AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner (CFP) and have performed fee only investment management and financial planning services for the past 11 years.
Question I am 36 years young. I have been investing for the past 10
years primarily in no-load mutual funds (mostly from T. Rowe
Price) and are diversified. I have other investments too. I
always keep an eye on my portfolio and analyze it frequently
but at the same time I am a long term investor. On an
average my investment generates 10% to 15% yearly. I also
have IRA and 403B. I don't have any debt except mortgage and
that too is manageable (My philosophy on purchases is that
if I can not pay by cash at that instant then I won't buy. I
consider credit card to be only of a convenience and I use
it as such. I divide things in "must have" and "nice to
have" categories. I lead a simple life.). I keep a 6 month
reserve of cash which is generally in Money Market and short
term CDs. The yearly invested amount, let's say, is around
$15,000 to $20,000 every year. I intend to keep this going
every year and keep increasing the amount. I am not eligible
for IRA contribution tax break and I am not eligible for
Roth IRA. Given this scenario, is it really that worthwhile
to max 403B and IRA? I realize they have the benefits of
savings on taxes on dividends every year and in case of 403B
the taxable amount itself is reduced. But I get locked in
till 60 years of age. If I diligently invest every year then
does it matter whether I invest in regular funds and take
the tax hit now at the current tax bracket rate but keep the
flexibility of cashing when I want or sock it in retirement
plans hoping to pay less tax later as the tax bracket will
be lower? In the end does it really make that much of a
difference?
Answer Hi. With the advent of extremely tax efficient vehicles such as ETF's, the tax free growth of 401k plans aren't as compelling as they once were. However, the up front tax advantages that comes with pre-tax contributions is meaningful. Whether or not it is "meaningful enough" depends somewhat on what your tax bracket is during the contribution years vs during the years when you take withdrawals. With that being said, the actual benefit of maxing out a 401k depends on each persons scneario not only now but in the future as well. Regardless, automatic 401k contributions does intill a savings discipline which most people lack. One final thought; for those who have tax deferred accts such as 401k's and IRA's in addition to taxable savings accounts, there is the idea of asset placement which involves putting certain investments in each type of account and managing the mix as "one" vs separate accounts. There is proven benefits to this. Although this isn't a straight forward answer, I hope it helps.
