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When Should I Open a Taxable Account?

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  • When Should I Open a Taxable Account?

    Hi All,

    First time poster with a couple of questions.

    Background info:
    • 5 years into Orthopedics practice in HCOL area
    • Maxing out 401k, two back door Roths and SEP contribution
    • Have four children 10 and under, have started 529s for each
    • Debts: Practice Buy-In, Surgery Center Buy-In, Mortgage, Family Loans from residency---Adding up to about $1.2M
    My current asset allocation across retirement funds (all in low cost index funds at fidelity, schwab and vanguard):
    45% US Stock
    40% International Stock
    10% Small Cap Value
    5% REITs

    Does this allocation make sense? I know there isn't a "right" answer and think as long as I don't mess with it this should be ok until I have to eventually add bonds. Correct?

    When should I pull the trigger and open a taxable brokerage account? Any time I consider it, I think that contributing more to my children's 529s or paying down our sizable debts is more urgent and still moves my net worth in a positive direction. Appreciate any advice.

    Thanks

  • #2
    I think we need more information. How old are you? How much do you have in retirement currently? What is your yearly income? How much money do you have each month after paying bills, contributing to retirement, and taxes? Planning to work to 65? Are you totally comfortable with 100% stocks? Do you have an emergency fund?

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    • #3
      You should be putting 20% towards retirement. If you are not able to do that with tax advantaged accounts you need to add taxable.

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      • #4
        Originally posted by OrthopodFamily View Post
        Hi All,[*]Maxing out 401k, two back door Roths and SEP contribution
        Need more info on this. SEP will make one or both of you subject to the pro-rata tax when contributing to the BD Roths.

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        • #5
          From what you've written sounds like you're going to have a massive headache with the prorata rule

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          • #6
            How much money is in the SEP? Two choices...convert to Roth or quit the BD roths. Depending on the balance is the right answer. Do you understand what we are talking about? You basically cannot do BD roths if you have any IRA money. To do BD roths you need 401K money. It is just a stupid government rule. I have a large SEP so I have never done a BD roth. Rules change on you.

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            • #7
              -I'm 38
              -Yes, planning to work to 65
              -Comfortable with 100% stocks
              -$325k currently in retirement
              -Make about $700k annually
              -Yes, we have an emergency fund but it's been depleted during COVID. Usually has $75k, now has about $40k
              -Difficult to say what's left after bills because I'm paid a "draw/salary" twice a month and then larger bonuses quarterly. Never seem to have the problem of leftover cash.

              Curious about the pro-rata tax comment. Our accountant advised me to contribute X amount to a SEP and just roll it into Roth. Said it wouldn't affect our ability to do two back door roths again the following year.

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              • #8
                Originally posted by OrthopodFamily View Post
                Curious about the pro-rata tax comment. Our accountant advised me to contribute X amount to a SEP and just roll it into Roth. Said it wouldn't affect our ability to do two back door roths again the following year.
                That is correct if you actually did roll ALL the SEP into your Roth IRA. If not, the BD Roth would be subject to the pro-rata rule. Did your accountant complete Form 8606? That is where both transactions are documented and determines how much is subject to income tax. If you are contributing to a 401k and a SEP does that mean you have a moonlighting side-gig? If so, replacing the SEP with an individual 401k would probably be better.

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                • #9
                  You need to put $140k into retirement, at least. What are you on track to do this year? Last year? You should have opened a taxable account years ago based on what you have written. You are behind on retirement savings. But you have a big shovel with that income and can easily catch up

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                  • #10
                    Yes. It was only about $1k and I converted it all to roth.

                    I make some 1099 income from medical legal depositions. I remember listening to a podcast about i401k vs SEP but don't recall the pros/cons.

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                    • #11
                      Originally posted by JBME View Post
                      You need to put $140k into retirement, at least. What are you on track to do this year? Last year? You should have opened a taxable account years ago based on what you have written. You are behind on retirement savings. But you have a big shovel with that income and can easily catch up
                      Thanks. 100% true. Sometimes you just need to hear it from someone else.

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                      • #12
                        Originally posted by OrthopodFamily View Post
                        Yes. It was only about $1k and I converted it all to roth.

                        I make some 1099 income from medical legal depositions. I remember listening to a podcast about i401k vs SEP but don't recall the pros/cons.
                        It allows you to do the backdoor Roth while making pre-tax retirement contributions. If you make SEP contributions you have to convert them to Roth by the end of the year, which is unfavorable at your income.

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                        • #13
                          i dont understand how you do not have a taxable account with 700K income 5 years out.
                          this sounds like a budget/spending problem.

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                          • #14
                            Definitely should have a taxable by now. Your retirement savings are paltry, given your large income.

                            Also, what are the rates on your loans? Even if they are high (6% +), might still be better to open taxable before paying down.

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                            • #15
                              Message received. I literally just opened a taxable account. All of our loans are 5% and under.

                              Per the "I don't understand how" comment, I did not make $700k each of the past 5 years, only last year. We spent a significant amount renovating and repairing our home, which is still relatively modest for our area. I realize we do not have an income problem. I thought potentially the forum might say investing in taxable is equally advisable to heavily funding the 529s.

                              I appreciate everyone's advice.

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