In contrast to recent conversations, Jesse has determined that a traditional IRA is the better option for most individuals when considering marginal tax rates. Is there something he might be overlooking?
An anonymous caller, four years away from early retirement, is uncertain if her portfolio allocations are appropriately placed. How and when should she begin converting equities to cash?
Luz is unsure about how to manage her company stock options. Is there an ideal difference between the exercise price and the stock price? Additionally, what should she do once she exercises the stocks?
Former financial planner Joe Saul-Sehy and I address these three inquiries in today’s episode.
Enjoy!
P.S. Do you have a question? Feel free to leave it here.
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Jesse inquires (at 01:26 minutes): A few weeks back, a listener named Von called in to discuss the advantages of Roth accounts versus traditional ones. You covered the benefit of being able to contribute more tax-free money into a Roth, considering that both types of accounts have the same annual contribution limits.
I think one aspect that was overlooked is the difference between marginal and effective tax rates. Financial planners Cody Garrett and Sean Mulaney have touched on this subject in interviews with other podcasters, and it has influenced my perspective.
For instance, my effective tax rate in retirement is likely to be significantly lower than my highest marginal tax rate today, which stands at 22 percent—assuming the current tax laws remain unchanged and there are no drastic hikes in future tax rates.
When I analyze the numbers, it appears that contributing to a traditional account is more beneficial for me, as it decreases my tax obligation today by 22 percent, while any extra funds can be placed into a taxable brokerage account.
The gains in the brokerage account would subsequently be taxed at the lower long-term capital gains rates, which, for 2025, are 0 percent for single filers earning up to $48,350 and for married couples earning up to $96,700.
If I were to focus solely on Roth contributions, I would incur my highest marginal tax rate now to have tax-free withdrawals later. That trade-off doesn’t seem as advantageous, particularly for those with high savings rates who plan to live on 60 percent or less of their current income during retirement.
So, what might I be missing? Is there a flaw in my reasoning, or does my strategy hold up?
An anonymous caller asks (at 27:24 minutes): My wife and I are in our mid-40s and about four years away from transitioning to work-optional status. What’s the best approach for asset allocation and timing in the next four years to ensure we’re financially ready for early retirement?
We both work full-time, generating a combined gross income of $150,000, with a net worth of $1.6 million and no debt.
Here’s how our net worth breaks down:
$400,000 in our fully paid-off home,
$900,000 in retirement accounts,
$220,000 in a taxable brokerage account,
$24,000 in HSA accounts (which we max out and don’t use), and
$100,000 in cash (in a high-yield savings account).
We need to build investments outside of retirement accounts to bridge the nine-year gap between when we stop working and when we can access our retirement funds at age 59½. Thus, we've redirected our contributions from Roth IRAs to our taxable brokerage account.
Our plan for the next four years is to keep contributing to our workplace retirement accounts while investing as much as possible in the taxable brokerage account. Assuming an average market return of 8 percent, we believe we’ll be sufficiently prepared to leave our jobs completely.
That said, I might consider part-time work or contracting since I enjoy my job and am concerned about potential boredom. We are currently trying to figure out how to adjust our investment allocations as we approach our work-optional status.
In recent years, we’ve moved our retirement accounts toward the efficient frontier, but how or when should we shift to bonds or increase our cash reserves? What’s the method for determining the right allocations and timing?
Our anticipated spending is between $50,000 and $60,000 annually, adjusted for inflation. We plan to conduct Roth conversions during the early retirement years to manage taxable income and potentially qualify for health insurance subsidies (assuming I am not working part-time).
Furthermore, we have $185,000 in Roth contributions that are accessible if necessary, but we aim to avoid using those until after age 59½.
Luz asks (at 51:27 minutes): I would like guidance on managing stock options and company stock.
Every March, I receive stock options as part of my bonus package. What is the ideal spread between the exercise price and the actual stock price that I should target before exercising the options? Once I exercise them, should I retain the stocks in my brokerage account or sell them?
I also receive restricted stocks that vest
In contrast to recent debates, Jesse has determined that for the majority of individuals, a traditional IRA is the more advantageous option when considering marginal tax rates. Is he overlooking anything?