How to Pick The Right Retirement Accounts

The Silicon Valley Investors Club is excited to have Kartik Kaipa join us for a talk about Retirement accounts. He is a software engineer at Google, working in the Bay area.

Saving for retirement and old age is one of the most important things you have to do. There are no pensions anymore. Social security is NOT enough to enjoy the standard of living you are used to. If you want to avoid returning to the workforce when you are old and might no longer have the skills needed in a changing world, you better save for retirement.

Saving for retirement could mean the difference between lounging around at the beach or working a crappy job to get by. 

In my last post, I provided you with a guide on how to build wealth. In this post, I will explain the various types of retirement accounts. By the end of this post, you will have learned:

  • What taxes are and how they work
  • The various types of retirement accounts
  • How to optimally save for retirement


What are taxes?

“In this world nothing can be said to be certain, except death and taxes” is an oft repeated quote. The conventional view of taxes is to say that they are used for the running of government and to fund public projects. However, this is not the whole story. Viewed in another light, taxes are really a system of incentives that the government provides around stuff they want to get done.

For example, with the mortgage tax deduction, the government is incentivizing home ownership and real estate investments. By not having taxes on home sales under certain conditions, the government is incentivizing folks to move and buy more expensive homes as they get older.

Capital gains tax rates are lower than income tax rates because the government wants people to invest for the long term.

We can debate all day long about how just or correct these tax policies may be. However, at this point, it is what it is so all you can really do is respond to the incentives that are given to you.

In a similar vein, the government doesn’t want you to depend on it in your old age, and so it has provided a system of incentives around making sure you have a nest egg when you are old.

Want to become a better investor? Visit our library for the best books on investing. 


Retirement Accounts: How does the government incentivize retirement savings?

The government incentivizes retirement savings via four special types of retirement accounts.

  • Traditional 401k: 
    1. Funded with Pre-tax dollars. So, if you make let’s say $100, instead of paying income taxes on the full $100, you can contribute $20 to a 401k and only have income taxes applied to the remaining $80. This is a super simplification.
    2. An employer-provided account. Put your money in tax-free today and pay taxes on the gains when you withdraw your capital as you grow older.
    3. Companies may choose to match your contributions with some of their own capital. This is the closest thing you will get to a risk-free return. So, if your employer offers you a 10% match for every dollar invested, you are earning a risk-free return of 10%. Truly a great deal!
  • Traditional IRA: 
    1. Pre-tax dollars.
    2. An account you open. Put your money in tax-free today and pay taxes on the gains when you withdraw your capital as you grow older.
    3. This account is not tied to your employer, so you have complete freedom to decide where to open this account and which funds you pick to invest in.
    4. Note that for most readers of this blog traditional IRAs are going to be funded by post tax contributions as you will exceed the income threshold for claiming a deduction. You are better off rolling a Traditional IRA into a Roth IRA.
  • Roth 401k:
    1. Post-tax dollars. Going back to our $100 example, you would pay income taxes on the $100, and what’s leftover, you can invest in a Roth 401k up to a cap, and the earnings on your investment will grow tax-free.
    2. An employer-provided account. Put post-tax money in today and pay no taxes when withdrawing.
  • Roth IRA:
    1. Post tax dollars.
    2. An account you open. Put post-tax money in today and pay no taxes when withdrawing.
    3. People have done some clever stuff with these. See Mitt Rommney’s Roth IRA account.
    4. We also have a great SVIC article on how you can use your ROTH to minimize your taxes when you invest in startups

Related Article: SVIC Guide: How to Invest In Startups With Angel Syndicates

Note that with retirement accounts your contributions are taxed exactly once

  1. Either at withdrawal time or at contribution time.

For your normal accounts, taxation happens twice due to:

  1. You are investing post-tax money.
  2. And, you will pay taxes on capital gains.

Thus, retirement accounts save you a lot of money by avoiding double taxation.

Hypothetically, if you were to make the same income throughout your life and the tax code doesn’t change, both types of accounts will give you identical returns. However, most people are going to see earnings go to near zero when they retire. Thus, it makes sense to put away pre-tax dollars now and reduce taxes as much as possible in the present. If you have more funds left over after that, put those to work in post-tax retirement accounts. This way you get both pre-tax and post-tax diversification.

Related Article: Building Wealth with Index Funds, Angel Investing, and Venture Capital


The optimal strategy for most readers of this blog

It can be difficult to write a “one size fits all” investment strategy, especially for retirement accounts. 

At the Silicon Valley Investors Club we have decided to focus on STEM employees. 

The following advice assumes you make at least $100k+ per year, are early in your career, and have minimal obligations, and have the potential to make more money as your career progresses. 

The goal is to start retirement savings as soon as possible so you can take advantage of compounding

  1. Max out your traditional 401k and get the company match ($19.5k pre-tax dollars)
    1. The company match is free money. In addition, you can almost safely bet that your income is going to lower at the time of retirement than when you are working. So minimizing your tax burden now makes sense.
  2. Backdoor Roth IRA: Contribute to a traditional IRA up to the annual limit and roll over to Roth IRA ($6k post-tax dollars in 2020/2021)
    1. For most readers of this blog, you are NOT going to be eligible to 
      1. Contribute to a Roth IRA.
      2. Claim a tax deduction on whatever you contribute to a traditional IRA .
    2. However, there is a backdoor. You can contribute to a traditional IRA account and then rollover into Roth IRA immediately.  
      1. Most brokerages support this.
      2. Rollover to Roth IRA as soon as possible because if you keep the money in your traditional IRA you will be taxed twice. You already put in post-tax income and you will pay taxes on any gains too.
    3. Find a detailed guide on traditional vs Roth IRA on the college investor.
  3. Mega Backdoor Roth IRA: (Roughly $27k to $32k)
    1. The mega backdoor Roth IRA is available in a few 401k plans. Check if your employer offers them. Google and Facebook have one-click options to get this setup trivially.
    2. Also check that you have zero funds in traditional IRA accounts as you do this. If you have post-tax funds, roll them over to a Roth IRA. Otherwise do a reverse rollover into your company 401k. (The details behind why you need to zero out your traditional IRA are arcane).
    3. You want to make sure that these contributions are AFTER-TAX, NOT Roth 401k contributions.
    4. Once you have made your contributions you can withdraw these “After Tax” funds to a Roth IRA.
    5. Note that Google/Facebook have automated this process so it’s doable in a single click. This makes it a complete no brainer.
    6. Find a more detailed article on the college investor


What funds should you invest in?

401k Accounts: Invest in the lowest-cost target-date fund that you can find. Typically a lot of target-date retirement date funds will have high expense ratios. Anything above 0.25% is too much. 

If target-date retirement funds are too expensive scroll down all the way to the bottom. This is typically where the lowest cost index funds are present. Pick the ETF with the lowest cost and you should be fine.

Traditional IRA or Roth IRA: Invest in VTI. You might want to add some bonds to smooth the retirement ride.

In conclusion, get your retirement accounts setup. Take a day off work if you have to. It does not take a lot of time and is the highest ROI activity you will do all year.

Related Article: Investing in ETFs and Index Funds: Signal vs Noise



Latest posts by Kartik Kaipa (see all)
The content here is for informational purposes only, and should not be taken as investment advice. All views contained herein are my own and do not represent the views of any other organization.

Silicon Valley Investors Club (SVIC) is a global community of STEM professionals interested in making smarter investment and career decisions.


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20 hours ago

On occasion, I will get asked by investors about the pros/cons of investing in rental property in various cities/counties in California. Seeing how Alameda County has treated landlords during the pandemic sheds light on how little they value property owners. I understand the need for urgency ordinances to help those who have been financially impacted by COVID-19, but why is Alameda taking this further and prohibiting ALL evictions unless it is related to protecting the health and safety of others (even this small exception is very difficult to enforce)? Let me provide you with some examples specific to Alameda County:

1) Your tenant moves in unauthorized occupants in violation of your lease- you CANNOT terminate their tenancy or evict.
2) Your tenant moves out and sublets your property without your permission. They continue to collect rent from the subtenant while not paying you rent for over a year- you CANNOT terminate their tenancy or evict.
3) Your tenant owes you a large sum of money for past due rent (all pre-Covid). You decide to put them on a payment plan, which they ultimately refuse to honor- you CANNOT terminate their tenancy or evict.

Apparently, a colleague tried filing an eviction because one tenant set fire to another tenant’s car at the property. The judge found that the incident was not enough to rise to an “imminent threat” to the health or safety of others.

(Note: I am not posting this to incite a political debate on my page, I am simply stating my opinion on a county that has taken it too far by stripping landlords of their rights.)
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PK Singh: TY for sharing. Please take the day off, full pay. Everyone: PK Singh is a landlord attorney in the Bay Area, and you can find some of her other excellent work on our blog:

1 week ago

My handyman just retired. SAD! Does anyone have a good handyman that works in San Jose? ... See MoreSee Less

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thoughts and prayers

We've just postponed a remodel project because of complete inability to find a plumber (Maine).

My short list is on south peninsula, but the role of a Handyperson is a broad. Any rough idea what kind of projects you are looking for?

I have someone, he is about ~$100/hour. Some say that rate is high but I like him because he is fast, efficient and reliable. Let me know if interested and I can PM his contact info to you.

6 days ago

SVICmates, (I'm trying to find some term of endearment to refer to us as. I can't do the classic tech company cop-out of (Insert here company name) + "er", so if you have any ideas let me know. SVICmates does sound like the word inmates so I don't know if it's the best choice, lmk what you think in the comment section)

Oh ya, now what I was talking about, now that the group is almost 4,700 members, every now and then you will get a person who tries to message members individually pitching their product or deals.

Soliciting folks via DM is no bueno, so if you find anyone doing that, please NARC them out err let me know.

Love always,
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umm well personally I joined this group to sell lightsaber chopsticks and other basic essentials, rude

'SVestors' / regular use 'svestors': like sylvester; not to be confused with sinvestors. ... Yeah that isn't great. How about: 'SiVICs' / regular use 'sivics': like civics; sometimes to be confused with cynics. Or classic boring but descriptive branding: 'Clubmates' or 'members'.

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