Diets and Retirement in Moderation
A well-balanced diet contains protein, fats, and carbs¹. A well-balanced retirement has a quality balance between pre-tax, after-tax, and taxable accounts².
The percentages for a quality balance can be debated for both diets and retirements, but a key to life is moderation. Keeping things somewhat even is probably a best practice.
Here is how focusing on just one retirement account leads you astray:
“I’m just going to focus on maxing out my 401(k) and lower my tax bill,” exclaims the new guy signing up for benefits. Well, great, but once you get to retirement you’re going to have a sizable income-tax liability; see, every withdrawal from your 401(k) you have to cut some to the government. You’ve pumped up your retirement through avoiding taxes, but now you’re a bodybuilder who can’t touch his toes! You’ve sacrificed flexibility for hopes of the largest account balance.
“I’m going to prepay all my income tax and put it into a Roth (after-tax account),” yells the oddball libertarian friend. Welp, you’re limited to what you can put in there unless you do a conversion³. Also, once you have assets in there you cannot access them until 59 ½. Yikes, that’s an eternity away!
“Screw it, I’m just going to put everything into a brokerage/taxable account,” the stranger at the bar tells you. Not bad, but all the growth of those assets will be taxed at capital gains rate. So, if you make $10k and you sell it, then you’re going to owe the government a slice⁴.
By moderating contributions between the three different accounts you’ll be able to create a healthier retirement; maximize flexibility, controlling your tax situation, and hopefully have a less stressful life.
How do I figure out what an appropriate balance is? Well, that’s between you and your trusted advisor who you should be working with to decide what’s best for you!
Death and taxes are all we have to look forward to, but hopefully not stress.
Feel free to reach out with questions!
Disclaimer — this is not financial advice. Work with your advisor to make these decisions.
Footnotes:
- A good rule of thumb for nutrition is to get your caloric intake close to 40% protein, 40% carbs, and 30% fats.
- Ya know, maybe footnote 1 isn’t a bad idea for your retirement accounts…
- There are a bunch of strategies to increase contributions to a Roth, but, sweet baby Jesus I cannot emphasize this enough, please work with a qualified advisor on this stuff!
- Capital gains rates depend on your income
