Ratio of Retirement vs. Non-Retirement Investing?

Hi all, after reading a bunch of material by JL Collins (thanks Ivory Storm for the recommendation!), I think I've got a more solid foundation and comfort level with investing. One lingering question I had was how to decide how much to invest in retirement vs. invest in a regular account that I can use anytime. For example, to save for our next house, or build up our own "long term disability" fund (as an alternative to expensive insurance) that hopefully we won't have to touch, and that we want to let grow in the stock market.

It seems wise to put as much as possible into retirement accounts, but when we can't afford to max out our Roths or 401k IRAs at this time (though we are at least able to max our HSA), I'd like to still be putting some into a regular investing account. Note that we're currently investing some each month for that "long term disability" fund, plus a 529 for our toddler.

Are there any good rules on where to draw the line? I know that the less we put into retirement accounts, the more that will hurt us in the long run, but we also feel the need to be doing some other funding in regular investments so we can access some of that money before retirement, again for things like a house or to replace lost income due to disability. I know it's possible to at least pull Roth contributions before retirement if we're in a pinch, but I'd rather be pulling from a regular investment's contributions and interest, and from something not intended to be left alone until retirement.

Curious to hear how others handle this question, and how to balance the ratio of retirement investing vs. non-retirement investing. My wife and I are both in our mid 30s so still have awhile before retirement.

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  • You can't necessarily do everything you want to do, because the money doesn't spread that far.

    There are ways to get money out of tax-advantaged accounts  before age 59.5, so it generally doesn't make sense to invest in taxable for post-employment unless you are already maxing those out. People assume you can't get the money out earlier without penalty, but that's just not true.

    It also doesn't make sense to invest savings for a house unless you can wait 10 years after a stock market drop for those investments to recover. Your house buying timeline would need to absolutely be that flexible.

    It makes sense to invest in taxable for spending you might do in 10+ years. Anything less than that and you risk not having the money when you want it.

    As for a 529, all I can say is this. The best gift you can give your children is not a college education (heck, they might not even go to college, and then what do you do with the money?), but rather not being a financial burden on them in your old age. That said, do you get a state tax deduction for a 529 contribution? If so it might be worth it, otherwise I would not bother in your position.

    Others may differ in opinion, but my opinion is that unless you are maxing out tax-advantaged space there is no reason to  have a taxable investments or a 529. For our kids we went a different route from 529 that doesn't require education expenses to be able to use the money, but is still tax-deferred and/or tax-free. UTMA savings accounts, I Bonds and a UTMA brokerage account in which we tax gain harvest.

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  • Thanks nolesrule ! Always appreciate your input and thoughtfulness. 馃檪

    I was very intrigued by you saying that one can get money out of tax-advantaged accounts before age 59.5 without penalty, so did some searching and found this: https://www.thebalance.com/exceptions-ira-early-withdrawal-penalty-2388980. I'm putting the exceptions down here for my own future reference (the original post of course has more details/caveats):

    • CARES Act Withdrawals
    • You Spent the Money on Medical Expenses (our HSA/out of pocket max should cover this, but nice to know it's an option if we end up with extreme amounts of medical costs)
    • You Spent the Money on Health Insurance
    • You're Disabled (has to be pretty severe/long-term, but maybe that can fill the role of "long-term disability" insurance, plus our Roth contributions which we can access anytime)
    • If You've Inherited an IRA
    • 72(t) Payments (intriguing - seems viable in an emergency, but only if we're much closer to retirement)
    • Qualified Higher Education Expenses -- (very interesting...maybe this could fill the role of a 529 if needed?)
    • First-Time Home Purchase
    • Qualified Reservist Distributions

    Interesting to think about the 529 situation. Given that we're not currently maxing out our retirement accounts, you've got me thinking it would be better to do that, and only after that do we put excess toward the 529, if we're still using it. We're also going to get our first I-Bonds toward the end of the month, thanks to helpful info from you and others, and will continue moving savings over there in the years ahead. I'd heard of UTMA but didn't know what it was - will look into that more.

    Thanks again as always - I aspire to someday rise to your level of financial know-how! 馃檹

    Like 1
      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
      • 5 days ago
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      Silver Guitar A UTMA is a custodial account, so any money added is an irrevocable gift. However, the money in the accounts can be used for their benefit, but not to pay for anything that is considered expected parental support (i.e. room and board for a minor). Once they reach the age of UTMA majority for the state the account is registered under, the account is theirs with no custodial oversight.

      One of the benefits of a custodial account is that the account is in their name, so there are some tax advantages for unearned income (interest, dividends and capital gains). There is a kiddie standard deduction of $1100 (it goes down if the child has earned income) in which none of the income is taxed. The next $1100 is taxed at 10% for ordinary unearned income (short term capital gains, bank interest, unqualified dividends), and 0% for long term capital gains and qualified dividends. Above $2200 the unearned income is taxed at the parents marginal rate for ordinary income and/or capital gains.

      Note: like all tax brackets, these limits get adjusted for inflation over time, though there has been no change the last couple of years because inflation wasn't enough to bump it up to the next incremental value.

      That means for investments, you can sell and re-buy annually some or all of the position to increase the cost basis with no tax implications every year which has a similar effect to tax-free. You just have to be mindful of any bank interest and dividends (and capital gains distributions) to determine how much you can sell of both short and long term unrealized gains.

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    • nolesrule Thanks so much for this info!

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    • Silver Guitar you can take contributions out of Roth IRA without penalty.  My new approach will be to max the 401k and put other money into a Roth.

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    • Navy Blue Guitar yes I love that feature of Roths!

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  • There's always the handy dandy /r/personalfinance flowchart :D.  I actually use that.   nolesrule 's advice is sound, of course.  I can tell you though, that when I had my first kid, I was like, crap we need to get that college savings going!! So I dumped a bunch of money in a 529.  And then a few months later I was like, crap we can't contribute enough to get the 401k match!  My mom took over setting up 529's for the kids and now they're gigantic and I have 3 idiots.  Well, the first's SAT scores come in tomorrow so the jury is still out on that one.  He's finishing up an Associate's (cost $0) and today is his 17th birthday, and all that MIT money will probably end up rolling over towards the next less-than-motivated kid.  So yeah, consider alternatives cuz you never know 馃ぃ馃ぃ.

    I do have taxable investments, but they are OLD.  Like, play money from my college years.  And some inherited.  I don't feel I've yet to make it to the point as an adult where I can go ahead and contribute new money to those accounts.  Oh wait, I do have a taxable very conservative intelligent portfolio at Schwab that I use as a secondary cash holding spot, but it's not really meant for long-term growth because I could still need the cash at any time.  

    I'm not quite as savvy as nolesrule's on tax-efficient investing, but I know that I always shoot for those kind of accounts above all else, and I still haven't maxxed out every single avenue.  You're young, have a lot of earning years AND dare I say expensive years ahead of you.  Shelter your long-term savings in high growth investments in tax sheltered accounts and keep that more accessible cash conservatively saved/invested because man, you're gonna need it :).

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      • WordTenor
      • Can we agree that goals are dumb and immature? Sure.
      • WordTenor
      • 5 days ago
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      Annieland said:
      There's always the handy dandy /r/personalfinance flowchart :D.  I actually use that. 

       This is a super killer resource, OP,  if you've never seen it! I have a little bit of quibble about the ordering of paying down low interest debt vs. investing, but it's one of these "You're not going to go wrong by following this to the letter" kind of resources. 

      https://i.imgur.com/zlGnuDO.png

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    • Annieland Whoa thanks for mentioning that flowchart! I feel like maybe I saw it once upon a time, but it's great to revisit here. Wonderful visual. I appreciate also the encouragement to focus on investing as much as possible in long-term, tax-sheltered, high-growth investments. Most definitely keeping everything else in easy-to-access low-risk buckets.

      Hoping for the best with your kid's SAT scores!! 馃

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    • WordTenor Yeah I'm loving it! Thanks for the direct link! While the simplicity of YNAB's four rules and Dave Ramsey's Baby Steps have helped me tremendously over the past decade, the added complexity of that flowchart is great for me these days, as my own financial picture has gotten much more complex since then with marriage, investing, HSA, home ownership, becoming a parent, etc.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 4 days ago
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      Silver Guitar The jerk still won't get out of bed to check them.  Says "they'll just email me."  We all know there's always a delay with email notifications for everything, and I bet if he'd just log into the site he'd find something.  But nope, 2:15pm is too early to get up.  Yeah, these scores are gonna be just GREAT.

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      • jenmas
      • jenmas
      • 4 days ago
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      Standardized test-taking is its own skill set that is often not linked to other skills/abilities.

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    • Annieland 馃槃Sounds like me as a teen! 

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    • jenmas Agreed. I did much better on my second go-around after using a practice CD to get accustomed to the test itself

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 2 days ago
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      jenmas Very true!  Unfortunately, his test-taking is superior to his other skills and abilities.  Broke 1500 combined , semester grades are absolute garbage.  Lost the new iPhone I was dangling in front of him. What's done is done, I guess.  I hate Covid :(.  

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  • Annieland said:
    and all that MIT money will probably end up rolling over towards the next less-than-motivated kid.

    Many trade schools qualify for the use of 529 funds so he may still need the funds.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 5 days ago
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      jenmas Oh yeah, and I have people tell me "You can always go back to school too!" Shyeah, right.  Much rather have it for the first new HVAC quote I got today 馃う鈥嶁檧锔.

      I did tell him though, if he goes to college he can use money towards a really fancy new computer, so that's a bit of an incentive I guess :).  

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    • jenmas Good to know about this flexibility!

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  • Relevant to 529s is thought that if you are worried about having a super smart kid, you can withdraw any money that corresponds to the amount paid out in a scholarship (but you have to pay taxes on it). 

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    • WordTenor Awesome I didn't know that!

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  • Hi Silver, 

    For me 0% extra cash into retirement and 100% extra cash into non-retirement investing. 

    My approach is that I would rather handle the money, as opposed to pumping the cash into retirement accounts. My reasoning is that I don't want to put any extra cash into my retirement investment account because I want to control how it is invested. In Australia we have what is called Superannuation accounts, which are retirement investment accounts. There are companies that invest that for you and take %'s in fees. I still take all the risk if the Market tanks,  and I pay them money to manage it in return for meagre yearly gains??? No thanks.

    I can do something very similar in terms of returns (with some homework and study), still carry all the risk and not pay % management fees. I don't know how the retirement accounts work in the US, but I am assuming SOME similarities and a long way from being identical. 

    I will use that extra cash and invest that myself. I am still investing in my families future, but I have access to this should things come up.  

     

    I would not however invest cash that I know I am going to need. Don't invest that extra $100 bucks this week if you know next week, your going to need a new pair of pants and have to sell the shares you just bought. Treat your non-retirement investing like your retirement investing with emergency powers.  

    This is just my approach and I dont mean to offend anyones point of view. 

    Brgds

    Jay

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    • Jay Melv This works somewhat differently in the US, in that you typically get a very large tax break for using officially-designated retirement accounts, and so while you may get more flexibility and lower fees from using a non-retirement investment account, you have to weigh that against the fact that the government is essentially paying you to use the retirement account!

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    • Jay Melv Thanks for this perspective, Jay.  Matthew likely knows a lot more than I, but it's also my understanding that retirement account investing is best in the US for long term wealth building, due to how our tax system works. After some other recent exchanges in the forums here, and lots of extra reading on my own, I'm looking for ways to put even more into retirement accounts than I had been, including potentially shifting some non-retirement investing to retirement. Lots of changes in the works!

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      • Jay Melv
      • Welding the best Oranges.
      • Orange_Welder.10
      • 3 days ago
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      Silver Guitar Hey man, that's great that you get Tax breaks for retirement investing. As should everyone really. Well done also on shifting more into retirement. 

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      • Jay Melv
      • Welding the best Oranges.
      • Orange_Welder.10
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      Matthew Thanks Matthew. 

      Wow it is a lot more different than I thought. Do you get to choose what your retirement account invests in? 

      Would be interested to know predominantly what a retirement account consists of in the states. ie investment makeup. 

      Cheers 

      jason

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 3 days ago
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      Jay Melv Basically, whatever you want.  If it's an individual retirement account outside of an employer, it can be absolutely anywhere, including ones with next-to-no fees.  You can use it to pick risky stocks or whatever floats your boat.  If it's through an employer, choices are usually a bit more limited, but most decent employers realize that employees want attractive low cost options.  American culture in general doesn't like anyone breathing down our neck telling us what to do with our money.  Sometimes it's unavoidable, but at least when it comes to private investing the pendulum is swinging far towards newer, low cost options.

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      • Jay Melv
      • Welding the best Oranges.
      • Orange_Welder.10
      • 3 days ago
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      Annieland 

      That is really really good. Thanks for that. I wish we had that in Aus. 

      While our employer is forced to make contributions to our retirement, it is very difficult to gain control of this money and invest in what you wish. So basically Australian business is forced to prop up this retirement account industry that grows fat off the working people while bragging to their friends about how much money they have under management.   They use that money to take % fees of the money they manage, make 30% off it in good conditions and give you 8% back. Then if the market sucks, you still have all the risk and still pay them a % fee even though they just lost your money. 

      It took me approx 4 months and a lot of paperwork to get my money out and under my control. 

      And still you should see the fees I have to pay, especially if I want to invest in the other markets around the world. 

       

      So if Americans get a tax break and can control their retirement accounts I completely agree with you all to pump more money into this. 

       

      My opinion was solely dependent in the US retirement being similar. 

      Thanks to all. 

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      • Jay Melv
      • Welding the best Oranges.
      • Orange_Welder.10
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      My opinion was solely dependent in the US retirement being *more* similar 

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  • Also, any of us with half a brain consider our future gov't retirement payments as pocket change, if we even get any.  My experience with people from other countries show they have much more confidence in future pensions and gov't support.  That just isn't our current reality and personally, I'm fine with that.  Talk about wanting more control over your money!

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    • Annieland My parents are pretty brainy, and if they heavily discounted their future Social Security payments, they would have to go back to work in their 70s. Being too pessimistic about government retirement support comes with enormous costs for non-high-income households.

      I'm not taking a position one way or the other on the future of Social Security, of course, but planning out your life based on a bad-case scenario is hard, and if you guess wrong, you're probably going to be really upset. I don't know what the right answer is, but what feels right to me is some level of, "Keep an eye on it."

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      • Annieland
      • I was told there would be no math.
      • Annieland
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      Matthew No, I get you.  I really meant more of the "current generation."  I'm not arguing against the importance of social security, it is always calculated in all our retirement forecasters.  I was just tailoring my reply to this younger crop of savers starting out, and comparing to the set-ups in other countries.  I know growing up my parents' retirement plans were heavily focused on their private and government sourced pensions, but that's out the window for most of us now.  

      I also managed my mom's finances for her final 10 years and SS ended up being a drop in the bucket compared to her long-term care needs.  I didn't mean to be obnoxious, just reiterating the same warning to youngsters all the financial blogs do... "Don't put all your eggs in the social security basket!"

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    • Annieland Agreed鈥攖hanks for clarifying.

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  • Jay Melv said:
    Do you get to choose what your retirement account invests in? 

     Kinda sorta. There are personal retirement accounts and employer-sponsored retirement accounts. In the personal accounts, you can pretty much choose any investment a brokerage offers. Employer sponsored accounts generally have a limited lineup of choices based on what is available through the plan provider... the choices can range from completely awesome to "hold your nose" bad.

    My last employer was "hold your nose" bad, but I was only there 4 years and moved my money to an account I had total control over as soon as I left. My current employer options were serviceable, but just last week they were switched out for less expensive really good replacements.

    Like 3
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 3 days ago
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      nolesrule My company has really good custom low cost index funds. If you want, you can also invest 50% of your funds via a Schwab account with most everything that has to offer. They don't allow you to invest in individual stocks however.

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      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
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      Superbone yeah, i wasn't going to get into those brokerage link scenarios. And like I said, they can range from great to "hold your nose" bad. I've had the entire range.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 3 days ago
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      nolesrule So have we.  And that's why I was alluding to the fact that employers are realizing there is a demand now for better investment choices and to attract and retain the best employees, they are improving their offerings.  Woohoo for a competitive marketplace!

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  • @silver_guitar I'm so glad it was useful to you!

    I think @Annieland said on another threat that @nolesrule is on the "Boglehead" forum. Given how much I appreciate his knowledge I thought I would check it out too. It's been a treasure trove. Here it is: https://www.bogleheads.org/

    What happened for me is that 1.5 years into YNAB, I am in so much gazillion times better shape than I ever was, and I have so much control over my money, that suddenly questions about priorities are . . . actually meaningful. 

    I never even knew it was a goal to max my 401k but this year I'm getting close to it and next year I should be there.  So that creates obvious intrinsic motivation to learn about investing. I can't *believe* I am doing and learning all of this. Mind blown every day by how far this budgeting software has taken me. You got so much great perspective here. Good luck to you!

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    • Ivory Storm I'm a Bogleheads fan, too! I don't post often, but I've benefited hugely from their no-nonsense advice.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 2 days ago
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      Matthew Yeah I've only posted when I'm in some serious financial panic (worse than I've ever posted here, believe it or not) and I usually get a string of responses saying basically, Dude, just hire an accountant or lawyer already, geez.

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  • Ivory Storm said:
    I think @Annieland said on another threat

     I have to quit my threatening talk, I know.  Already had a couple terroristic posts removed recently 馃槵馃

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      • Ivory Storm
      • Ivory_Storm.3
      • 3 days ago
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      Annieland HA!

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      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 2 days ago
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      Annieland You also threatened a 鈥渃onfusing and disgruntled journal鈥. Now that is something that I would read.

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      • WordTenor
      • Can we agree that goals are dumb and immature? Sure.
      • WordTenor
      • 2 days ago
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      Annieland #accidentaltruth

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 2 days ago
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      WordTenor Zing! Just don't go through my carry b... I mean, purse.

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      • Annieland
      • I was told there would be no math.
      • Annieland
      • 2 days ago
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      Superbone Haha I'll put a +1 Feature Request on that, along with a SFTF fix.

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  • Ha, nice to read all the old gang's posts.  I'm hardly on here anymore, which just means I'm doing fine and my finances are boring, which is a good thing IMO.  But, I had the same question as the OP awhile ago.  I max out my Roth IRA and I have a 401a at work that I put in 5% and my employee puts in 10%, pre-tax.  I also have access to a 403b (both pre-tax and Roth versions), which I had re-started investing in 1% a quarter until I realized I have to invest $750 in my Roth IRA/month to catch up this year, since I used until the deadline in the summer of 2020 to max out my 2019 Roth IRA (because I was aggressively paying off debt before that).   For me, it would be really hard to max out all my tax advantaged accounts, I'd have to live on a very tight budget.

    I did start a taxable account with Fidelity and put a few hundred $ into the Vanguard total stock market ETF (VTI I believe) in March 2020 because the market was down and I wanted to buy when it was on sale. 

    I also bought some Gamestock stock to give to the cause of screwing over the hedge funds.  I used my causes money.  Yes, that was a YNAB win.  I lost money over it, but I did contribute to the cause, which was the goal of that category, so I think it was a win.  Speaking of which, apparently I need to vote as as Gamestock shareholder.  I've never owned an individual stock before, so this is a first for me.

    I still think I would like to start putting some  % of my long term money for house upgrades and for my next car (10+ years into the future) invested in taxable, but I think getting the full match and maxing out a Roth IRA first is a must before even thinking about that.

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