Ask HN: When does it make sense to build wealth in taxable accounts?

2 pointscivicsquid2y ago1 comments

Most of my co-workers aggressively max out their 401k's and contribute to an after-tax scheme once they hit IRS limits. They stress to me that it is important to keep as much money as possible out of taxable accounts.

Does this make sense for someone who is early into their professional career?

It seems like it makes less financial sense to do this if you need the money before retirement, e.g. if you are planning to buy a home or make some other large purchase in 5-10 years. As far as I can tell, you have to pay a significant penalty and/or interest to take this money out, so it feels like it would make more sense to contribute steadily (not aggressively) to tax-advantaged accounts while building wealth in a taxable account, where it can be accessed freely when needed.

1 comments

DavidPeiffer2y ago

It depends on your motivations and goals, but if you're trying to optimize for maximum net worth, maxing tax advantaged accounts probably makes sense for most people.

* IRA contributions (but not growth) can be withdrawn without penalty anytime (though you'll need to pay normal income taxes if you contributed to a traditional IRA.)

* You can pay for health expenses out of pocket and reimburse yourself later from your HSA contributions. So the money deposited pre-tax can continue to grow and compound, and if you need it later and have incurred expenses, you can pull it out without penalty.

* Any contribution to a traditional (pre-tax) IRA or 401k avoids taxes now, but you'll pay them later when you withdraw. If you withdraw during retirement, you'll be withdrawing some or that money to fill up the standard deduction, meaning you paid 0% tax. That's a huge incentive to contribute.

These tax advantaged accounts are generally not best for money you'll need in the next couple years, but the strategies I mentioned above can make them marginally more accessible.

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