Roth IRA or 401(k)? Where to invest first with Sean Mullaney / 72

If you’ve spent any time reading personal finance advice, you’ve probably heard the same advice on repeat: max out your Roth IRA. But what if that’s not actually the best move — at least not right now?

In this episode, we sit down with advice-only financial planner Sean Mullaney to challenge some of the most common investing advice out there and replace it with something a little more nuanced — and helpful. We talk about how to think about taxes across your lifetime (not just this year), why traditional retirement accounts deserve more attention, and how small shifts in strategy can make a meaningful difference over time.

✨ Episode Highlights ✨

• [00:00] Meet our guest and why “Roth first” isn’t always the best advice
• [02:00] The two-sentence framework for retirement planning: investing + taxes
• [04:30] Why traditional 401(k)s can be more powerful than Roth accounts
• [08:00] What to do if you don’t have access to a 401(k)
• [12:30] The real order of operations: emergency fund, employer match, then what?
• [15:30] How taxes actually work in retirement (and why they’re often lower)
• [18:30] The “hidden Roth IRA” concept explained in plain English
• [24:30] Capital gains, cost basis, and why your taxable income may be lower than you think
• [28:00] The “compelling three” framework for investing (and how to use it)
• [32:00] Where HSAs fit into your overall investing strategy
• [34:00] The biggest mistake we see in your 20s and 30s — and how to avoid it
• [36:00] Balancing saving for the future with actually enjoying your life now

✨ Resources ✨

Connect with Sean:

• Sean’s book: Tax Planning to and Through Early Retirement 
• Sean’s blog: FITaxGuy.com 
• Sean’s YouTube channel

Listen to The Finance Girlies beginner-friendly investing episodes:

• Why you don’t feel ready to invest (and how to start anyway) / 67
• Health Savings Accounts (HSAs): The incredible financial tool you may be overlooking / 54
• Q&A: Everything you need to know about Roth IRAs / 12

 As Sean mentioned, some capital gains in New Zealand are not subject to tax, but some are. As always, tax rules are nuanced. Learn more in this video and this article.

The discussion is intended for general educational purposes only and is not tax, legal, or investment advice for any individual. Cassidy, Emily, and The Finance Girlies podcast do not endorse Sean Mullaney, Mullaney Financial & Tax, Inc. and their services. 

Transcript

SPEAKER_01 0:00

Hey girlies, welcome back to another podcast episode. Today's guest is Sean Mullaney. He is an advice-only financial planner and the president of Mullaney Financial and Tax Inc. He's also the co-author of Tax Planning to and Through Early Retirement, published in 2025. Sean writes the Plutus Award-winning blog, FITAXGuy.com on the intersection of tax and financial independence, and he also has a personal finance YouTube channel.

SPEAKER_00 0:24

If you're like us, you've heard the advice again and again about why you should invest in a Roth IRA. But in this conversation, Sean explains why it might actually be advantageous to prioritize other accounts. He also gives a really easy-to-follow framework called the Compelling Three, which can help you figure out where to start if you're confused about investing. If you listen to this and find it feels a little advanced, that is okay. We have other episodes about Roth IRAs and getting started investing that are much more beginner-friendly. We will link them below in the show notes. But enjoy this conversation with Sean.

SPEAKER_01 1:10

We are Emily Backdorf and Cassidy Horton, podcast hosts, longtime friends, and finance writers for brands like AOL and Yahoo Finance.

SPEAKER_00 1:18

Rather than giving you prescriptive advice, we talk about money the way friends actually do. With stories, questions, and a lot of figuring it out in real time. And as a reminder, this episode is brought to you by us. We have no sponsors, so if you want to support the Finance Girlies and earn our undying love and eternal appreciation, you can become an insider. For just$5 a month, or basically$1.25 a week, you'll help us keep the podcast ad-free. And you'll get one insiders only episode every month. We'll put a link to become an insider in the show notes. Sean, thank you so much for joining us today for this episode of The Finance Girlies. Can we start by having you summarize your approach to retirement planning in one sentence?

SPEAKER_02 2:01

So, Emily, thanks so much for having me. I'm gonna cheat on this one. I'm gonna give you two sentences. So the first sentence is buy diversified financial assets. Over the long term, and especially for your audience, right, many of whom might be in their 20s, 30s, 40s, they've got a long time to be thinking about this stuff. And there's no period I'm aware of in modern history where over five, six decades, which could easily be the horizon that your listeners are looking at, where those who acquired financial assets did poorly. Diversification is really important. Keeping fees low is important. And just buying these financial assets tends to work out over long periods of time. And frankly, even over short periods of time, even if the markets collapse, these diversified financial assets just tend to benefit you even in down markets, by the way. So that's the first sentence by diversified financial assets. The second moves into the tax planning, which is pay tax when you pay less tax. And it turns out that most Americans, even most affluent Americans, tend to pay less tax in retirement, which gives us a little bit of a purr, a little bit of a nugget there, right? When you have a tax deduction on the table while you're working, which tends to be for most of the listeners, the highest income years, isn't that a great time to get a tax cut, which is something like a traditional 401k contribution? Now there might be years, for example, maybe the year you graduate grad school, you work for three months at the end of the year, fine. Maybe that's going to be a low income year for you. But for most folks, it turns out that when we're working, we're at our highest tax. It's just the way the federal uh tax rules work. So that's a really good time to think about not paying tax, i.e., maybe saving for retirement with a 401k contribution that's into the traditional 401k. And then in retirement, most Americans, even most affluent Americans, are going to find their tax rate tends to drop. There's a variety of reasons for that we can go into later on in the conversations. That would be my second sentence. I'm cheating on this answer, of course. Pay tax when you pay less tax.

SPEAKER_01 4:06

This really tees us up for my next question, which is that we hear people talking about Roth, like Roth, Roth, Roth all the time online. Can you break down why that advice might not be right for everyone? Because Emily and I are both freelance writers. We're financial services companies. And I was, this is probably like 2021, making$140,000 a year, still maxing out my Roth IRA first before anything else, because I that was like the advice that I was getting. And it wasn't until I pivoted to maxing out like accounts that gave me a tax break now that I really saw my tax bill go down. And I was like, hmm, this advice is so popular and also was not the correct advice for me. So I want you to speak to that.

SPEAKER_02 4:52

Yes. So let's start off some fundamental ground rules. Remember my first sentence buy diversified financial assets. Having a traditional retirement account is a good thing. Having a Roth retirement account is a good thing. Having more amounts in both of those is a good thing. Okay, so that's a basic predicate. But now let's think about a little bit of optimization here. You hear this Roth, Roth, Roth, and they bring up, well, Roth is great because you don't have to pay tax on it. What they fail to mention is you might not pay all that much tax on the traditional, even in retirement. What happens is when we're working, our income is what we're taxed on. So if we get a December bonus, regardless of whether we spend it in December and we probably can't just practically, that's our income. Our spending is not a floor, uh, a break on our taxable income. In retirement, our spending itself tends to be a break on our taxable income. Even if everything's in a traditional retirement account, our taxable income can only go as high as our spending. And it turns out when we're working, most of us, especially those in your community that are paying some attention are like, I'm I'm saving for one day. So that means your spending is by definition lower than your income because some piece of your income, 5%, 10%, 15%, maybe 20 or 30%, some piece of your income went into these retirement accounts or other savings. So that means when you're retired, your income is going to be lower, generally speaking, than when you were working because there's no December bonus to worry about, because your spending is a natural break on your taxable income. And so Roth has its place. But I would argue for most Americans, the place of the Roth is not to re to crowd out the best tax deduction you might ever have, which is generally speaking, for most in the audience, a traditional 4K contribution. Because that's going to be during your working years. It goes against your highest rate. And it might be that that's just an incredible tax deduction. But where does Roth have its place for most potentially in the audience? Maybe where we don't have a tax deduction available. That's part of the reason I like the Roth IRA when we're at home. Right at work, we have a traditional 401k. So I like to start off thinking about traditional 401k, getting a bunch of money in there. And then at home, for our additional savings, let's do a Roth IRA. Because the alternative would have been a taxable account. Not that a taxable account is a bad thing, far from it, but often at home, we can't deduct into that traditional IRA based on the rules. So a Roth IRA is a better landing spot, in my opinion, than a taxable account, just because the investments do generate some income every year, and that has to go on our tax return unless it's in a Roth IRA. So a Roth IRA has its place, has its role, but boy, these traditional retirement accounts give us tax deductions when we need them the most, when we're working and we haven't built up our financial wealth as much. And it turns out, and I've done a lot of YouTube videos on this, in retirement, they tend not to be high taxed. It tends to be that in retirement, they go back up against the standard deduction, 10% bracket, 12% bracket. We have progressive federal tax rates in this country, and we now have a very high standard deduction. That combination makes it that these traditional retirement accounts, even for affluent retirees, tend to be relatively lightly taxed. Now, is that universally 100% true? No, if you have 20 million in an IRA, yeah, you're gonna pay a bunch of tax. It's actually gonna be a good problem to have, but yeah, you'll be tax inefficient, but you'll be very rich. And yeah, you'll lose it on the spreadsheet when it comes to your tax uh efficiency, and that's okay too.

SPEAKER_00 8:34

I want to ask you more about how taxes work in retirement, but before we get there, just kind of backing up to something you said, what would you say to somebody who doesn't have access to a 401k through their employer?

SPEAKER_02 8:46

Excellent question, Emily. So for that person, I think there are sort of three paths available. All right. The first path applies only if you're married. Does your spouse have a traditional 401k? Because that could be for the couple, that could be the prioritization. You say, okay, you know, one spouse has no workplace retirement plan, but the other one does. Great. Let's max out for the spouse that has it. So that's the first path. Second path would be a potentially a deductible traditional IRA contribution. So what happens is let's let's make it a single person to make it easy. Single person has uh W-2 income, but that employer or employers have no 401k, so they're or 403B, 457, anything like that, and no pension. So there's no workplace retirement plan. Well, the rules are favorable to this person, this single person, because it says that person could make a million dollars, a billion dollars. They still get to deduct their traditional IRA contribution. It actually makes sense if you think about it, right? They don't have that ability at work like many Americans do. So they get to deduct into a traditional IRA regardless of their income level. So that would be the second path I would think about. And the rules get a little complicated, but maybe you have one spouse with no workplace coverage, one space spouse with workplace coverage in a 401k or similar plan. Okay, great. Maybe the uncovered spouse could deduct into a traditional IRA. You have to look at your numbers and that year's particular rules. Okay, so that's the second path, though, potentially a deductible traditional IRA contribution. And then the third path is this so-called taxable account, just in your own name or jointly with your spouse. Could even throw this into a revocable living trust if you're thinking about some estate planning concerns, just invest into taxable brokerage accounts. And this isn't that bad at all in today's environment. So you guys are way too young to remember this, but it used to be that yields, so that's a fancy term for the dividend or interest that a financial asset pays, yields used to be much, much higher. In the early 1980s, I don't remember this, but I was alive for it. Uh, we had treasury yields over 10%. The S P 500 itself paid over 5% in dividends. So if you owned, say,$100,000 of the S P 500 back in 1981, that was going to show up as$5,000 of dividend income on your tax return. Well, where are yields today? They're not that high. I haven't looked up treasury bills any anytime recently, but you know, say you had a bond fund, maybe you're getting three, four, five percent tops, and then your stock portfolio, if it's like a domestic equity index fund, as we record this in mid-April 2026, it's yielding something like 1.2%. So if you had a million dollars, you'd get about$12,000 of dividends, not enough to buy a new car. Think about that. You could have a million dollars and it kicks out 12,000 of dividends, and that has to go on your tax return. And then you have these favored capital gains rates. So that would be the third path, would be contribute to a taxable account, and you say, Oh, that's taxable. Yeah, but in a low-yield world and we have qualified dividend rates, it's actually not so bad. So, my three paths, if we were not covered at work, are look to your spouse and if they're covered at work, potential deductible traditional IRA contribution, and then contribute to a taxable brokerage account. And by the way, two and three can, and maybe even one and two and three can be all combined together.

SPEAKER_01 12:20

It sounds like, and of course, this is not blanket advice or anything like that, but if you do have access to your traditional K or some type of traditional account, to like max that out first, and then if you still have money that you want to contribute, do a Roth IRA versus like if your only choice is to do a Roth IRA or a taxable account, like it would still be encouraged to go the Roth IRA route because you're at least getting some tax deduction, even if it's on the back end for a tax benefit.

SPEAKER_02 12:47

Cassidy, great question. And there's no perfect answer. I will say this most Americans, especially most younger Americans, need at least some emergency savings. So that could be like an online savings account, money market fund, this sort of thing. And, you know, before we just max out our traditional K, we ought to have at least some protection from an online savings, you know, some sort of cash holding. You do you in terms of that, um, in terms of size. I I tend to be, I sort of tend to disfavor cash, but I do acknowledge that most Americans, especially most younger Americans, need at least some in an emergency fund. And you got to sort of do you in terms of the size and scale of that uh fund. So that's the first thing. Second thing is traditional 401k to the employer match. So many employers say, hey, if you put in, you know, five cents of your five cents on the dollar, five percent of your paycheck. That's just an example. It could be three percent, it could be two percent, it could be six percent. Pick out your percentage. They will match, you know, it could be 50 cents on the dollar, 25 cents on the dollar, 100 cents on the dollar, it could be a one-to-one. You have to capture that employer match, generally speaking. That's free money. And there is something called vesting. You don't get it if you don't stay that long. I would argue you don't really need to worry that much about vesting because if you're not contributing to that small level, are you ever going to be able to retire? That's the question. So just, you know, make sure you're contributing to at least capture the employer match. Then a lot of folks will say, well, then go to the Roth IRA. I say, I don't know about that because you're leaving on the table a very valuable tax deduction. Is it shameful to go to the Roth IRA in that situation? Of course not. But I think for many Americans, the optimization play might be to keep going to the traditional and get the tax deduction. Now, if the investments aren't good in the plan, maybe no, okay, I'm gonna do a Roth IRA because it does have some favorable tax attributes, and maybe the investments and the fees are lower. So that could be a reason to go to the Roth IRA. And I like the what I refer to as the compelling three, right? Traditional 401k at work, Roth IRA at home. And then especially for those in the audience who are thinking about an earlier retirement, the taxable account. Do all three of them if you can, to at least to some degree. Because I will say this, as much as I like the traditional 401k, if that's the only thing you're doing, even if you max it out, it's gonna be hard to early retire. Now, yeah, if you want to conventionally retire, that's probably gonna be enough for most Americans. You add that to Social Security, you're probably there uh for a conventional retirement. But if you're thinking about an early retirement, almost certainly you got to be doing additional pots. So Roth IRA comes in into the picture, taxable brokerage account then comes into the picture as well.

SPEAKER_00 15:26

Anytime I hear the advice about capturing the employer match, I just I wish so much that I had that option. Uh there are perks to self-employment, but an employer match is not exactly one of them. So let's get back to talking about taxes in retirement. And you've touched on this with some of your previous answers, but can you kind of talk a little bit more about what most people misunderstand about how taxes work in retirement?

SPEAKER_02 15:52

Great question. So in retirement, two things tend to happen. The first thing in the first part of retirement, particularly for the early retiree, is you tend to live mostly off taxable brokerage account assets. So like a mutual fund that's sitting in a taxable account. Okay. Well, what happens there? Say you're spending$100,000 a year. So you go into your brokerage account, you find ABC mutual fund, and you sell it. Well, what's your taxable income on that transaction? Well, it's not$100,000. It's$100,000 less your what we call on tax basis, your historic cost for that investment. So you invested$30,000,$40,000,$50,000 to get that investment, and then it grew to the$100,000 and then you sold it. So say your basis is$40,000. You're living on$100,000, but your income is only$60,000. And it gets even better. Not only do we get basis recovery, which helps us in the first part of our retirement, generally speaking, we also get favored long-term capital gains rates. And in fact, if that was your only income,$60,000, and you're a married couple, you don't pay any federal income tax on that. Because we have something called the 0% long-term capital gains rate, which applies, I believe, in 2026 through taxable income, which includes the standard deduction, through taxable income of$98,900, if I've got my number for 2026 correctly, for a married filing joint couple, if if if their capital gain doesn't exceed that level in terms of all their income, you have to add interest income, social security that's taxable, anything like that. But if all their income doesn't exceed that 98,900 of taxable income, they pay 0% long-term capital gains rate. Well, if almost all your income is long-term capital gains and you're below that 98,9 uh 98,900, that married filing joint couple doesn't pay a penny of federal income tax. That's very powerful. So that's the first piece that makes taxes and retirement sort of an opportunity, not a problem. And that's by the way, an argument to do more traditional work, and then that can clear out there's tax savings up front. Well, then throw that in a taxable account, which could then be a 0% taxed account at the beginning of your retirement. So that's the first thing. But then you say, well, Sean, we're gonna run out of these taxable brokerage accounts, right? Eventually, we can't be retired forever and just have infinite taxable brokerage accounts. Well, okay, that's fine. Then, you know, you're probably gonna go to these traditional IRAs and you say, oh boy, but that's taxable. Well, to start, it might not be all that taxable. So what I mean by that is say you are under 70 years old and you haven't started collecting your Social Security. So you're just living, you maybe you have it some interest income on that emergency savings account. Well, that's not gonna be that much money, but let's call it$2,000. Okay. And then you've depleted your taxable accounts. So now you're living on your traditional IRA. Well, if you if you're a married couple and you're both under 65, say you're retired, you're you're 63 years old, and wife, each are 63 years old. They've got a they get a$32,200 standard deduction this year. Well, the first$2,000 goes against that interest income. Okay, but then you still have$30,200 of standard deduction that would shield from taxation the first$30,200 from the traditional IRA. I actually have a pet name for that phenomenon. It's called the hidden Roth IRA. You take money from a retirement account, a traditional IRA, and that's quote unquote taxable, but then the standard deduction steps in and says, not so fast, Uncle Sam. You're not IRS, you're not getting a penny of this. It's 0%. I call that the hidden Roth IRA. It looks like a Roth IRA, but it's hidden inside a traditional IRA. So that's the first piece. And then you say, well, wait a minute. Now I'm going into the 10% bracket because I took more than$30,200. And that's fair, but for another almost$25,000, it's taxed just at 10%. And then we go into the 12% bracket, which is pretty wide. That goes up to about$100,000 of taxable income. So we only start hitting the uh 22% bracket well into six figures of income. And it's going back through these progressive tax brackets that helps alleviate the taxes in retirement. Now, yes, eventually we'll collect Social Security, that will take out the standard deduction, maybe the 10% bracket, but we then start at 12%. We got to go back through that bracket and then 22%. And by the way, our spending is going to be the natural ceiling on that. So it turns out our taxes in retirement in today's environment that has a very high standard deduction. I think in today's environment, retirees tend to be lightly taxed. And retirees are the biggest beneficiary, in my opinion, about new higher standard deduction, because most retirees don't itemize their deductions anyway. They've paid off their home. There's no mortgage interest there. You know, they might have some high property taxes. The other one's charitable contributions, but you can do that from your IRA even better. So a lot of folks, when they're 70 and a half and older, go into their traditional IRA and they make they call it a qualified charitable distribution. For those in the audience who are charitably inclined, it's another reason to contribute to traditional retirement accounts, not Roth, because what you can do is you can take the money out of the IRA, you send it directly to the charity, not to you, and it's excluded from your income, which is very powerful. So then you marry a high standard deduction with this exclusion from income. You know, look, if you're not charitably inclined, it's not a reason to contribute to a traditional retirement account. But if you are charitably inclined and believe in your 70s and 80s, you want to give to charities, your church or whatever it might be, then absolutely it's a great advantage to the traditional retirement account. And in today's high standard deduction environment, it's very powerful.

SPEAKER_01 21:39

I have never thought about how you are taxed in retirement. And you have painted such a crystal clear picture of the the advice that I've heard from other people before, which is like, you might be in a lower tax bracket than you think you might be in retirement. You know, and you like hear that advice and you think, okay, but I feel like you just walking us through the standard deduction. And the capital gains and like all of this stuff, and then also just like moving up through the regular tax brackets. I feel like I'm learning so much.

SPEAKER_02 22:08

Yeah, you know, it's funny how taxes are opaque. And you know, the other thing about it is there's a million tax rules. And do you think I know all those millions of tax rules? Heck no. But the way I try to look at taxes is yes, we have to respect the rules. But it's what we're really looking to do is look at this from a planning perspective. How would I plan out against the system? One of the nice things about retirement for many Americans is the tax return is not all that complicated, right? Because maybe you have a taxable brokerage account, all right, a 1099 DIV, something called a 1099 uh-B, that's for capital gains. You sold some you know mutual funds or whatever. Um, and then, you know, you get 1099 R for your IRA distributions or any Roth conversions. You get a 1099, I think it's uh SSA for your Social Security income, and maybe some charitable contributions, and that's it, right? There's complexity in terms of, well, you could have all these different rates apply, but from a planning perspective, it's like, wait a minute, this boils down to a place where most retirees tend not to pay a lot in tax. And you say, well, why is that? And I think there's that could be its own podcast season, but I'm gonna give you one little nugget. Uh, the 2024 election, not that long ago, but you know, okay, 2024 election. Uh, there was a stat that I found in my research. According to, I think it's called PRRI, they claimed that of the 2024 electorate, 58% of the electorate was age 50 or higher. It's like, whoa, boy, that's revelatory. So that means that almost three-fifths of the electorate in 2024 was either retired or had their eyes on the prize. And that, it's like, wait a minute, now I'm starting to understand why perhaps retirees are relatively lightly taxed. Turns out retirees and those close to retirement tend to vote in higher proportion than those who might be a little younger. That is what it is. I'm not here to make any political commentary. It just sort of is what it is, and that incentivizes the politicians perhaps to be more gentle when it comes to retiree taxation.

SPEAKER_00 24:14

Um the piece that I didn't realize and maybe had never heard of that you just mentioned was I forget what you called it, but your example was putting forty thousand dollars into a brokerage account, ending up with a hundred thousand dollars, and then your income is the sixty thousand dollars, not a hundred thousand dollars.

SPEAKER_02 24:36

Can you yes, yes, so this is just capital gains, right? So when we sell assets and we have gains, they're reported on the tax return. And for the vast majority of assets, including all all the financial the common financial assets like stocks, bonds, mutual funds, ETFs, it says, okay, you know, this is called capital gain income. And assuming you've hold held it for more than one year, which you know, most as most retirees are gonna have that, or at least if they have it, they're gonna have held it for or most of it for at least a year. Then it's called a long-term capital gain. And it's segregated as a separate class of income for our tax system. And what that means is it has its own distinct tax brackets. It's you apply the tax brackets based on where it fits in the capital gains tax brackets after you apply all the ordinary income. So capital gains is sort of taxed on top, but even so, what tends to happen is if you're in retirement, especially the first part of retirement and you're living off long-term capital gains, you might not have much ordinary income at all. So you could even have a situation where some of that ordinary or some of that long-term capital gain is just sheltered by the standard deduction. That happens uh to some people. Once we're taking Social Security, generally that's not gonna happen. But prior to Social Security, and you might delay all the way to 870, you could get that. You could get some of that capital gain could just be sheltered by the standard deduction. But then you have three different tax brackets once we're beyond the standard deduction. The first tax bracket is zero, and then there's a 15% bracket and a 20% bracket. And you say, why is there a zero percent long-term capital gains bracket? Well, I'll give you sort of two reasons that this sort of exists in the world. One is we do want to encourage retail investors to build up financial wealth. We want to encourage participation in the financial markets. Uh, the tax code tends to love financial assets, tends to love stock prices. And so that's a piece of it. And by the way, there is this argument. And I was listening to a podcast last year, a woman from New Zealand was talking about their tax system. They don't even tax capital gains. They sort of say, well, wait a minute, you invested after tax money into that brokerage account. So we're gonna stop taxing the gains on that. So in New Zealand, my understanding is based on this podcast episode, I could send you a link for the show notes if you're interested. In New Zealand, they don't even tax capital gains. And I believe there's other countries that do the same thing. So in America, we almost have a hybrid approach. We sort of acknowledge, well, wait a minute, it was after tax money that went in there. So maybe some of it should come out at zero. And then by the way, it only goes up to 15% after that, and it's just the next amount. So say your capital gains was 150 or 175 for the year. Well, most of it, if if that's your only income, most of it's gonna go against 0%, and then some of it will go against 15%. So your effective rate sort of blending it all together will be like, you know, 3%, 5% won't be bad at all. So living on these capital gains can be very powerful and can help the early retiree, particularly, because you can use this basis recovery mechanism to control your income and you can keep in that 0% bracket, and now you're you're cooking with gas. And maybe if you live in a state with a state income tax, you might pay a little state income tax, but it's not going to be that bad.

SPEAKER_01 28:04

You have already briefly mentioned the compelling three framework, but this is also a new concept to me and Emily. And we would love to hear you break down this framework more in like a really simple, real-life way. Like how, how is it so compelling for someone who's in our audience, for example, who's like maybe 20 in their 20s and 30s, maybe thinking about retiring early.

SPEAKER_02 28:26

All right. So the compelling three are traditional K or other workplace retirement accounts. So traditional there, Roth IRA at home, and then taxable accounts. Those are the compelling three because people worry about what do I invest in? Well, I would say if we're going to start out in our 20s or early 30s, let's start there and we get think about some other things in the world, but those are really the compelling three to my mind. And why are they so compelling? One on the traditional workplace retirement accounts, you get a tax deduction when you most need it before you've built up your financial wealth and when you're likely paying some of the highest taxes, if not the highest taxes of your lifetime. So that's very helpful. So then, second is Roth IRA. Roth IRA, all right, you don't get a tax deduction up front, but you do avoid future taxation. It's a bit of a hedge play because you say I could go into retirement with, yeah, traditional 401k, but also some tax-free assets in retirement. So that is pretty compelling to me as well. By the way, the Roth IRA can also be used as a backdoor emergency fund because your contribution, your annual contributions can come out anytime, any reason, tax and penalty free. Generally speaking, you don't want to do that while you're working, but if you had to, just a good feature. And then the third one is the taxable brokerage account, which I think is pretty compelling because the tax treatment of these taxable accounts in the first part of retirement, where we don't have much other money or much other income, is very good and very compelling in my mind. That taxable account sort of sets you up for these potentially low tax or no tax years in the first part of retirement, particularly in early retirement. So the compelling three are pretty compelling to me. That said, I want to add something here. The compelling three are not the mandatory three. So what I mean by that are first of all, the Roth IRA didn't exist to the year 1998. All right, so let's think about that for a second. So were there people in the early 90s, late 80s who achieve financial success, retirement in a world that didn't even have the Roth? Yes. That I think to my mind just proves like the Roth is great, you know, for its in its uses potentially, but it's not necessary because you can get to financial success, early retirement, financial independence, whatever you want to define it as, regardless of whether or not you have a Roth IRA, but it can be very helpful. And even, you know, the traditional retirement account, even the taxable account, there are situations where there are retirees who get to retirement maybe because their 4K just did really well. And that's the lion's share of the assets. I would argue that person can even, you know, be able to early retiree as long as they've met their sufficiency needs. And maybe they don't have that much in a Roth IRA, maybe they don't have that much in a brokerage account. They could still have financial success. And there are things to do. You know, people worry about, oh, it's a traditional IRA or traditional 401k, but I'm not 59 and a half yet. That's a tax age that matters for this 10% penalty. But it turns out there are plenty of workarounds around that 10% uh early withdrawal penalty. So anyway, so I would say that the compelling three are very compelling, but they're not mandatory. You're gonna need probably at least one of the three and better two of the three, certainly better three of the three, but you can get there different ways. But I think the compelling three are a great way to start, especially in our 20s and early 30s.

SPEAKER_01 31:48

I feel like I accidentally set these up in my late 20s because I had my Roth IRA, which I was already maxing out, and then I was self-employed and was so hung up on the fact that like I wasn't sure which, like if I wanted a solo 401k or a SEP IRA. So for probably a year and a half, I was just investing in a brokerage account once I maxed out my Roth IRA, just because I kept delaying the decision of like you just need to pick some type of self-employed retirement account and go with it. And then once I picked a solo 401k, then pivoted to like maxing that out instead. But now I inadvertently have all three purely just because I like didn't know what to do.

SPEAKER_00 32:26

But we have done an episode at least one on health savings accounts, HSAs. And I use one, Kesty. I know you've used them in the past or you might use them now. Where would you say that fits in? Just kind of on a very broad, high, high level.

SPEAKER_02 32:42

Great question, Emily. I start with a HSA, a health savings account is another good thing to have in the world. And if you've got an HSA balance, that's a good thing. I don't view it as compelling as the compelling three, but it can absolutely play a role. So health savings accounts are associated with high deductible health plans. Not everybody has access to a high deductible health plan as their uh only means of medical insurance. It may not be the right fit for everyone in the audience. I tend to like them though, and I like HSAs. I don't find them quite as compelling as the compelling three, just because it's a little more restricted in terms of our use. One of the nice things about the HSA is there's no time limit on reimbursements. So maybe in your big surgery and it costs a lot of money out of pocket. Save the receipts in your 60s or your 70s. You could just take a tax for your reimbursement for that, and you could do whatever you want with that reimbursement. It could be a trip to Vegas, but it was a reimbursement from the HSA for this old surgery from 20 years ago because you paid for that out of your checkbook checking account or you put it on your hotel credit card or whatever it might be. So I think HSAs are great. I just don't find them quite as compelling as the compelling three.

SPEAKER_00 33:58

I think having the compelling three is a really helpful framework because, as you said, like sometimes people are just confused about where to start. And like there are so many options out there sometimes that it just feels like having those three as a kind of North Star, I think, would will be helpful for a lot of people. Let's switch gears a little bit. What is one mistake that you see people in their 20s and 30s make when it comes to either taxes or saving for retirement?

SPEAKER_02 34:27

The biggest thing is not starting. You know, sometimes when you look at some of the personal finance content, you'll see this concern about, oh, taxes and retirement are going to be terrible and you better do Roth conversions and all this sort of jazz. And I say, wait a minute. If we're looking at the financial problems of retirement, it's not taxation, it's sufficiency. Look at median stats in terms of wealth. The big thing is just get started. And maybe the compelling three can help, you know, give you some educational insight in that journey. But the big thing is just start acquiring these financial assets, especially the diversified low-cost assets. I tend to like what are called index funds. Get started. I think too many people in their 20s and 30s just don't spend enough of time thinking about, well, wait a minute, wouldn't it be good if I had some financial stability? And the best way to get financial stability is to get these financial assets. So whatever excess you got from your paycheck, start thinking about hey, is there a way I could put that to work for me in a financial asset that's low cost, that's diversified? And yeah, maybe it'd be best in a traditional 401k. But even if you're not optimizing for that, just get started and start buying these financial assets.

SPEAKER_01 35:39

Yeah, I do think so many times the fear of doing it wrong can keep people stuck and prevent them from actually starting to invest or say for retirement for the first time. But I also have found that it's such a good reminder to be like, there are lots of ways to do it. And even in my case, looking back, I'm like, you invested a lot of money into a brokerage account before you ever opened up like a solo 401k. And a lot of experts could look at that and be like, you did that wrong. But also, like I was still investing, right? And that's like better than nothing. And so I think it's just important to remember that like starting period, like you can always adjust your strategy. You can always change things down the road. Nothing is set in stone, but like picking a direction and just going with it is so important at the end of the day, especially when you're young and you do have so much time on your side. Okay. Moving on to the next question. How do you personally think about balancing investing for the future versus actually enjoying your life right now?

SPEAKER_02 36:36

How do I balance living for today versus saving for tomorrow? Well, one, I do think there's this issue about experiences versus stuff. And, you know, I've actually been through some moves recently for people I know, and stuff holds you back. So think about this, right? All the knickknacks, all that stuff is either one day when you guys move, you gotta deal with it. You gotta make a decision about do you take it with you when you get to the new place? Where does it go? The stuff is a burden. My goodness, the stuff weighs you down, and you're gonna find as you get older, like I am, it's not really worth that much. You need like a table and you need a couch and probably a TV and a dining room table, but you don't need as much stuff as you might think you do. So I would bias towards experiences and away from the stuff. You know, when you buy, and I'd also bias a little bit towards the financial assets. Now, that doesn't mean be miserly. You gotta live your life and enjoy some experiences while you're both, you know, if you're married while you're both still here. But think about when you move, right? All your stuff is an anchor. It weighs you down versus you move and you have these financial assets. No, I gotta go to fidelity.com and do a change of address uh form because I bought some mutual funds with them. What a terrible outcome, right? Moving with financial assets is incredibly easy. Moving with the stuff can be quite a headache. And it's uh, you know, it's delayed decisions. If you move, it's decisions you gotta make in the future. What when you die? Now your loved one's gotta make a decision. Like, do we keep this? Do we throw it away? How do we throw it away? The whole bit. So I would say, you know, try to bias towards the experiences and away from the stuff. And then yeah, build up some of those financial assets while you're at it as well.

SPEAKER_01 38:20

My family, specifically my mom's side of the family, they have inherited like great grandmother's things, two grandmothers' things, to you, and it's just like my mom has so many people's things at this point, and I'm like, you should just get rid of all of this stuff, but also because it was like a family member saying, and then it was a family member saying. It's so much, so much.

SPEAKER_00 38:41

Yeah. Both of us have moved within the last year, and so we we feel that deeply.

SPEAKER_01 38:47

For anyone who's listening who wants to learn more about you, your book, anything. Is there anything that you want to plug?

SPEAKER_02 38:54

Thanks so much, Cassidy. Uh, the book is called Tax Planning To and Through Early Retirement. I co-wrote it with Cody Garrett, who's a financial planner in Texas. Uh, that's on Amazon, Barnes Noble, where you commonly get books online. So there's that. And then my blog is sort of my internet home, fytaxguy.com, fi taxguy.com. I put my bio up there, link to my LinkedIn page, and then roughly once a month, it sort of depends. I post articles about tax planning topics, about how tax and financial independence intersect. And so you can find me there. I do have a little YouTube channel. Uh, I have it's Sean Mulaney videos, just put that in the search bar on YouTube.

SPEAKER_00 39:34

Yeah, we will put them all in the show notes too. Yes. All of your links.

SPEAKER_02 39:37

Cassidy Emily, thanks so much for having me. Really enjoyed the conversation.

SPEAKER_00 39:43

That's a wrap on another episode of the Finance Girlies podcast. Nothing in this episode is meant to be taken as financial advice.

SPEAKER_01 39:50

Please do your own research and talk to a professional if you need advice. If you like this episode, consider leaving a review. Better yet, send the show to a friend who might enjoy it too. Love ya. Bye. Nailed it.