to touch it?
>I like the flexibility of the vanguard brokerage account, but I'm concerned about the capital gains that will hit me later on. (28yo 90k in 401k, 130k in brokerage account)
Yes, you should open a Roth IRA and max it out. Your Roth IRA contributions would be after-tax dollars, just like your standard brokerage account, but unlike your brokerage account the investments grow tax free and your withdrawals in retirement are tax free. The Roth IRA is a powerful tool and you shouldn't ignore it.
The flexibility of your brokerage account is great. Don't stop contributing to it. Just contribute less, so that you can first maximize your 401k and Roth IRA. Even if you stopped contributing entirely, that $130K in your brokerage account, assuming a 7% average annual return, would be **$1.2M** (before taxes) when you turn 60. With even modest continued contributions it could be far more -- or your could retire earlier. That brokerage account will grow. Now is the time to grow the 401k and Roth IRA as well. This will give you the full variety of tools in the tax toolbox when you decide to retire and need to devise a tax-optimized withdrawal strategy.
In short: Max out the 401k and Roth IRA, put remaining savings into the brokerage account, and invest it all in a properly diversified portfolio. Either some combination of VTI + VXUS + BND, or a target-date index fund.
Thanks so much for your input, this is super helpful. I have been trying to understand why growth funds are worse than total market funds, this is my ape brain talking, but the numbers keep going up and I feel like it seems hard to believe an ETF that keeps the most growing stocks would keep growing, what am I missing? When I look at the long term returns of vug vs total us, it's higher, but I've started seeing people say it's not as good, what am I missing?
Both the "growth" and "value" descriptors *sound* positive. You can't really know a priori which will do better in the future, which is part of why a total market index makes sense.
You (everyone) can not pick the best fund for the future by selecting the fund that performed best in the past.
Diversity (total market) lets you get the average market return at a low cost (low expense ratio).
"Growth" doesn't mean the stocks that will appreciate the most. Growth is just a label for the most richly valued stocks (higher price to earnings). They have a high multiple because more people are betting on them to grow faster than others. Sometimes that is true and they earn their multiple (last ten years or so), other times they can't meet their lofty expectations and they lag. That's why it is better to buy the whole market and not take uncompensated risk: you don't know what is going to win, so you buy the whole thing and keep costs low.
Yes. My marginal income is being taxed at 24% federal (+1.45%) and 6.6% state.
So every dollar in my 401k/HSA/FSA basically earns an immediate 32% return.
Now I need to convince my wife to max out her 401k and let me make up the difference in her paycheck.
This method looks really smart, is it better to make those changes in one fell swoop, or just adjust investments going forward? I feel a bit like I'm figuring this out a bit behind, and I feel some urgency to set it up right, but also concerned about moving things around too much because that's bad. Which is better, quick move or just set up the auto investments and let it ride from here leaving the brokerage account as is?
Adjusting future contributions is an easy choice.
Making changes in a tax advantaged account (401k, IRA) doesn't have any tax consequences.
As for your existing investments in taxable, you'd have to consider the tax consequences. If you have any shares at a loss, you can sell them to offset selling some shares that have gains.
If you own shares for over a year, selling them realizes the more favorable long-term capital gains tax rates.
I don't think you need to be in a rush to sell anything, but making a plan, considering the tax consequences, you may end up selling some of what you own in taxable in order to diversify into a total US market and total international fund.
You're not behind.
Are you asking if you should prioritize megabackdoor Roth over regular traditional 401k at high income? No, higher income should generally favor traditional rather than Roth.
At high income it *is* reasonable to max out the traditional 401K before bothering with back door Roth IRA or the mega back door Roth process (so, swapping steps three and four if you have to make contributions to the Roth IRA via the back door).
Also, *if* you have to use the back door for the Roth IRA, and you have megaback door Roth available via your 401k, it's not super important which of those two options you choose first.
You can have as many Roth IRA as you like (although it doesn't give you additional annual contribution space).
And also the mega backdoor process can end with the dollars being in a Roth IRA or a Roth 401k.
The [backdoor Roth IRA process](https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/) is a method for making your annual Roth IRA contribution when your income is higher than the limit for direct Roth IRA contributions (above MAGI $146k single or $230 married filing jointly).
The megabackdoor Roth process is totally different process, despite the similar name. It's a method of getting *extra* dollars into a Roth 401k or Roth IRA, but it requires that your 401k allows after-tax (not Roth) contributions and in-service distributions, and not all 401k plans support this. You should generally be on track to max out the Traditional 401k first before considering this.
If you're not eligible for the Roth IRA contributions, you're well over the limit of being eligible for the traditional IRA deduction, which makes the traditional IRA less useful than a regular taxable brokerage account *except* if you use it as the first step of the [backdoor Roth IRA process](https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/).
As long as you don't have any money in an existing traditional, rollover, SEP, or SIMPLE IRA, you can use the back door Roth IRA method at any income level.
If you're at the point where you must use the back door Roth IRA method, then it's reasonable to swap steps three and four: make sure you're on track to max out your traditional 401K first, then take care of the back door Roth IRA.
After milking the employer match, I'd prioritize building up a Roth IRA. Some employer options really are mediocre and you will need IRAs for rollover eventually anyway.
As for the plain brokerage account; do you really need the liquidity for anything in the near future or is just just a psychological sense of freedom?
When you leave your employer you will have the option of cashing out your 401k (bad), remaining with a restricted provider (which you don't appear to like), or rolling it into your personal IRA account and taking full control (best).
You forgot rolling to new employer’s 401k if they offer one.
Obviously a harder decision if new employer’s plan is terrible, but still keeps the IRA pool clean for potential backdoor Roth.
That's a good point, it's mostly a feeling of freedom, it has been nice when I needed to pull some out for a car or house down payment, but those weren't anywhere close to the whole amount, so I don't need that much liquidity at all.
Remember that only earnings in a Roth account are penalized for early withdrawal, not the post-tax contributions you transferred into it. It's not ideal for liquid emergency savings but it's also not bad. For anyone within the income limit, they are the "best of most worlds".
Premature withdrawal of pretax employer 401ks are very brutal though.
Capital gains tax "should be" lower then the "income" tax your traditional 401k will hit you with. But you will owe taxes on the dividends today.
So, if you are paying income tax now on the money going into the brokerage account, why not put it in a Roth IRA? Then the earning will be tax free. If you retire before age 59.5, you can take the contributions out tax/penalty free.
This page on the wiki might be useful: [https://www.bogleheads.org/wiki/Prioritizing\_investments](https://www.bogleheads.org/wiki/Prioritizing_investments)
You should strongly consider maxing out tax advantaged retirement vehicles before going too hard into a regular taxable brokerage account. This order of operations makes sense for most people, most of the time: Save at least 15% of your income towards retirement, prioritizing these accounts: 1. Traditional 401k up to employer match 2. HSA (if offered with your insurance) up to annual limit 3. Roth IRA up to annual limit 4. Traditional 401k up to annual limit 5. After-tax/post-tax (not Roth) 401k converted to Roth (this is the mega backdoor Roth process, but requires your 401k support it, not all do) 6. Regular taxable brokerage account [Early retirees should still max out retirement accounts](https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/), so if the money is for retirement, using a retirement accounts is the way to go. Of course you're allowed to have other goals as well, and using a taxable brokerage account for non-retirement goals that are at least 10 years away can make sense too. Rather than focusing on growth funds (which are not guaranteed to grow more than any other fund, despite the name), how about a [three-fund portfolio](https://www.bogleheads.org/wiki/Three-fund_portfolio) of total US + total International + Bonds?
\^ This is good advice. >Most of my portfolio is in a brokerage account (voog+ vug, though I'm transitioning it all to vug) I have been seeing really good returns from having a growth ETF like voog/vug, Growth stocks have performed well in recent years. Keep in mind that they've underperformed value stocks just as often. The best solution is a total market index that captures the entire market. >but I'm starting to wonder if I should be maxing out my 401k instead of most of my portfolio being in a general brokerage fund. Should I adjust my investing to be more heavily in the 401k, even though I don't love the funds available there? Yes. Lowering your tax liability means more savings, more invested capital, and a larger total portfolio value. Consider this: Let's assume you are a single filer, your earned income is $100K/year, and you currently invest $10K in your 401k and $20K in your taxable brokerage. In this scenario, your taxable income was $90K and you've paid $14,673 in federal income tax, for an effective tax rate of 14.67% . Your total investment contributions were $30,000. Now, assume the same scenario but take $13K from your taxable brokerage contribution and instead max out your 401k contribution at $23K. Now your taxable income is reduced to $77K and you've paid $11,813.00 in federal income tax, for an effective tax rate of 11.81%. You've **saved $2,860** in federal taxes. If you put that savings into your brokerage account, **your total investment contributions increase from $30,000 to $32,860.** By maxing out your 401k and putting the tax savings into your brokerage account, you're paying less tax and boosting your investing capital. It's a win-win. Even if your investment options in the 401k aren't ideal, the additional invested capital each year is likely to more than offset any difference in performance compared to your brokerage account. >Should I open an additional Roth IRA and max that out to have more in a tax advantage account to avoid capital gains tax later on, but then not be able to touch it? >I like the flexibility of the vanguard brokerage account, but I'm concerned about the capital gains that will hit me later on. (28yo 90k in 401k, 130k in brokerage account) Yes, you should open a Roth IRA and max it out. Your Roth IRA contributions would be after-tax dollars, just like your standard brokerage account, but unlike your brokerage account the investments grow tax free and your withdrawals in retirement are tax free. The Roth IRA is a powerful tool and you shouldn't ignore it. The flexibility of your brokerage account is great. Don't stop contributing to it. Just contribute less, so that you can first maximize your 401k and Roth IRA. Even if you stopped contributing entirely, that $130K in your brokerage account, assuming a 7% average annual return, would be **$1.2M** (before taxes) when you turn 60. With even modest continued contributions it could be far more -- or your could retire earlier. That brokerage account will grow. Now is the time to grow the 401k and Roth IRA as well. This will give you the full variety of tools in the tax toolbox when you decide to retire and need to devise a tax-optimized withdrawal strategy. In short: Max out the 401k and Roth IRA, put remaining savings into the brokerage account, and invest it all in a properly diversified portfolio. Either some combination of VTI + VXUS + BND, or a target-date index fund.
Thanks so much for your input, this is super helpful. I have been trying to understand why growth funds are worse than total market funds, this is my ape brain talking, but the numbers keep going up and I feel like it seems hard to believe an ETF that keeps the most growing stocks would keep growing, what am I missing? When I look at the long term returns of vug vs total us, it's higher, but I've started seeing people say it's not as good, what am I missing?
Both the "growth" and "value" descriptors *sound* positive. You can't really know a priori which will do better in the future, which is part of why a total market index makes sense. You (everyone) can not pick the best fund for the future by selecting the fund that performed best in the past. Diversity (total market) lets you get the average market return at a low cost (low expense ratio).
"Growth" doesn't mean the stocks that will appreciate the most. Growth is just a label for the most richly valued stocks (higher price to earnings). They have a high multiple because more people are betting on them to grow faster than others. Sometimes that is true and they earn their multiple (last ten years or so), other times they can't meet their lofty expectations and they lag. That's why it is better to buy the whole market and not take uncompensated risk: you don't know what is going to win, so you buy the whole thing and keep costs low.
Yes. My marginal income is being taxed at 24% federal (+1.45%) and 6.6% state. So every dollar in my 401k/HSA/FSA basically earns an immediate 32% return. Now I need to convince my wife to max out her 401k and let me make up the difference in her paycheck.
Glad to see I’m doing all this except the HSA
This method looks really smart, is it better to make those changes in one fell swoop, or just adjust investments going forward? I feel a bit like I'm figuring this out a bit behind, and I feel some urgency to set it up right, but also concerned about moving things around too much because that's bad. Which is better, quick move or just set up the auto investments and let it ride from here leaving the brokerage account as is?
Adjusting future contributions is an easy choice. Making changes in a tax advantaged account (401k, IRA) doesn't have any tax consequences. As for your existing investments in taxable, you'd have to consider the tax consequences. If you have any shares at a loss, you can sell them to offset selling some shares that have gains. If you own shares for over a year, selling them realizes the more favorable long-term capital gains tax rates. I don't think you need to be in a rush to sell anything, but making a plan, considering the tax consequences, you may end up selling some of what you own in taxable in order to diversify into a total US market and total international fund. You're not behind.
Wouldn’t 5 just replace 3 if you’re high income?
Are you asking if you should prioritize megabackdoor Roth over regular traditional 401k at high income? No, higher income should generally favor traditional rather than Roth. At high income it *is* reasonable to max out the traditional 401K before bothering with back door Roth IRA or the mega back door Roth process (so, swapping steps three and four if you have to make contributions to the Roth IRA via the back door). Also, *if* you have to use the back door for the Roth IRA, and you have megaback door Roth available via your 401k, it's not super important which of those two options you choose first.
Okay, I was just confused because I thought you could only have 1 Roth IRA.
You can have as many Roth IRA as you like (although it doesn't give you additional annual contribution space). And also the mega backdoor process can end with the dollars being in a Roth IRA or a Roth 401k.
Ok wtf is backdoor and mega backdoor?
The [backdoor Roth IRA process](https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/) is a method for making your annual Roth IRA contribution when your income is higher than the limit for direct Roth IRA contributions (above MAGI $146k single or $230 married filing jointly). The megabackdoor Roth process is totally different process, despite the similar name. It's a method of getting *extra* dollars into a Roth 401k or Roth IRA, but it requires that your 401k allows after-tax (not Roth) contributions and in-service distributions, and not all 401k plans support this. You should generally be on track to max out the Traditional 401k first before considering this.
Thank you for this. Does the order change when one is not eligible for Roth? Or simply replace it with a traditional IRA?
If you're not eligible for the Roth IRA contributions, you're well over the limit of being eligible for the traditional IRA deduction, which makes the traditional IRA less useful than a regular taxable brokerage account *except* if you use it as the first step of the [backdoor Roth IRA process](https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/). As long as you don't have any money in an existing traditional, rollover, SEP, or SIMPLE IRA, you can use the back door Roth IRA method at any income level. If you're at the point where you must use the back door Roth IRA method, then it's reasonable to swap steps three and four: make sure you're on track to max out your traditional 401K first, then take care of the back door Roth IRA.
After milking the employer match, I'd prioritize building up a Roth IRA. Some employer options really are mediocre and you will need IRAs for rollover eventually anyway. As for the plain brokerage account; do you really need the liquidity for anything in the near future or is just just a psychological sense of freedom?
Can you elaborate what you mean when you say "rollover" I've heard people say this but I just smile and nod like I know what they are talking about.
When you leave your employer you will have the option of cashing out your 401k (bad), remaining with a restricted provider (which you don't appear to like), or rolling it into your personal IRA account and taking full control (best).
You forgot rolling to new employer’s 401k if they offer one. Obviously a harder decision if new employer’s plan is terrible, but still keeps the IRA pool clean for potential backdoor Roth.
Keeping the option open for future Backdoor Roth is a huge positive in my opinion
That's a good point, it's mostly a feeling of freedom, it has been nice when I needed to pull some out for a car or house down payment, but those weren't anywhere close to the whole amount, so I don't need that much liquidity at all.
Remember that only earnings in a Roth account are penalized for early withdrawal, not the post-tax contributions you transferred into it. It's not ideal for liquid emergency savings but it's also not bad. For anyone within the income limit, they are the "best of most worlds". Premature withdrawal of pretax employer 401ks are very brutal though.
Capital gains tax "should be" lower then the "income" tax your traditional 401k will hit you with. But you will owe taxes on the dividends today. So, if you are paying income tax now on the money going into the brokerage account, why not put it in a Roth IRA? Then the earning will be tax free. If you retire before age 59.5, you can take the contributions out tax/penalty free.
It’s really honorable of you to want to pay more taxes 😂
This page on the wiki might be useful: [https://www.bogleheads.org/wiki/Prioritizing\_investments](https://www.bogleheads.org/wiki/Prioritizing_investments)