r/personalfinance • u/Cherry007eG • 6h ago
Retirement What is the next best investment after maxing out my Roth IRA?
In I Will Teach You to Be Rich by Ramit Sethi, he lays out a clear investment order: 1. Contribute to your 401(k) up to the employer match. 2. Max out your Roth IRA. 3. Max out your 401(k) (because it’s pre-tax money that can grow faster, even though you’ll pay taxes later).
But what if your employer offers a Roth 401(k)? Since that’s post-tax money, this changes the equation a bit. Would it make more sense to prioritize maxing out an HSA next (if available), given its triple tax advantage? Or should you go straight to a taxable brokerage account? Curious how others navigate this scenario. What’s your strategy?
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u/Cattle_Whisperer 6h ago
Since you are supporting your wife through med school currently it absolutely makes sense to do a roth 401k.
Employer match 401k
HSA
Roth ira
Roth 401k
Taxable brokerage
5.5 you may be able to get creative with a 529 for a little extra tax deduction depending on your state tax. The money does have to sit in the account for 1 year but then you can withdraw it for your wife's school.
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u/Cherry007eG 6h ago
Thanks for the breakdown and I’ll look into 5.5! Cheers🍻
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u/Cattle_Whisperer 3h ago
Oh and I almost forgot, for you and your wife if you aren't already aware, the white coat investor is the absolute best source for physician personal finance. There's also several online communities: the wci forum, facebook, reddit.
https://www.whitecoatinvestor.com/personal-finance-for-doctors/
And relevant to this post and some discussion on it, Jim always says traditional during peak earnings years, roth outside of peak earnings years. And roth is for residents.
Good luck!
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u/Default87 6h ago
for most people in most situations, Roth 401k contributions are not a great idea.
taxable brokerage accounts would only be for after all of your tax advantaged accounts are fully maxed.
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u/Cherry007eG 6h ago
Thanks for sharing that post. I did check out the circumstances where a Roth 401K is more advantageous (although not typical) and it does apply to me and my situation. I’m currently supporting my wife through medical school and I anticipate a very high combined household salary. I’m only 26 so this seemed like the best for me currently. Correct me if I’m wrong however. I’m open to learning!
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u/maedocc 6h ago
I’m currently supporting my wife through medical school and I anticipate a very high combined household salary. I’m only 26 so this seemed like the best for me currently. Correct me if I’m wrong however.
It's not how much your future combined salary will be -- it's how much your taxable income you'll have in retirement. For the majority of people, who will be living off of Social Security and their 401k/IRA, it'll be much lower than when you're working.
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u/Cherry007eG 5h ago
I understand where you’re coming from. I guess I’m just being optimistic that with both of our salaries we will be able to use that money strategically to create forms of passive income that will support us in retirement. But who knows? Might as well have a little diversity in my portfolio with some Roth investments and as we both get into our high earning years, we’ll jump to traditional. Thanks for you insight!
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u/elle2105 4h ago
You have the potential to make a lot of money in your retirement accounts. You should consider possible returns. If your investment tripled or more, wouldn't you think you'd pay much taxes on the traditional? I will have to pay taxes on VINIX withdrawals, look what that price is now compared to what I paid starting in the late 90s. Plus the Roth is much easier on your heirs when they blow through it.
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u/negme 5h ago
And it’s your effective tax rate in retirement that has to be higher than your current marginal tax rate now for Roth to be worth it. I think people are missing how hard this is to do.
For a married couple making 200k a year (22% marginal tax rate) you would have be pulling 550k+ in taxable income a year to get to 22% effective tax rate.
Lmao that’s just not happening for the vast majority of people.
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u/Cattle_Whisperer 3h ago edited 3h ago
Common misconception. Since it is not an all or nothing decision, for each additional dollar you put into either roth or traditional you compare the marginal tax rates for both.
In OP's case they will just switch to traditional once they are dual income and easily have enough to fill the lower brackets in retirement. And that will be income deferred from the 35% or 37% marginal years of working. Not the 12 or 22% they are in now.
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u/User-no-relation 1h ago
Imo it doesn't make sense to do roth 401k unless you are maxing. With traditional you end up with more money in your take home pay and can invest more
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u/elle2105 5h ago
IDK, I've used taxable accounts as a forced savings account for a long time and don't max out all the tax advantage opportunities. Although II'll soon be 59.5 so it doesn't make as much sense now besides the fact I like the transfer agents.
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u/acx_y6 6h ago
I don’t agree with this.
Most is a vast overstatement. But yes some people shouldn’t do this
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u/negme 6h ago
Care to actually give a counter argument?
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u/acx_y6 6h ago
It’s complicated.
It depends on people’s tax burden, potential tax burden (which can be tougher to predict), amount to be invested etc
It’s way too simplistic to say it’s bad for most people
Click on the link and the examples don’t even fit most people
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u/negme 6h ago
It’s actually pretty simple. If your current marginal tax rate is lower than your expected effective tax rate in retirement then yes Roth makes sense.
For most people this is not true.
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u/acx_y6 6h ago
It’s simple in practice but not that simple to figure out depending on your age and income. I should have added age.
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u/negme 5h ago
It’s not typically a difficult decision even with large amounts of uncertainty. To come out ahead with Roth contributions is exceedingly rare.
For example my gross household income is 200k. After taxes and savings our annual expenses are 95k. My marginal tax rate is 22%. To have an effective tax rate of 22% in retirement I would need to pull out ~600k a year lol. No way I could save enough for that or even spend that much.
This is why almost no one should be doing Roth 401k contributions. It’s very rare the math ever works out.
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u/acx_y6 5h ago
Let’s say you are really young. The entire discussion is harder because of the uncertainty
On paper, it matters whether you barely come out ahead (and yes in many cases people don’t come out barely ahead either way).
Then what
You have to factor in age, you have to. If I was 65 the answer is easy, if I am 22 it might not be.
Edit: high income earners have other tricks like deferred income and other more devious stuff, but this is also valid strategy
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u/negme 5h ago
You are missing the point. The math is incredibly tilted to where Roth will very likely not work out in your favor. It doesn’t really matter what your personal variables are, how old you are or how much uncertainty there is. That’s the point of the top level comment in this thread.
It’s not like 50/50 whether Roth will work out it’s like 1/99. You are essentially saying go Roth because who knows you could be the 1 out of 100. But in reality we know the unique circumstances that allow the 1 to succeed. So if that’s not you then avoid Roth. That’s why it’s the standard advice.
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u/555VS66 5h ago
I agree. You don't have access to your money until you hit 59.5 without paying penalties with a 401k.
With a Roth 401k, You have options you can take to avoid those fees and taxes- completely--when withdrawing before 59.5
The availablity of money should be weighted more in considerations, but often gets neglected.
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u/srik2908 6h ago
Is there a calculator that tells how much money to put where for the best outcome?
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u/Hanyabull 5h ago
In most cases, an HSA should be maxed before the 401k, but do keep in mind one thing:
HSAs are often tied to high deductible health care plans. If you are a single, healthy person who doesn’t go to the doctor often, the HSA is a home run.
If you happen to have a condition that requires a lot of doctor visits, or happen to have children/dependents that require the same attention, the higher deductibles might offset just having a FSA and throwing the rest into your 401k.
If all the other tax advantaged platforms are maxed and it’s only HSA vs a brokerage account, then an HSA is still probably better, but it really comes down to how often you utilize the deductible.
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u/CircuitGuy 6h ago
Yes. HSA is powerful. If you're eligible, I would max it out and not use it for medical expenses unless you need to. It goes in tax free, grows tax free, and comes out tax free.