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[Randolph Freelander]

Ok...so I just did some research and saw that you only get to claim a partial deduction for Traditional IRA contributions if your MAGI is between $60,000-70,000. Over $70,000 and you can't deduct any of it. (for people with work retirement plans)

So, if you make over $70,000, then a Roth IRA is the only sensible choice?

If you make over the limit for Roth, then an IRA is completely pointless, right? Why not just do an normal investment and only pay the capital gains taxes?

I'm not affected by this at this time, my MAGI is probably ~$49,000, but my taxes are complicated as my grandfather is dishing out investments to his grandkids which we claim on our taxes so I don't know if I'm in the partial-deduction territory.

I'm just sticking with my Roth...this is getting too confusing.

I guess if I ever become self-employed, which is my goal, I can revisit Traditional IRA.

The income phase outs are hilarious and I don't get the point. The pre-tax deduction phases out squarely in the middle of the middle class, and even the Roth phases out while still in the middle class (but at least further up the scale). It's not like the contribution limit is particularly high, so why phase it out at all? It's not going to significantly reduce the tax liability of one who is wealthy, nor would it represent a large share of the savings for one who is wealthy, but it will greatly benefit those in the middle income group, both in the near and long term.

Fortunately, the contribution limit for 401Ks is significantly higher and the compensation limit is in the mid 200s.

Speaking of which, the IRS has released the new limits for 2015. Unfortunately, the IRA limit of $5500 hasn't increased, but the income phase-out levels for both traditional and Roth have increased slightly. The 401K base contribution limit has increased to $18000 (from $17500) and the "catch-up" for those 50 or above to $6000 (from $5500), so plan accordingly.

There's also the "myRA" for those without employer plans. It's apparently Roth, which means contributions are post-tax and withdrawals are tax free (after 5 years and after you reach 59.5), but you're limited to basically investing in government bonds. If your balance grows to more than $15000, they kick you over to a private plan (which is to your benefit). I'd have to read up a bit more on that to see how it works, regarding continuing your contributions once you have exceeded the balance threshold for the plan.

For more on the limits, go here: http://money.usnews.com/money/retirement/articles/2014/10/27/401-k-and-ira-changes-coming-in-2015

 

[Husker86]

Why would you want to pay capital gains taxes if you don't have to?

Because they are lower than the income tax you'd pay upon withdrawal if you had a traditional IRA that you weren't able to deduct from your taxes when contributing, aren't they?

 

[KooPaL]

Because they are lower than the income tax you'd pay upon withdrawal if you had a traditional IRA that you weren't able to deduct from your taxes when contributing, aren't they?

This was also my understanding which is why I am pumping up more funds into my traditional 401k from what I read from MoneyMoustache and bogleheads.org the that my income tax bracket would be lower when I retire than what it is currently.

 

[cametall]

Ok...so I just did some research and saw that you only get to claim a partial deduction for Traditional IRA contributions if your MAGI is between $60,000-70,000. Over $70,000 and you can't deduct any of it. (for people with work retirement plans)

So, if you make over $70,000, then a Roth IRA is the only sensible choice?

If you make over the limit for Roth, then an IRA is completely pointless, right? Why not just do an normal investment and only pay the capital gains taxes?

I'm not affected by this at this time, my MAGI is probably ~$49,000, but my taxes are complicated as my grandfather is dishing out investments to his grandkids which we claim on our taxes so I don't know if I'm in the partial-deduction territory.

I'm just sticking with my Roth...this is getting too confusing.

I guess if I ever become self-employed, which is my goal, I can revisit Traditional IRA.

Well then you can contribute to an SEP-IRA (in general) and your contribution limits are determined by your net profit. Potentially up to $53,000. It's basically a Traditional IRA with potentially higher contribution limitations.

 

[GhaleonEB]

On Roth vs. IRA/401k a question/clarification. The calculators and logic I've seen indicate that if the tax rate in retirement is lower (or at least expected to be) then it makes sense to use a traditional retirement account. But doesn't that implicitly assume that the tax savings from traditional is also invested at that time? If so we should be clear that is part of the strategy.

Example: I contribute $10k to a Roth 401k, or B) $10k to a traditional IRA. From a planning standpoint, what I care about is how much income this will provide me in retirement. If these are the the options, then the Roth will win out every time because in retirement, I will not be taxed on my gains while the traditional account's gains will be taxed at my tax rate at that time. Assuming equal investment strategies and returns, both accounts would end up with the same amount in the end - just with one being tax free in retirement.

In the meantime, using the traditional retirement account put more money in my pocket before retirement. Money that will probably be spent, not invested.

If we did put the tax savings from using a traditional account into retirement - increasing contributions to say, $12,000 vs. the original $10,000 - that would tip the situation in retirement to making the traditional the better choice since the extra investments will result in a larger retirement income, even after taxes.

Is this thinking correct? I got my brain turned into knots trying to work through it this morning.

And if so, how does this thinking affect those who are maxing out? Is the implicit assumption there that the tax savings from going traditional is also being saved, just not in a retirement vehicle? If it's being used to generate additional discretionary spending at the time income is received, does the trade off of going traditional still make sense?

 

[Husker86]

On Roth vs. IRA/401k a question/clarification. The calculators and logic I've seen indicate that if the tax rate in retirement is lower (or at least expected to be) then it makes sense to use a traditional retirement account. But doesn't that implicitly assume that the tax savings from traditional is also invested at that time? If so we should be clear that is part of the strategy.

Example: I contribute $10k to a Roth 401k, or B) $10k to a traditional IRA. From a planning standpoint, what I care about is how much income this will provide me in retirement. If these are the the options, then the Roth will win out every time because in retirement, I will not be taxed on my gains while the traditional account's gains will be taxed at my tax rate at that time. Assuming equal investment strategies and returns, both accounts would end up with the same amount in the end - just with one being tax free in retirement.

In the meantime, using the traditional retirement account put more money in my pocket before retirement. Money that will probably be spent, not invested.

If we did put the tax savings from using a traditional account into retirement - increasing contributions to say, $12,000 vs. the original $10,000 - that would tip the situation in retirement to making the traditional the better choice since the extra investments will result in a larger retirement income, even after taxes.

Is this thinking correct? I got my brain turned into knots trying to work through it this morning.

And if so, how does this thinking affect those who are maxing out? Is the implicit assumption there that the tax savings from going traditional is also being saved, just not in a retirement vehicle? If it's being used to generate additional discretionary spending at the time income is received, does the trade off of going traditional still make sense?

I found some calculators the other day that specifically stated just that.

They assume that the money you save from deductions on taxes from traditional IRA contributions are being invested in a normal brokerage account and also earning an assumed 7%/year.

http://www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx

Click "View Report" to see full explanation.

They also seem to assume "full deduction" eligibility. Meaning if you are participating in an employer plan, and make over $60,000 (MAGI) then the calculators will incorrectly favor Traditional IRA.

 

[Randolph Freelander]

On Roth vs. IRA/401k a question/clarification. The calculators and logic I've seen indicate that if the tax rate in retirement is lower (or at least expected to be) then it makes sense to use a traditional retirement account. But doesn't that implicitly assume that the tax savings from traditional is also invested at that time? If so we should be clear that is part of the strategy.

Example: I contribute $10k to a Roth 401k, or B) $10k to a traditional IRA. From a planning standpoint, what I care about is how much income this will provide me in retirement. If these are the the options, then the Roth will win out every time because in retirement, I will not be taxed on my gains while the traditional account's gains will be taxed at my tax rate at that time. Assuming equal investment strategies and returns, both accounts would end up with the same amount in the end - just with one being tax free in retirement.

In the meantime, using the traditional retirement account put more money in my pocket before retirement. Money that will probably be spent, not invested.

If we did put the tax savings from using a traditional account into retirement - increasing contributions to say, $12,000 vs. the original $10,000 - that would tip the situation in retirement to making the traditional the better choice since the extra investments will result in a larger retirement income, even after taxes.

Is this thinking correct? I got my brain turned into knots trying to work through it this morning.

And if so, how does this thinking affect those who are maxing out? Is the implicit assumption there that the tax savings from going traditional is also being saved, just not in a retirement vehicle? If it's being used to generate additional discretionary spending at the time income is received, does the trade off of going traditional still make sense?

Yes, I'd think if you were blowing the money on frivolous spending, then you'd actually be at an advantage if you decided to instead blow that money on tax (if that's your only option, which obviously it isn't). If, on the other hand, you're investing every last available dollar (whether that means you have an additional brokerage account or if you're simply maxing out your available retirement accounts with nothing left over), then it's back to the calculation of your top marginal tax rate now vs. your expected average tax rate in the future.

It's a good thought, though. If you're just wasting your money on something you don't really need, and it's here today and gone tomorrow, rethink your strategy. Maybe that means just paying the tax now, but I'd suggest instead to funnel those excess funds towards other investment vehicles if the tax calculation warrants it.

 

[Piecake]

Because they are lower than the income tax you'd pay upon withdrawal if you had a traditional IRA that you weren't able to deduct from your taxes when contributing, aren't they?

Hrmm, I guess I could be mistaken since I just didnt comprehend how you could pay income tax twice if you invested in a traditional IRA, but were over the deduction limit. But if there isnt some sort of measure to get out of that ridiculousness, then that seems to be the case...

Well, there is always a back-door Roth in that scenario, which might be the reason why it still exists.

 

[GhaleonEB]

Yes, I'd think if you were blowing the money on frivolous spending, then you'd actually be at an advantage if you decided to instead blow that money on tax (if that's your only option, which obviously it isn't). If, on the other hand, you're investing every last available dollar (whether that means you have an additional brokerage account or if you're simply maxing out your available retirement accounts with nothing left over), then it's back to the calculation of your top marginal tax rate now vs. your expected average tax rate in the future.

It's a good thought, though. If you're just wasting your money on something you don't really need, and it's here today and gone tomorrow, rethink your strategy. Maybe that means just paying the tax now, but I'd suggest instead to funnel those excess funds towards other investment vehicles if the tax calculation warrants it.

To be fair, I think it's not as simple as blowing money on frivolous spending, but that is certainly the reality for many. In my specific situation, I'm weighing the benefits of switching from a Roth 401k to a traditional, and using the increase in my take-home pay to pay the mortgage down faster. That's both a financial calculation (rate of return versus interest rate) and a life style one. But I wasn't sure how to factor that into the Roth vs. traditional equation. Thanks everyone for the answer, it's a detail I never quite got.

Right now I'm leaning toward continuing my Roth contributions, but I need to look at the deduction phase outs and complete the picture. On that note, thanks for the update on the deductions and contribution limits earlier, it's a good reference guide.

Edit: okay, after running the numbers, I think I'll switch contributions from the Roth 401k to the traditional, but keep our IRA's as Roths as a bit of a hedge (and to manage tax rates in retirement). That makes the most sense until the deduction starts to get phased out, but I'm a ways from that threshold.

 

[clav]

http://www.cnbc.com/id/102115185

401K limit raised for 2015. Now $18K with $6K catchup.

No changes to IRAs.

 

[RumblingRosco]

-

 

[PflargBlarg]

FOR CANADIANS

This thread is quite US focused so I figured it may be useful to cover the investment vehicles available to us as well as the best options for investing.

The general strategy is the same over the whole world so we're still going to be concentrating on index investing, just in slightly different ways. Your first step is to read the first post in this thread and then come back here.

BROKERAGES
For reasons I'll go into later, you want a brokerage that gives you the best deal on ETF trading.
A quick google will give you quite a few options for discount brokerages in Canada. Questrade is a good choice as is RBC Direct Investing. Mostly what you're going to want to do is look at their fees and decide which one will work out to be the cheapest for your style of trading. If you do infrequent large buys, then a flat fee may be best for you. On the other hand, Questrade only charges commission when you sell ETFs, so you can buy as many ETFs as you want for free. Questrade is probably the best choice overall, but just make sure to do your own research.

INVESTMENT VEHICLES
TFSA - TFSAs are nice things to have. Gains that you get inside a TFSA (capital gains/dividends) are not taxed, even when you withdraw them. At the time of this posting the annual contribution room is $5500/year. That dollar amount is set to increase in $500 increments in step with inflation so you can expect an increase to $6000/year probably sometime in the next 2-3 years. Any unused contribution room will roll over indefinitely which is one of the big advantages that we have over the American system.

RRSP - As opposed to TFSAs, RRSP contributions are tax deductible. No income within the account is taxed (capital gains, dividends, etc.). The 'downside' of RRSPs is the opposite of the TFSA. Any withdrawals are taxed as income at your current tax rate when you withdraw them. There are some exceptions to this such as the Home Buyer's Plan and the Lifelong Learning Plan, but you can read up on those on your own. The contribution limit is 18% of your income up to a maximum (currently around $26000 and increasing with inflation), with unused room rolling over, same as the TFSA. The general idea is to contribute to an RRSP during your prime earning years when you're in the highest tax bracket. You then withdraw during retirement when your income is lower thus paying a lower amount of tax then you would have.
You can look here for a good description of when you SHOULD contribute to your RRSP http://www.theglobeandmail.com/glob...-rrsps-consider-other-options/article8916348/

IMPORTANT NOTE: You should realize that you can defer claiming your RRSP deductions for as long as you want. If you contribute $20,000 in 2016, but you think that your tax rate is going to go up significantly in 2017, you may wish to claim your deduction for 2017 instead. See here for further information http://wheredoesallmymoneygo.com/deferring-your-rrsp-deductions-to-higher-income-years/

Less Important Note: If you are holding any US stocks directly, or own shares in a Canadian ETF that DIRECTLY holds US stocks, then you will probably want to hold them in an RRSP. There is a tax treaty between the US and Canada for registered accounts that means you will not get taxed by the US on dividends generated by stocks in your RRSP whereas you will get taxed if those stocks are anywhere else. It is for this reason that I would recommend holding XAW instead of VXC. The differences are relatively minor (10-15k) over 25+ years but worth doing if you're starting off.

----------------------------------------------------------------------------------------------------

Obviously, the ideal situation is to max out your contributions to both your RRSP and TFSA to take advantage of the tax sheltering. This may be difficult for some people but I think it's a very good goal to aim for. After that you're going to be moving to taxable accounts.

If you are unable to max out both, my recommendation is to max out your TFSA first until your yearly income is putting you in a higher tax bracket than what you think you'll be in during retirement. Then you'll want to switch to maxing out your RRSP first to take advantage of the tax deductions. This can be tricky since you don't really have any idea what your tax rate or income is going to be when you're retired. You also have to consider that having a high enough income from RRSP withdrawals could make clawbacks happen on any Old Age benefits you may be entitled to.It's also worth noting that many institutions will charge a small annual fee for having an RRSP account. For example, Scotia iTrade will charge $100/year unless you have more than $25,000 in accounts with them.

Investment Vehicles in Retirement
TFSA - Once you're retired (or really any other time you feel like) you can withdraw however much you want from your TFSA, or nothing at all if you like. The brilliant thing about withdrawing from a TFSA is that it doesn't count as income. You can take out whatever money you want and still be eligible to get full Old Age Pension from the government. How great is that?

RRSP - At age 71 your RRSP is forcibly converted to an RRIF and you must remove a certain percentage per year. Luckily the new budget has changed this to only 5.28% now. This is good news as anything you withdraw from an RRIF is taxable income and if you have enough stashed in there the government is going to be taking some Old Age Pension clawbacks.

INVESTMENT OPTIONS
Refer to the first post in this thread for reasoning here. I'm going to be strictly sticking to the same index fund/bond strategy as Piecake. There are a couple differences for us Canadians.

First, we have very few mutual funds with a reasonable MER as compared to the states. This is why I was specifying that you should try and get into a brokerage with low ETF fees. My thinking aligns with Canadian Couch Potato so I'm going to be recommending his model portfolios for the simplest fire and (mostly) forget investment strategy.

Canadian Couch Potato Model Portfolios

Tangerine Investment Funds
I can see utility in the Tangerine one fund deal if you're supremely uninterested in investing, but that laziness will cost you over 4 times as much in fees. It's also, in my opinion, heavily overweighted in Canadian stocks. It's an unfortunate reality that Canada is very undiversified when compared to the US. Finance, Energy, and Materials make up an absolutely massive part of our market. Your portfolio is going to be having a bad time if something unfortunate happens in those sectors (http://www.canadiancapitalist.com/sector-breakdown-of-diversified-portfolios/).

So, that's pretty much off the table.

TD e-series Funds
If you don't have a ton to contribute, this is a pretty good option. You'll have to make TD Direct Investing your brokerage as these funds are not available outside of TD.
Since this is based on mutual funds you don't have to worry about transaction fees since mutual funds are free to purchase and sell.

If you take a look at the actual model (e-Series Model Portfoilios) you'll see five different styles of investing. I recommend going even beyond the aggressive style while you're still young (say below 30) and not getting any bonds. Then slowly phasing in more bonds as you get older. This is a very general strategy used for any kind of investing.

This option is great if you want to contribute a small amount into your investments every paycheck and you're up for rebalancing your portfolio yourself every year or so.
If that's the style of investing you're interested in, you'll do just fine sticking with these funds for your whole lifetime.

Vanguard ETFs
Vanguard is great and we have to be super thankful that they saw fit to come to Canada and they've slowly been giving us better and better options over the years. ETFs have the lowest management fees available and are thus the best option if you can handle doing very infrequent, but large, contributions. Most brokerages are going to charge you about $10 flat for every trade you make so you want to get as much use out of that 10 bucks as possible. You have to have a large amount of money in ETFs for the very low management fees to even out the costs of making trades which is why Couch Potato recommends having at least 50k before doing this option.
I wouldn't go that extreme as you can just do less transactions but you'll still want a good chunk.

He has a great spreadsheet that you can download from here http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/ to compare whether you should go for ETFs or the e-series funds. Make sure you ignore the $100 fee that he's put on there if you don't have an RRSP or the fee has been waived by your brokerage.

I make the same recommendations as per bond allocation as the e-series fund above.

IMPORTANT NOTE: Note that you can be much more active in purchasing ETFs if you use Questrade since all their ETF purchases are free. It's important to remember that if you sell you will be charged the normal commission.

 

[Randolph Freelander]

INVESTMENT VEHICLES
TFSA - TFSAs are pretty awesome. Gains that you get inside a TFSA (capital gains/dividends) are not taxed, even when you withdraw them. Your contribution room is $5000+ dollars for every year since the inception of the TFSA. In 2013 they increased the contribution limit to $5500 to account for inflation. This will continue to happen in future years in $500 increments. Any unused contribution room in a year will carry over to the next year. So if you've never put anything into a TFSA your current contribution room should be $31000 (increasing to $36500 next year). The downside to a TFSA is that contributions are not deductible for income tax purposes. A TFSA could be considered as the opposite of an RRSP.

This makes me so completely jealous. This is a true "catch up" plan, unlike the silliness that the US code allows people to do, and only if they're 50 and older in the tax year.

 

[Piecake]

FOR CANADIANS

This thread is quite US focused so I figured it may be useful to cover the investment vehicles available to us as well as the best options for investing.

The general strategy is the same over the whole world so we're still going to be concentrating on index investing, just in slightly different ways. Your first step is to read the first post in this thread and then come back here.

BROKERAGES
For reasons I'll go into later, you want a brokerage that gives you the best deal on ETF trading.
We don't have access to Vanguard or similar brokerages so your options aren't quite as good. The ones that market themselves as super discount are Questrade and VirtualBrokers. Questrade ends up hitting you with a lot of ECN and Exchange fees so I would definitely recommend VirtualBrokers over them.
On the other hand you have the bank connected ones such as Scotia iTrade and RBC Direct Investing. These two offer a flat rate commission on trades whereas Questrade and VirtualBrokers charge per unit of stock. Overall you're probably going to be paying more in commission at the banks than the super discount guys but the difference is likely to be insignificant and the advantage could flip depending on how high your volume of stock traded is.
Overall I would recommend either RBC Direct Investing (lowest flat rate without having to hold at least $50,000 if that matters to you) or VirtualBrokers (lowest fees, they have a selection of ETFs that are commission free for both buy/sell but they kind of suck).

INVESTMENT VEHICLES
TFSA - TFSAs are pretty awesome. Gains that you get inside a TFSA (capital gains/dividends) are not taxed, even when you withdraw them. Your contribution room is $5000+ dollars for every year since the inception of the TFSA. In 2013 they increased the contribution limit to $5500 to account for inflation. This will continue to happen in future years in $500 increments. Any unused contribution room in a year will carry over to the next year. So if you've never put anything into a TFSA your current contribution room should be $31000 (increasing to $36500 next year). The downside to a TFSA is that contributions are not deductible for income tax purposes. A TFSA could be considered as the opposite of an RRSP.

RRSP - As mentioned above, RRSP contributions are tax deductible. No income within the account is taxed (capital gains, dividends, etc.). The 'downside' of RRSPs is the opposite of the TFSA. Any withdrawals are taxed as income at your current tax rate when you withdraw them. There are some exceptions to this such as the Home Buyer's Plan and the Lifelong Learning Plan, but you can read up on those on your own. The contribution limit is 18% of your income up to a maximum (currently around $25000), with no rollover from year to year. The general idea is to contribute to an RRSP during your prime earning years when you're in the highest tax bracket. You then withdraw during retirement when your income is lower thus paying a lower amount of tax then you would have.

My recommendation is to always max out your TFSA if possible until your yearly income is putting you in a higher tax bracket than what you think you'll be in during retirement. Then start throwing it all in an RRSP. Obviously this is tricky since you don't really have any idea what your tax rate is going to be when you're retired. I suggest that a good point is if you're making somewhere in 80k-90k/year. If you're only making in the 30k-40k range/year, you're probably only going to be hurting yourself by investing in an RRSP. Remember, this is all strictly my opinion and you should definitely do your own reading and make a decision.

INVESTMENT OPTIONS
Refer to the first post in this thread for reasoning here. I'm going to be strictly sticking to the same index fund/bond strategy as Piecake. There are a couple differences for us Canadians.
First, our mutual funds have completely awful MER. I use Scotia iTrade and I just took a quick look. There are literally two index mutual funds available that have below 0.25% MER and they're not very good. There's a couple non-index funds that are alright but I still wouldn't consider them worth investing in.
This is the whole reason why we have to target ETFs for investment.
There are many more options available for low MER, low turnover index ETFs, even some that are very similar to ETFs available in the USA. I'll quickly list out my top picks here.

SCHB - Best MER and my top pick for the US market.
VTI - Is also really good. Slightly more cap diversified with 0.1% higher MER.

Get one of these two to cover your US market.


For international markets

SCHF - I'd consider this the best bet even though it's quite lacking in Small Cap holdings.
VXUS - Maybe worth considering as it's more diversified both regionally and in cap size than SCHF but still, the MER is almost double

EDIT: Apparently Vanguard dropped the management fees on VXUS to 0.09 which is much closer to SCHF than it used to be. It might be much more worth it once the MER is updated.

So, canadian holdings are included in those 2 international funds at about 7% of holdings. If you want more you can get some Canadian funds. The only two worth looking at are

VCE - For a large cap blend
VCN - For a blend of all cap sizes at a higher MER

EDIT: Apparently Vanguard dropped the management fees on these to 0.05 which is much more attractive than before. The MER should be updated at the end of the year. I would totally buy into these at this point.

See here for why not to worry about currency hedging http://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/
Reading Canadian Couch Potato is a good idea in general

Again, these are just my suggestions and what I'm doing for myself. There are a couple of mutual funds that run in the 0.5% MER range which is more than what I want, but they be more appropriate for you if you do more smaller transactions as there is no commission on mutual fund purchases (TD's e-series index funds).

Hope that helps the canadians out a little bit.

Awesome. I will link your post in the OP

 

[simplayer]

The contribution limit is 18% of your income up to a maximum (currently around $25000), with no rollover from year to year.

Unused contributions do roll over though.

 

[Husker86]

This makes me so completely jealous. This is a true "catch up" plan, unlike the silliness that the US code allows people to do, and only if they're 50 and older in the tax year.

And even then it's only an extra $1,000 extra...

 

[PflargBlarg]

Unused contributions do roll over though.

Woops, my mistake. I'll fix that up.

 

[Jason's Ultimatum]

I'm 32 and thinking about putting away $100 a month in a roth. I would double that, but I work in retail, so as of now, $100 is all I can afford. I've read an example that if someone who's 35, and puts away $100 a month (assuming compound interest is 8%), that person could earn $300,000 by the time they're 65.

Does that sound about right? I'm totally ignorant when it comes to finances. I don't think I want to invest in my job's 401k plan. They match half of what I put in, but the problem is, I make on average $1200 a month. So factor in bills and health/dental insurance, groceries, gym, etc., and I have very little left. Also, I don't plan on being with the company very long.

Thanks

 

[GhaleonEB]

I'm 32 and thinking about putting away $100 a month in a roth. I would double that, but I work in retail, so as of now, $100 is all I can afford. I've read an example that if someone who's 35, and puts away $100 a month (assuming compound interest is 8%), that person could earn $300,000 by the time they're 65.

Does that sound about right? I'm totally ignorant when it comes to finances. I don't think I want to invest in my job's 401k plan. They match half of what I put in, but the problem is, I make on average $1200 a month. So factor in bills and health/dental insurance, groceries, gym, etc., and I have very little left. Also, I don't plan on being with the company very long.

Thanks

I would strongly suggest putting into the 401k first to take advantage of the match, even if you don't stay with the company very long. Just put the $100 you plan to put into the Roth and direct it to the 401k instead. Even if you are not with them long, that extra little bit can add up.

I ran a simple scenario that has you investing $100 per month for two years, and then nothing after that for 30 years after, assuming 8% growth, to isolate what you can invest now. That $2,400 would grow to $28,000, a gain of over $25,000 in 30 years.

If you got the half match with your employer for those years, you'd invest the same $2,400, but with the extra $50 per month for just those two years, it would grow to over $42,000 30 years later. That's a $14,000 difference for taking vs. not taking the match for a couple years.

Small differences add up to very large amounts when left to grow for 30 years. In general, you'll always want to take the employer match first, and max out that match. Then, open an IRA. The impact of even a little extra really makes a difference.

 

[Jason's Ultimatum]

Thanks.

So you're saying if I only invest in my company's 401k for only 2 years, I can grow my money to $28,000 in 30 years? How does that work if I don't continue investing in it after 2 years, especially if I'm not with the company?

So puzzling, lol.

 

[Ashhong]

This is very helpful as I'm starting a new job, my first real career job, and I'll be doing 401k and whatnot.

I always thought IRA was a type of 401k, no? I remember at a previous job we had options to invest, and it listed IRA and Roth as 401k options..I think. The company used fidelity. You say to fully fund a 401k and an IRA, what does that mean?

 

[Husker86]

Thanks.

So you're saying if I only invest in my company's 401k for only 2 years, I can grow my money to $28,000 in 30 years? How does that work if I don't continue investing in it after 2 years, especially if I'm not with the company?

So puzzling, lol.

That was just an example to show the difference the match can make.

Anyway, you can roll-over your 401k when you get a different job (or leave it to grow on its own, but I'd think it'd be easier to manage fewer accounts).

In short, there is no reason, no matter how soon you will be leaving, to not take advantage of a free match that your employer offers.

This is very helpful as I'm starting a new job, my first real career job, and I'll be doing 401k and whatnot.

I always thought IRA was a type of 401k, no? I remember at a previous job we had options to invest, and it listed IRA and Roth as 401k options..I think. The company used fidelity. You say to fully fund a 401k and an IRA, what does that mean?

401k and 403b, etc. are employer offered plans. IRAs are Individual Retirement Accounts, meaning it's an account you open and manage on your own. Since they're separate, they have different contribution limits.

Roth is a type of account that uses already taxed money for contributions. This means that the contributions are not tax deductible. The bonus is that any growth is tax free, so when you go to withdraw $50,000 in retirement, you get $50,000.

There are Roth 401k plans and Roth IRAs. Separate plans, but the same "already taxed contributions" idea.

 

[Ashhong]

Ooh ok maybe it was Roth 401k that I saw. So it is recommended to do 401k to the employers match, and open a separate IRA as well? And that "fully fund" amount mentioned in the op, that is per year?

 

[Piecake]

Thanks.

So you're saying if I only invest in my company's 401k for only 2 years, I can grow my money to $28,000 in 30 years? How does that work if I don't continue investing in it after 2 years, especially if I'm not with the company?

So puzzling, lol.

Like others have said, the 401k and the money in your 401k is yours. After you quit your job, you can roll-over or transfer the funds in that 401k into an IRA (Individual Retirement Account - you set this up on your own - very easy) or to your new companies 401k.

Even if you don't transfer it (thought you might have to, the funds inside your 401k will (hopefully) continue to grow. So it will move up or down so long as funds exist in that 401k. For that reason, it makes far more sense to invest in a 401k since your company offers a match. Passing that up is free money.

This will complicate things a bit, but I would look to see if your company has this policy that I will explain. I forgot the term of it, so hopefully someone can help me out, but basically some companies require you to be at your job for a period of time (usually two years) to get a partial of full company match. I know I have to be at my job for 5 years for my company to pay out the full match if quit before then. If you don't even get a partial match before you plan on quitting, then the 401k might not be worth it.

Ooh ok maybe it was Roth 401k that I saw. So it is recommended to do 401k to the employers match, and open a separate IRA as well? And that "fully fund" amount mentioned in the op, that is per year?

Yep, per year.

for the Roth or not rule, basically, if you think are going to be in a higher tax bracket when you retire, go Roth. If you think you are going to be in a lower tax bracket, go tradtional. Since that is a lot of guess work, I would advocate simply getting a good blend of the two. So do 401k and Roth IRA or Roth IRA and Traditional IRA.

 

[Ashhong]

I am just starting my career so hopefully I am in a higher price bracket by the time I retire lol

Damn, I need to put 13000 a year into a 401k if I want to drop into a lower tax bracket....

 

[Piecake]

I am just starting my career so hopefully I am in a higher price bracket by the time I retire lol

Damn, I need to put 13000 a year into a 401k if I want to drop into a lower tax bracket....

Well, just be aware that tax rates can change. You also will likely be in a lower tax bracket when you retire than you were a few years before that because 'theoretically' you will need less income than when you are working - especially since big expenses - like houses - will hopefully be paid off. I honestly prefer Roths to traditional because I think of it as a hedge against uncertainty. I have no idea what the tax rates will be in 35 years. With a Roth, that question has no relevance.

For tax brackets, there are only a few specific situations where lowering your tax bracket truly helps you over a Roth. If you gain access to tax credits that you would not have gotten otherwise, traditional is quite useful since that will lower your taxes beyond the amount you put into an IRA/401k - giving it an advantage over Roths.

If you are on the income based repayment plan for student loans and are a public servant, lowering your taxable income through traditional IRAs and 401ks is godly. I mean, you lower your student loan payment each month and the total you ahve to pay while saving for retirement!

Another advantage is if you invest in taxable accounts and your traditional IRA will lower your capital gains tax into a lower tax bracket. I am not too sure how valuable this is, and it likely is mighty complicated to figure out.

Basically, thats it. The reason that is it is because we have a marginal tax rate system. So the first 8k will be taxed at 0, 8-15k will be taxed at 10% your 15-30k will be taxed at 15% (this is just an example). So if you make 33k a year, only 3k of that will be taxed about 20%.

 

[SyNapSe]

I forgot the term of it, so hopefully someone can help me out, but basically some companies require you to be at your job for a period of time (usually two years) to get a partial of full company match. I know I have to be at my job for 5 years for my company to pay out the full match if quit before then. If you don't even get a partial match before you plan on quitting, then the 401k might not be worth it.

You're referring to vesting. e.g. after 1 year you're 25% vested, after 2 years 50% vested.

Ashhong, you misunderstand. When you retire, you won't have any income except what you're removing from your retirement accounts. Think of it this way.. if you make 39k your first year and make 86k your final year of work. The next year when you're actually retired you'll have very little income. Depending on when you retire, you might have SSI which will be a huge drop from your 86k a year. Then it comes down to how much you remove from your investment accounts and whether they effect your taxable income (traditional) or don't (ROTH). Using more from your ROTH let's you stay in a lower tax bracket. Until it runs out.

For the average person who can't predict the future I think it's pretty healthy to keep a mix of both. Having both just gives you good flexibility.

 

[Randolph Freelander]

I need to put 13000 a year into a 401k if I want to drop into a lower tax bracket....

That's the wrong way to look at it. Whether or not you completely fall out of a particular marginal rate bracket, any pre-tax contribution is reducing your taxable income within that bracket. You have less income being taxed 28%, then 25, then 15, etc. If your income is high enough to get into some larger marginal rates, then it becomes advantageous to start avoiding some of those taxes, as you're avoiding the highest tax rate that you're subjected to on those dollars.

The way you have phrased it, it's almost as if you have the expectation that all of your income is taxed a given rate, and if you reduce your income to a different bracket, then all of your income is now taxed at a lower rate. That is, of course, not how it works.

 

[Y2Kev]

http://www.cnbc.com/id/102115185

401K limit raised for 2015. Now $18K with $6K catchup.

No changes to IRAs.

What exactly is the logic behind the IRA not having the same ceiling as the 401k?

 

[Randolph Freelander]

What exactly is the logic behind the IRA not having the same ceiling as the 401k?

More apt... what exactly is the logic behind the IRA plus 401K not being the combined ceiling that you can meet anyway you see fit. It's not either/or, you have access to both... except for the people that don't because their employers don't offer a plan, not to mention employers that offer bad plans.

 

[RumblingRosco]

-

 

[Piecake]

The man keeping us down?

Yea, fuck the man.

It is pretty stupid though. I really don't understand the rationale for it because not has access to a 401k, even people who could easily afford it like freelancers and the like.

 

[clav]

Yea, fuck the man.

It is pretty stupid though. I really don't understand the rationale for it because not has access to a 401k, even people who could easily afford it like freelancers and the like.

What's ridiculous is the disparity between those plans and a SEP-IRA.

 

[RumblingRosco]

-

 

[Husker86]

Never heard of an SEP-IRA. Looks like the contribution limit is 25% of your annual income... That's awesome. What kind of company offers those?

It's for self-employed people.

 

[Cybit]

Hrm.

So I have employer match up to 8%, with a cap of 25% total into my 401k. So I'm doing that currently (25% of my salary goes into a 401k). Capping out my IRA at 5500 a year, and then investing $150 a month into an Edward Jones account.

Any ideas on what I should change? I will make between 80-100k this year, so I think the 401k will hit the cap. Been doing the 25% 401k thing since I started this job 7 years ago.

 

[Husker86]

Hrm.

So I have employer match up to 8%, with a cap of 25% total into my 401k. So I'm doing that currently (25% of my salary goes into a 401k). Capping out my IRA at 5500 a year, and then investing $150 a month into an Edward Jones account.

Any ideas on what I should change? I will make between 80-100k this year, so I think the 401k will hit the cap. Been doing the 25% 401k thing since I started this job 7 years ago.

As far as contributions go, I don't think there is much, if anything, you could do better.

The only potential changes could be what funds/stocks you are actually investing that money in.

Either way, I think you're going to have a pretty comfortable retirement!

 

[Ashhong]

That's the wrong way to look at it. Whether or not you completely fall out of a particular marginal rate bracket, any pre-tax contribution is reducing your taxable income within that bracket. You have less income being taxed 28%, then 25, then 15, etc. If your income is high enough to get into some larger marginal rates, then it becomes advantageous to start avoiding some of those taxes, as you're avoiding the highest tax rate that you're subjected to on those dollars.

The way you have phrased it, it's almost as if you have the expectation that all of your income is taxed a given rate, and if you reduce your income to a different bracket, then all of your income is now taxed at a lower rate. That is, of course, not how it works.

I don't expect that my entire income will be taxed lower, just that if I do more pre-tax contribution, I would fall into a lower tax bracket and I would pay less taxes. Is that incorrect?

While we are on taxes, I was filling out my w4 and California de4, and put 2 allowances for w4 but only 1 for California. Shouldn't they be the same? Seemed like California doesn't give me an allowance for having only 1 job but I wasnt sure

 

[Husker86]

I don't expect that my entire income will be taxed lower, just that if I do more pre-tax contribution, I would fall into a lower tax bracket and I would pay less taxes. Is that incorrect?

While we are on taxes, I was filling out my w4 and California de4, and put 2 allowances for w4 but only 1 for California. Shouldn't they be the same? Seemed like California doesn't give me an allowance for having only 1 job but I wasnt sure

You'd pay less taxes only because the contributions are pretax. The bigger advantage of falling into a lower tax bracket is that if you contribute to a Roth IRA which isn't tax deductible, those dollars that you put in were technically taxed less, but depending how far into the higher tax bracket you were, that is even not a huge deal.

So even if you were $100 above the lower tax bracket, you still save (essentially) just as much as if you would have put $101 more into your 401k.

 

[Piecake]

I don't expect that my entire income will be taxed lower, just that if I do more pre-tax contribution, I would fall into a lower tax bracket and I would pay less taxes. Is that incorrect?

While we are on taxes, I was filling out my w4 and California de4, and put 2 allowances for w4 but only 1 for California. Shouldn't they be the same? Seemed like California doesn't give me an allowance for having only 1 job but I wasnt sure

Well, you gotta decide if you want 5.5k shaved off your taxable income now if you invest in an IRA or have your distributions (you sell stock in your Roth IRA and then take that money out as income) tax free when you reach retirement age.

So, if you have a Roth IRA worth 500k and need to take out 40k from that Roth for income, that 40k will be completely tax free.

Read my post previously about tax brackets. Those are the only situations where getting yourself into a lower tax bracket really matters. Simply investing in an IRA or 401k will lower your taxes by lowering your taxable income. You do not need to get into a lower tax bracket to make that happen. Of course, if you invest in an IRA/401k and not a Roth IRA, you will not have tax free distributions when you retire.

 

[Randolph Freelander]

I don't expect that my entire income will be taxed lower, just that if I do more pre-tax contribution, I would fall into a lower tax bracket and I would pay less taxes. Is that incorrect?

You pay less taxes regardless of the bracket. For every dollar you contribute pre-tax, you reduce your tax liability at whatever your applicable marginal rate happens to be. Those dollars may or may not drop you into a bracket with a lower marginal rate, but that (by itself) doesn't mean anything.

 

[Cybit]

Well, you gotta decide if you want 5.5k shaved off your taxable income now if you invest in an IRA or have your distributions (you sell stock in your Roth IRA and then take that money out as income) tax free when you reach retirement age.

So, if you have a Roth IRA worth 500k and need to take out 40k from that Roth for income, that 40k will be completely tax free.

Read my post previously about tax brackets. Those are the only situations where getting yourself into a lower tax bracket really matters. Simply investing in an IRA or 401k will lower your taxes by lowering your taxable income. You do not need to get into a lower tax bracket to make that happen. Of course, if you invest in an IRA/401k and not a Roth IRA, you will not have tax free distributions when you retire.

I am thinking of taking the money I would normally put into my 401k and moving everything after the 18k cap into a roth IRA (so like 2-3k a year). Thoughts?

 

[Randolph Freelander]

I am thinking of taking the money I would normally put into my 401k and moving everything after the 18k cap into a roth IRA (so like 2-3k a year). Thoughts?

If you can afford to max out a pre-tax 401k, then it's prudent to do so, as your marginal tax rate should be fairly high, though I suppose it's possible you're making 36K and contributing 50% of your income, which would suggest electing to contribute after tax would be the preferred approach. The Roth IRA is the next priority after that.

 

[PflargBlarg]

I don't expect that my entire income will be taxed lower, just that if I do more pre-tax contribution, I would fall into a lower tax bracket and I would pay less taxes. Is that incorrect?

While we are on taxes, I was filling out my w4 and California de4, and put 2 allowances for w4 but only 1 for California. Shouldn't they be the same? Seemed like California doesn't give me an allowance for having only 1 job but I wasnt sure

Let's pretend that you make 65000 a year and that there's a tax bracket 'break point' at 60000. The $5000 over $60000 will be taxed at the $60000+ tax rate, and everything below that will be taxed at the sub $60000 tax rate (or less if there are more break points at say 25000 or whatever).

If you deduct $4999, you will be paying the $60000+ tax rate on the one remaining dollar that you have over $60000. Deducting the one more dollar to drop you completely into the other tax bracket won't make any difference beyond the fact that you'll be paying tax on one less dollar.

You only pay higher tax rates on the amount of money that you have that is in that tax bracket. It doesn't change how the rest of your money is taxed. The only reason that you would be paying less tax is because you would have less taxable income. There's no reason to aim for deducting enough to drop past a tax bracket.

 

[Ashhong]

Let's pretend that you make 65000 a year and that there's a tax bracket 'break point' at 60000. The $5000 over $60000 will be taxed at the $60000+ tax rate, and everything below that will be taxed at the sub $60000 tax rate (or less if there are more break points at say 25000 or whatever).

If you deduct $4999, you will be paying the $60000+ tax rate on the one remaining dollar that you have over $60000. Deducting the one more dollar to drop you completely into the other tax bracket won't make any difference beyond the fact that you'll be paying tax on one less dollar.

You only pay higher tax rates on the amount of money that you have that is in that tax bracket. It doesn't change how the rest of your money is taxed. The only reason that you would be paying less tax is because you would have less taxable income. There's no reason to aim for deducting enough to drop past a tax bracket.

Ah this makes sense, thanks! I start my new job tomorrow, I will find out about all my 401k stuff and then see if I can afford to do an IRA as well..

So a Roth 401k is the same difference as a Roth IRA to a regular IRA correct? The biggest thing I didn't understand the last time I had this choice was what "investments" do I choose for these? Don't really understand the "aggressive" or less aggressive etc options for it

 

[Wellington]

Do you guys buy into any particular index fund, or is that not allowed to be talked about on here?

I already have a strong relationship with Fidelity through my company 401k. I am considering dumping my extra money into their FUSEX fund, IVV, and IVE Ishare funds.

 

[RumblingRosco]

-

 

[Wellington]

I'd say we frequently disclose what funds we buy into. I'm with Vanguard, not Fidelity, but I mostly invest into VTSMX, VBINX, VFINX, and VEIEX. VTSMX and VFINX being my main two. I think FUSEX is the Fidelity equivalent to VFINX so I'd say that's a decent fund to regularly contribute towards if you're planning to use it for retirement. I'm not familiar with IVV or IVE.

Yeah. I should have been more clear. I am basically just looking to buy into funds that mirror the S&P 500 or the total market with a couple of variations.

 

[lastflowers]

Yeah. I should have been more clear. I am basically just looking to buy into funds that mirror the S&P 500 or the total market with a couple of variations.

be sure to look into the fees associated with the fund.

 

[PflargBlarg]

Yeah. I should have been more clear. I am basically just looking to buy into funds that mirror the S&P 500 or the total market with a couple of variations.

Yeah, that's pretty much the standard plan. Get into a US Total Market fund and an International fund at the lowest fees you can find.

Some people may advise not mirroring the S&P500 since it's not a ton of diversification, and they're all large corporations. Not that I think it's really a bad choice but a total market is going to get you into something more like 3500+ companies. Hey, at least it's not the Dow Jones.