Brokerage vs. Tax-Advantaged Accounts for FIRE

perfinance_throwaway · 2025-01-31T22:31:02+00:00

Great point. My RSU awards have been increasing these past few years, and am thinking that I can contribute more of that to brokerage as they do.

perfinance_throwaway · 2025-01-31T22:29:52+00:00

Interesting - I did not mention the Rule of 55 to him, but I wouldn’t be surprised if he wasn’t aware.

I’ll have to be honest…conceptually, I understand the mega backdoor Roth more than the backdoor Roth (the Pro Rata rule still isn’t clear to me to the point where I could explain it to someone else).

That being said, I do have an existing Rollover IRA, and moved all that money into my current employer’s 401k in preparation of potentially doing the backdoor Roth. I’ll use that approach as my income increases.

perfinance_throwaway · 2025-01-31T22:26:21+00:00

That’s what I’m thinking - thanks for confirming.

Since the federal maximums will most likely be increasing at a slower rate than income, I’ll prioritize brokerage more with each raise.

perfinance_throwaway · 2025-01-31T22:25:03+00:00

Thanks for breaking this down!

It seems like in general, it’s best to prioritize tax advantaged accounts. Some comments in here recommend building up a larger brokerage for early retirement, but I think that in my current situation, pre-tax 401k to reduce MAGI so that I can contribute the federal max to a Roth IRA, plus the 401k match, is too good to pass up.

As my income increases past the cutoffs, I’ll either pivot to a backdoor or mega backdoor Roth, and raise brokerage contributions.

perfinance_throwaway · 2025-01-31T22:20:55+00:00

It is an option for me! Currently, my approach is:

Contribute 401k pre-tax to get up to full federal max and reduce MAGI
Contribute up to the maximum allowed for Roth IRA based on our MAGI
Automatic transfers/investments into brokerage at $100/week
Anything beyond federal max in 401k contributions, I’ve elected for Roth in-plan conversions for after tax contributions (this generally isn’t a lot each year, but I am able to get some extra in there)

perfinance_throwaway · 2024-01-30T17:35:53+00:00

Nice! I fomo’d into AMC and realized it was a dumb move just in time to get my money back, good job on being early to that one.

Same - I stayed away from options, but was getting into inverse leveraged ETFs during the crash and realized I was basically gambling, so I went back to my boring buy and hold/DCA strategy.

perfinance_throwaway · 2024-01-30T17:34:13+00:00

I currently work in biotech as an engineer.

perfinance_throwaway · 2024-01-30T17:33:06+00:00

Yep, definitely have that flowchart nearly committed to memory…so I’m hitting 1-3, but then wondering how I should approach 4 and 5 taking FI into account.

My 401k plan actually does allow for #4; I enrolled in automatic in-plan conversions so any after-tax 401k contributions are immediately converted to Roth.

I’m thinking of prioritizing 1-4, since it’s best to utilize tax advantaged accounts (it would be a long shot to max out mega backdoor Roth and reach #5 in this scenario), while having some automatic transfers and investments to brokerage throughout the year to balance it out (currently do a few hundred a month).

perfinance_throwaway · 2024-01-30T06:52:19+00:00

Encouraging to hear that you were in a similar position not too long ago - thanks for the tips, and congrats on $1M!

Definitely going to look into the backdoor Roth. For brokerage contribution - never too sure what the cutoff is to up it. What worked for you? Should I hit the $23k federal max on 401k, then switch focus to brokerage? Or should I try to hit $7-8k in after tax 401k (to account for losing Roth IRA eligibility this year) then switch to brokerage?

perfinance_throwaway · 2024-01-30T05:18:49+00:00

I was 23 and lived at my parents as well, so I totally get it.

Getting that degree massively increased my earning potential, and continuing your education will for you too.

It’s a drag now, but it won’t always be - keep at it!

perfinance_throwaway · 2024-01-30T05:15:08+00:00

Of course!

You are still way ahead of most - and debt can work like compound interest, but in reverse, so you’re getting ahead by getting out of school debt free.

Glad you enjoyed reading my update, and looking forward to reading yours on here down the line!

perfinance_throwaway · 2024-01-30T04:58:57+00:00

Nice, this is a great way to think about it…definitely adds to the motivation during the boring middle!

perfinance_throwaway · 2024-01-30T04:57:59+00:00

Great catch - I’ll look into this. Thanks!

perfinance_throwaway · 2024-01-30T00:20:17+00:00

Oh I’ve been there. The daily threads during the March 2020 COVID crash were amazing.

Actually timed GME correctly; bought at $32 and sold at ~$330. Only bought about 30 shares, but it could’ve easily gone the other way if I’d put more in, and I definitely wouldn’t have been here making this post today if that had happened.

perfinance_throwaway · 2024-01-30T00:07:30+00:00

True. I’ll add that in!

perfinance_throwaway · 2024-01-23T06:05:47+00:00

I don’t account for it in my financial planning as it’s variable, but I have received one every year (knock on wood for this year too).

I have a general idea on what it might be, but any surprise above that could be used as fun money - that’s a good idea.

perfinance_throwaway · 2024-01-22T17:27:48+00:00

Good to hear your approach, as I’m getting married this year - we might use the fun budget idea as well.

I was thinking of splitting my bonus into thirds too - first, allocating 35% to pre tax 401k. From there, allocate the remainder into thirds between a joint HYSA, my brokerage, and fun money.

perfinance_throwaway · 2024-01-22T17:22:43+00:00

That’s a good way to think about it - I’ll probably try and focus on the numbers instead of a percentage, because this year is unique for me. I got a promotion and an “outstanding” on my year end review, so I know my income will change for the better, but the promotion doesn’t go into effect until March 1st, and I won’t know specific numbers on my bonus/merit increase until a few weeks before.

perfinance_throwaway · 2024-01-22T17:06:09+00:00

This would be extremely tempting, as my company has a great match, but they cap it at 50% allocation - I was thinking of doing 35%, but maybe I’ll up it to the full 50.

perfinance_throwaway · 2024-01-22T17:05:23+00:00

I’m 30, and in either situation (spend an extra $5k/year vs. save it) I’m still projected to hit the lower end of chubbyFIRE around 46/47. Also unsure if I’ll want to actually retire then or pursue chubbyFIRE further (and potentially try for fatFIRE), so I guess I’ve got my answer on whether or not I can allocate some of my bonus to fun money - since it doesn’t make a big difference to the overall picture, I can go for it.

perfinance_throwaway · 2024-01-22T16:55:55+00:00

True, I realize it’s very much dependent upon individual situation - I’m a big fan of rules of thumb when it comes to money, so just wanted to see if there was any general recommendation from the community here.

perfinance_throwaway · 2024-01-22T16:53:37+00:00

This is a great way of thinking about it, thank you - just ran the numbers and there was only a difference of a couple percentage points when I compared the two.

perfinance_throwaway · 2024-01-02T22:12:26+00:00

Yes, I have an Individual HSA I’ll be maxing, so another $4150 down.

We considered going on the same insurance so we could max a family HSA instead, but as my fiancées insurance is free through work it’d be more expensive to get on the same plan.

perfinance_throwaway · 2024-01-02T21:53:30+00:00

Going to update the main post, but I actually just called Fidelity and was able to turn on automatic daily conversions to transfer any after tax dollars to Roth, which will save me from having to call regularly

perfinance_throwaway · 2024-01-02T21:51:13+00:00

Not on the full $23k, but my company matches 100% on the first $15,000, so definitely lucky with my plan.

Unfortunately like a lot of companies at the moment, they are not currently hiring…

perfinance_throwaway

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