[Kelly]

Scenario 1: contribute just enough to companies 401k to get match. Then invest around 15% of income to brokerage.

(This would enable me to access before 55.)(plan allows rule of 55)

Scenario 2: continue to max out 401(k) and contribute less to brokerage. Lowers taxable income but will not be able to access more funds pre 55.

[Frank]

Neither, and based on a completely false premise. You should get the match in 401k and then fill up an IRA before topping off the 401k.

The false premise is “not being able to access retirement funds early.” There are plenty ways to do that so it should not be prioritized.

The reason you would want to favor a taxable account is that you have other interim goals such as a downpayment on a house, etc.

[Cody]

Have you explored other ways to access retirement funds early without the 10% additional tax (penalty)? Such as Substantially Equal Periodic Payments (SEPP 72t)?

At which marginal tax rate(s) are you deducting your traditional 401(k) contribution?

What will your income sources be in early retirement?
Scenario 2 is often the better option for those planning to retire early due to lower distribution tax rates.

Contributions are deducted at your highest marginal bracket while working, but distributions may be taxed at multiple lower rates – including the significant standard deduction if you don’t have other income sources in early retirement.

[Christopher]

I’d sort out Roth conversion laddering, and plan on having ~5 years of spending in a brokerage, sheltering the rest.

Roth contributions also count towards the 5-year available amount.

Unless your taxes are already pretty low, you’ll likely want to shelter as much as reasonably possible.

[Sean]

Well, the “correct” FI play is to take full advantage of all the tax-advantaged accounts, as others have commented, before putting extra funds in a taxable (after tax) brokerage.

That would result in the highest net worth and would get you there the quickest.

If you can’t do them all and have to prioritize, optimal order would be 401k match, HSA, Roth IRA, then back to max out 401k, and lastly after tax brokerage (some general assumptions there: eligibility to Roth IRA, HSA makes sense given how often you go to doctor, etc. -> that is the general optimal path, may not be right for you).

However, I personally don’t follow this “optimal” path anymore and when “advising” friends and family, I do explain why another route may be better.

I did follow optimal order for the first several years of my FI journey but found myself in a tough situation a few years ago.

I was not in love with my job and wanted to take a break badly. I had several hundreds of thousands in invested assets but only like $20k in a taxable brokerage account, and was “trapped”.

For the last couple years, I now prioritize 401k match, HSA, and Roth IRA.

Maxing all three of those are non-negotiable to me. But everything extra has been going to taxable accounts, rather than the 401k. Much more flexibility.

I do plan on going back to the optimal path soon once I feel comfortable with the balance in my taxable accounts but I wish I would’ve started my FI journey for the first several years doing this instead of the optimal route.

Unless you know you love your job and will never want the option to take a break (optimal path is better in that case), I’d prioritize the taxable accounts before going back to maxing 401k, personally.

Plus, the taxable accounts are sneaky good! Especially if you don’t require a ton of spending in early retirement, a taxable account can kinda effectively act as a Roth IRA (with the 0% LTCG rate).

Even if you bump into the 15% LTCG rate, still favorable to earned income but obviously not as good as 401k from a tax standpoint.

Sorry for long post but I’m passionate about highlighting this “regret” I have and think people should be aware. Good luck!

[Jason]

Have a Roth option in your 401k? I used it for a while.. Match was still traditional.

Just something to look into.

[Rick McGinley]

Are these the only two options you are considering or feel that you have available?
A few others may be

72t from traditional ira (part of 401k if needed)

Selling house to downsize or rent or travel using those funds for tax free “income” and then doing Roth conversions for 5 year out use for expense

[Ron]

How many years of access to funds before age 55 do you need? How many years do you have to accumulate taxable side assets before you need to start accessing/using them?

What is the balance of taxable side liquid assets now?

Are there any other potential sources of income before age 55?

[Jule]

It all depends on your goals and when you are set to retire.

If you really want to retire before 55, then the extra funds will have to come from a brokerage.

[Jacobs]

I found running ‘simulations’ of drawdowns helped me decide towards the end of the journey where the money should go.

If you need a little more in traditional brokerage to support a Roth conversion ladder, then just model it out year by year to see if the funds will support.

If you’re closer to traditional retirement age, then it may affect the duration or look of the conversion ladder.

[Kyle]

Note that if you have kids in, or soon to be in, college, there can be a benefit to lowering the amount of taxable income, since that can lower how much colleges expect you to pay.

[Skippy]

401k for the match, Roth IRA max, brokerage account.

[Author]

Posts