Contrary to recent discussions, Jesse has concluded that a traditional IRA is the smarter way to go for most people once marginal tax rates are factored in. Is he missing something?
An anonymous caller is four years away from early retirement but she’s unsure if her portfolio allocations are in the right place. How and when should she start converting equities to cash?
Luz is confused about how to handle company stock options. Is there an ideal spread between the exercise price and the stock price? And, what should she do once the stocks are exercised?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Jesse asks (at 01:26 minutes): A couple of weeks ago, a listener named Von called in to ask about the benefits of Roth over traditional accounts. You discussed the value of being able to cram more tax-free money into a Roth, given that both traditional and Roth accounts have the same annual contribution limits.
One thing I think was missing from the discussion is the distinction between marginal and effective tax rates. I’ve heard financial planners Cody Garrett and Sean Mulaney delve into this topic during interviews with other podcasters, and it’s shaped my thinking.
For example, my effective tax rate in retirement will likely be much lower than my highest marginal tax rate today, which is 22 percent—assuming current tax laws remain the same and barring drastic increases in future tax rates.
When I run the numbers, it seems like I’m better off contributing to a traditional account, which reduces my tax obligation today by 22 percent, and putting any additional funds into a taxable brokerage account.
The gains in the brokerage account would then be taxed at long-term capital gains rates, which are much lower—0 percent for single filers earning up to $48,350 or married couples earning up to $96,700 in 2025.
If I focused solely on Roth contributions, I’d be paying my highest marginal tax rate now just to have tax-free withdrawals later. That trade-off doesn’t seem as favorable, especially for people with high savings rates who plan to live on 60 percent or less of their current income in retirement.
So, what am I missing? Is there a flaw in my logic, or does my approach make sense?
Anonymous asks (at 27:24 minutes): My wife and I are in our mid-40s and about four years away from becoming work-optional. What’s the best way to approach asset allocation and timing for the next four years to ensure we’re financially prepared for early retirement?
We both work full-time, earning a combined gross income of $150,000, with a net worth of $1.6 million and no debt.
Here’s the breakdown of our net worth:
- $400,000 in our paid-off home,
- $900,000 in retirement accounts,
- $220,000 in a taxable brokerage,
- $24,000 in HSA accounts (which we max out and don’t touch), and
- $100,000 in cash (in a high-yield savings account).
We need to build investments outside of retirement accounts to cover the nine-year gap between when we stop working and when we can access our retirement funds at age 59½. So we’ve redirected what we used to put into Roth IRAs toward our taxable brokerage account.
Our plan for the next four years is to continue contributing to workplace retirement accounts while investing as much as possible into the taxable brokerage account. If the market averages an 8 percent return, we believe we’ll have enough to step away from work entirely.
That said, I may work part-time or take on contract work, as I enjoy what I do and worry I might get bored. What we’re trying to figure out now is how to adjust our investment allocations as we approach work-optional status.
Over the past few years, we’ve shifted our retirement accounts toward the efficient frontier, but how or when do we reallocate to bonds or increase our cash holdings? How do we determine the right allocations and timing?
Our expected spending will be $50,000–$60,000 annually, adjusted for inflation. We plan to do Roth conversions during our early retirement years to manage taxable income and potentially qualify for health insurance subsidies (assuming I’m not working part-time).
Additionally, we have $185,000 in Roth contributions that are accessible if needed, but our goal is to avoid touching those until after age 59½.
Luz asks (at 51:27 minutes): I’m looking for advice on how to handle stock options and company stock.
Every March, I receive stock options as part of my bonus package. How much of a spread between the exercise price and the actual stock price should I aim for before exercising the options? Once I do that, should I hold onto the stocks in my brokerage account or sell them?
I also have restricted stocks that vest every bonus cycle. Should I keep those shares or sell them to diversify into stocks from other companies? Currently, 9 percent of my investment portfolio is tied up in my employer’s stock.
For context, I’m 31 years old. I have $92,000 in my Roth 401(k), $10,000 in savings, and a house with an interest rate under 3 percent. On the liability side, I have $8,000 in subsidized student loans at very low interest rates, $8,000 in a car loan at 4 percent, and $6,000 in credit card debt, currently in a 0 percent APR promotional period.
Additionally, my partner started a company two years ago, so I’ve become the primary breadwinner. These numbers reflect only my finances, as we’re waiting until we’re officially married and have a prenup in place to combine finances.
Resources Mentioned:
#530: The Overlooked Power of Stock-Based Compensation, with Brian Feroldi – Afford Anything | Podcast
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