At least you used the term "many" and not "all" because in general I agree with what you are saying, but "most" people get lost in the "weeds" of this problem when they try to solve this "word problem" in mathematics in the concrete using variables of many different "units" and not even being able to identify the initial starting points and units involved.
In the abstract, you're right, but in the concrete, not so much: there are limits to how much money can be moved into tax-advantaged accounts, and therefore many people *do* have after-tax, non-tax-advantaged money. This isn't magically creating post-tax money in a single step - that can't be done, and I'm not arguing that it is - but it *is* effectively transforming money from post-tax, non-tax-advantaged to post-tax tax-advantaged, which is in and of itself useful.
And converting money to a tax-advantaged account, in the course of time, will produce greater returns because of the lack of tax-drag. So this operation *plus time* does produce larger post-tax returns.
The people I admired in my high school higher mathematics classes were those that boil down a very complex problem to a simple equivalent and get the right answer on a multiple-choice question without even putting pencil to paper. In other words, they were able to simplify it to an equivalent problem that could be done in your head. In my case I was good but not that good, so it has taken me a few years solving at least the simple tax-advantaged problem without introducing outside money to obtain a solid base in the concrete, from many different angles.
Like you say in the real world taxable accounts are involved. In a few cases I have brought taxable accounts into the equation and as long as you remember a taxable account is also made up of pre-tax and post-tax money and essentially a "subset" of a Roth account depending on how you fund it and use it, then you don't get too lost in the weeds.
If you realize after retirement starts and you are into SS and / or pensions, and moving towards RMDs, there really is no need for the taxable account, unless you just like the security of a bigger pile of money, especially in the case where you maxed out your tax-advantaged options along the way, realizing they were the best use of your money in most cases.
What I also realized in the last few years is that there is No need to spend valuable time and in many cases cash to as you say to:
The taxable account is already a "subset" of a Roth account and all you have to do is send its "tax inefficiency" to zero to make it a Roth in your lifetime - realizing it won't be a Roth once it is inherited, or if some real emergency comes along where you need to spend a large chunk of it down.effectively transforming money from post-tax, non-tax-advantaged to post-tax tax-advantaged, which is in and of itself useful.
I realize the above is not easy to solve if you don't start it when the taxable account is small. I am just lucky in that my taxable account came into being shortly after I realized the above fact, so it has always had an extremely small tax footprint.
Statistics: Posted by FinancialDave — Sat Jul 20, 2024 11:33 am — Replies 44 — Views 4715