IRA/Retirement Fund

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dullard

Elite Member
May 21, 2001
24,872
3,194
126
Did you unfriend him for that?
It is worthy of considering an unfriend for recommending whole life insurance. In general terms, whole life tends to be a sub-par (high cost) life insurance blended in with sub-par (high fee) investments, and a bunch of mumbo-jumbo to make it all sound like it is the best thing you ever could do while obscuring the details and confusing the buyer.

Some whole life insurance is good, but not much. Some people need whole life insurance, but not many. Thus, you should be very cautious when thinking about it.

Also, in general, whole life usually only turns out well if you do everything perfectly (always invest in full, with never a single late payment, over decades of time, some of which might involve unexpected things like unemployment or another great depression). But if you screw up once, then you often end up with a giant money pit and almost next to nothing to show for it. So you need to also consider your commitment and reliability when deciding to go down the whole life route.

A far better way to get it is to buy a really high quality term life insurance and then invest properly, like what is being discussed here. Why blend two okay items when you can instead easily buy two stellar ones?
 

zinfamous

No Lifer
Jul 12, 2006
110,439
28,989
146
Yeah, I've glanced over some arguments for why term life can be a good investment tool, but it requires a good bit of work and research, and the idea still is a bit controversial.

I've never heard of a respectable individual recommending whole life insurance--it seems to me that WLI is in the same class as timeshares or betting on the Washington Generals when it comes to "the dumbest things you can possibly do with money" category of life choices.

But I really don't understand the nuances of playing with those type of annuities and how they are supposed to benefit you (the non-corpse you), so I just ignore it and try to keep things even simpler.
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
Yet another vote for Vanguard and a Target <year> fund. This is personal preference but I'd pick the year as 5-10 years later than when you really will retire so the fund includes more stock index funds, less bonds.

The Target <year> fund is fully diversified with US and foreign stocks plus bonds, so you don't really ever need to have any other funds unless you want to tweak the mix of company sizes (large vs. small) or have more non-US stocks in the mix.

If you do want other funds, as you change jobs over the decades you can roll over the 401ks from those jobs to a second Rollover IRA ( = Traditional = non-Roth) at Vanguard and pick different fund(s) in it.

As your income climbs, you might also find that you've maxed out your tax-sheltered retirement options and so need to open a regular taxable brokerage account at Schwab or Fidelity. At that point you can also add other fund(s) if you want.
 

evident

Lifer
Apr 5, 2005
11,885
485
126
Yeah, I've glanced over some arguments for why term life can be a good investment tool, but it requires a good bit of work and research, and the idea still is a bit controversial.

I've never heard of a respectable individual recommending whole life insurance--it seems to me that WLI is in the same class as timeshares or betting on the Washington Generals when it comes to "the dumbest things you can possibly do with money" category of life choices.

But I really don't understand the nuances of playing with those type of annuities and how they are supposed to benefit you (the non-corpse you), so I just ignore it and try to keep things even simpler.
I've never dabbled in any of those type of life insurances. As you've said, i'm not sure what the benefit of it is when i'm alive.
 

SketchMaster

Diamond Member
Feb 23, 2005
3,100
149
116
Another for Vanguard + Target fund. You're young, so don't worry too much about the details; just start saving! Any savings is better than no savings.

Once you get a nice job with a retirement plan you can sit down and start learning all the options you have.
 

edro

Lifer
Apr 5, 2002
24,328
68
91
As your income climbs, you might also find that you've maxed out your tax-sheltered retirement options and so need to open a regular taxable brokerage account at Schwab or Fidelity.
Why not just open a taxable account at Vanguard? It's like 3 clicks.
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
Why not just open a taxable account at Vanguard? It's like 3 clicks.

That's an option too. I haven't looked at their brokerage options to see how they compare to Fidelity and Schwab who offer not just Vanguard funds & ETFs but also every other kind of investment you can think of including other companies' funds, bonds, CDs, REITs.
 

stlc8tr

Golden Member
Jan 5, 2011
1,106
4
76
That's an option too. I haven't looked at their brokerage options to see how they compare to Fidelity and Schwab who offer not just Vanguard funds & ETFs but also every other kind of investment you can think of including other companies' funds, bonds, CDs, REITs.

Don't you have to pay a fee when purchasing Vanguard funds or Vanguard ETFs at Schwab/Fidelity?
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
Don't you have to pay a fee when purchasing Vanguard funds or Vanguard ETFs at Schwab/Fidelity?

Some funds yes, some funds no. If you want 100% Vanguard funds and nothing else in your taxable non-IRA account then Vanguard might be the best choice.

If you have a job and they offer matching funds that is always an option.

Yes, you should almost always contribute to your company 401k up to the level that your employer matches. Even with bad fund choices the +50-100% instant matching is a huge boost.
 

JDawg1536

Golden Member
Apr 27, 2006
1,275
0
76
why a Roth? it depends on your current/long term savings goals. If you want an IRA only for retirement/long term savings, then a tr IRA is superior because you get income deductions now, so that means you are putting more money in now, with more potential growth.

If you are planning to put a downpayment on something like a house in the next ~10 years, then open a Roth now and start making whatever contributions you can afford ($5500 max per year). 10 years later, you can withdraw up to 5 years-worth of those contributions, all the while that money has been been earning interest and paying dividends (all untaxable) that didn't exist before.

I like Roths as a short-term savings tool, but you need to be aware that all contributions are locked in at a 5 year cycle for each contribution year. tr IRA is better for retirement, however (in retirement age, you can also start a conversion ladder to move money from tr IRA to Roth, to reduce your trIRA tax burden, but no need to discuss that now)


....of course remember that you are trapped into those 5 year time limits.

That's not true at all. Your contributions to a Roth IRA are never "locked in." You've already paid taxes on that money, so you are free to take out your contributions whenever you want and you can do it tax and penalty free. The 5-year waiting period for qualified distributions applies to gains, and the clock starts running as soon as the account is opened. For that reason alone, you should open a Roth IRA anyway to get the clock started.

The 5-year rule also applies to conversions or rollovers, each of which will have its own 5-year waiting period. You're confusing the two.
 

stlc8tr

Golden Member
Jan 5, 2011
1,106
4
76
Some funds yes, some funds no. If you want 100% Vanguard funds and nothing else in your taxable non-IRA account then Vanguard might be the best choice.

I thought that Vanguard didn't participate in NTF marketplaces, that's why I was asking. The last time I checked, there was something like a $50 fee to purchase a Vanguard fund at Fidelity. So I was curious if this had changed.

Vanguard also offers a fund marketplace. Not sure how their listing compares though since I rarely purchase funds from other firms.

https://investor.vanguard.com/other-funds/
 

edro

Lifer
Apr 5, 2002
24,328
68
91
No, not really. the math has never supported that argument.

http://www.gocurrycracker.com/roth-sucks/

ROTH has it's uses, but it really isn't superior as a long-term retirement account because over that same time period, the amount you put in to the ROTH would actually be less than what you put into the tr IRA. I think it generally works out to tr IRA max contributions per year being about $1200 more in value compared to equal roth IRA contributions over the same 30-40 years. consider how much more return you are getting off of that extra $1200/year that your Roth never saw.

...this is because the tr IRA reduces your annual income and thus reduces your tax burden. The Roth is great as a secondary or tertiary savings, or even retirement account, if you have further disposable income that you would rather save.
I have read the article a few times now, and I still don't understand his argument.

Assuming income tax rates are identical now vs retirement (15% for this example), the end result would be the same.
Yes, tIRA account would have larger balance at end, but then ALL of the funds are taxed at 15%.
Roth has 15% smaller balance due to income taxes during career, but balance not taxed at all.
Again, assuming tax rates are identical.

See below. What am I missing?

n6U47d3.jpg


He specifically says this:
The Last Dollar Principle
In both examples, choosing a Roth 401k over a Traditional 401k resulted in less wealth and more tax. Why?

Think about it this way. When we invest $1 in a 401k, that dollar is the last dollar we earned. It is taxed at our highest marginal rate. But when we withdraw $1 from our 401k years from now, it is our First Dollar. As we saw in the pretty pictures earlier, the First Dollar is always taxed at 0%

Now as spending increases to large levels, above ~$94k into the 25% marginal tax rate things get interesting.

This is where some start to argue about mathematics. We could pull out our college algebra textbooks and prove beyond a shadow of the doubt that a Traditional 401k and a Roth 401k are EXACTLY THE SAME as long as the tax rate is the same. This is true. 25% tax paid today is mathematically the same as 25% tax paid in the future after our funds have grown tax deferred

But math textbooks make simplifying assumptions which are often impractical in the real world (Hello quadratic equation, I’m talking to you.)

The odds of our Mr and Mrs 90% earning $94k in income from other sources (the lower edge of the 25% marginal rate), and every penny withdrawn from their 401k is taxed at 25% in the future is infinitesimally small

What matters the most is the aggregate tax rate, and for both of our examples this is lower than the marginal rate.
See bold and underlined section. Why does he think it is a small chance? You will not have many tax deductions in retirement, so most income will be taxable.
 
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zinfamous

No Lifer
Jul 12, 2006
110,439
28,989
146
That's not true at all. Your contributions to a Roth IRA are never "locked in." You've already paid taxes on that money, so you are free to take out your contributions whenever you want and you can do it tax and penalty free. The 5-year waiting period for qualified distributions applies to gains, and the clock starts running as soon as the account is opened. For that reason alone, you should open a Roth IRA anyway to get the clock started.

The 5-year rule also applies to conversions or rollovers, each of which will have its own 5-year waiting period. You're confusing the two.

Ah, you are right. In my head, the reason I want a Roth is for a conversion ladder sometime down the line, so my mind defaults to thinking that my contributions would be coming from conversions. I haven't spent much time thinking about it--but damn! The fact that you can withdraw any non-conversion money makes it an even greater savings account.
 

dullard

Elite Member
May 21, 2001
24,872
3,194
126
See below. What am I missing?
Your math is correct. The Roth IRA and Traditional IRA are mathematically identical in many cases. If your tax bracket is the same when you retire as when you were working (which is true for many people until congress changes the tax brackets), then there isn't as much of a difference between the two as people think.

I didn't read the article, so I am not sure what part it focusses on. But, there are two key things that your math is missing.
1) Your math put $5000 into both the Roth and the traditional IRA. If you not are wealthy, then that isn't an issue. But imagine the person can afford to invest more than the maximum. Suppose you could afford to invest $6470.59 a year instead of $5000. In the Traditional IRA, you are capped at $5500 invested. In the Roth IRA, you pay $970.59 more in tax and can then invest the remaining $5500 in the Roth IRA.

In that case, your math* works out to $169,867.10 in both cases at year 20. With the Traditional IRA you then pay $25,480.07 in tax and are left with $144,387. But the Roth IRA you end up with $169,867.10.

So, the Roth IRA actually lets you shelter MORE in a tax sheltered account than the traditional IRA. This is since the traditional IRA caps you at $5500 and the Roth IRA caps you at an effective $5500 / (1 - your tax bracket) which is always more than the traditional IRA's cap. In this example of a 15% tax bracket, the Roth IRA lets you invest the equivalent of $6470.59 a year and the Traditional IRA lets you invest only $5500.

2) The traditional IRA forces you to withdraw each year after a certain age. Thus, you are essentially forced into a specific tax bracket if you only have a traditional IRA. But the Roth IRA doesn't have that restriction. if you have a mix of retirement accounts, you can pick and choose to minimize taxes.

Suppose you had only a traditional IRA, were married, and were forced to withdraw $50,000 a year in 2016 and later. Assuming only the $12,600 standard deduction then your tax bracket would be 15%. You'd pay $4691 in tax each year.

But what if you had half traditional IRA and half Roth IRA. Then you would be forced to withdraw $25,000 a year from the traditional IRA. Assuming only the $12,600 standard deduction then your tax bracket would be 10%. You'd pay $1243 in tax each year, well less than half. Or, you could withdraw even more than the minimum, lets say $31,150 so that you maximize the 10% tax bracket. Then all your traditional IRA is at a lower tax bracket AND you will drain it out faster so that you can end your life in the 0% tax bracket.




* Your math is odd. You math seem to have no gains the first year and then you are instantly getting the full gains on a contribution the instant you make them in subsequent years. Instead of using ((Previous Balance) + (New Contriubutions))*1.04, it would be more realistic to do (Previous Balance)*1.04 + (New Contriubutions).
 

zinfamous

No Lifer
Jul 12, 2006
110,439
28,989
146
I have read the article a few times now, and I still don't understand his argument.

Assuming income tax rates are identical now vs retirement (15% for this example), the end result would be the same.
Yes, tIRA account would have larger balance at end, but then ALL of the funds are taxed at 15%.
Roth has 15% smaller balance due to income taxes during career, but balance not taxed at all.
Again, assuming tax rates are identical.

See below. What am I missing?

n6U47d3.jpg


He specifically says this:

See bold and underlined section. Why does he think it is a small chance? You will not have many tax deductions in retirement, so most income will be taxable.

Off the top of my head, wouldn't your effective tax rate, while employed, be somewhere between 15-25% (depending on the deductions you are able to squeeze), vs 10-15% in retirement, filing retired and 100% of income realized as capital gains? Most income will be taxable, but at a much lower rate as retired/capital gains income. I think that this math also requires one to withdraw from their trIRA or 401k at the minimum calculated CoL per year, allowing them to convert the maximum trIRA value into a roth IRA per year, at absolute minimum taxed rate on that conversion, to best realize the tax-deferred value of the original tr IRA contributions that began a few decades before.

Then there is also that fancy and complicated IRS-allowed s-swap flipsomething that allows one to convert these funds completely tax-free while doing so, and of course I have already forgotten that rule, which apparently many CPAs tend to ignore or simply not know about. ...Now I'm off to do some digging.
 

JDawg1536

Golden Member
Apr 27, 2006
1,275
0
76
Ah, you are right. In my head, the reason I want a Roth is for a conversion ladder sometime down the line, so my mind defaults to thinking that my contributions would be coming from conversions. I haven't spent much time thinking about it--but damn! The fact that you can withdraw any non-conversion money makes it an even greater savings account.

You cannot withdraw any non-conversion money. You can withdraw any contribution you've made to the account, and can take a qualified distribution on the interest earned on those contributions. A qualified distribution would be one taken after 59 1/2, for a "first-time" home purchase up to $10k (lifetime amount), or for certain things like medical, education, disability, etc....(there are strict rules concerning qualified distributions before age 59 1/2, so be careful or it could cost you)

The Roth is a fantastic tool, especially for younger people.
 

Scarpozzi

Lifer
Jun 13, 2000
26,385
1,773
126
Max your ROTH first. The key to ROTH is that you can take money out later without a tax penalty (once you're of age). The advantage there is when you're working or drawing from non-ROTH retirement accounts, it won't count toward your taxable income. This can be huge if you've got an annuity and are working and are on the edge of going up to the next tax bracket.

Think about when you reach retirement age. You likely won't want to withdraw all your savings at once....you'd be paying a high tax penalty. You'll want to setup an annuity to pay out over X years and depending on the stock market outlook at the time and account value, you may want to delay when the bulk comes out. If you get stuck and need cash, you should have a number of income streams planned to allow you more flexibility without pushing you into that next bracket. So....save in ROTH, decide when you can start drawing from the accounts (earliest), and decide with your income at that age if you should start moving funds.

A final note...index funds are great. So are dividend stocks and some ETFs also pay dividends. The returns don't have to be extremely high if you hold a stock for 30-40 years. You can set those accounts to reinvest the dividends and see small gains over time as the account starts to snowball without any action on your part.
 

brianmanahan

Lifer
Sep 2, 2006
24,146
5,557
136
it's Roth, not ROTH... and it's spectacular.

i do about half in traditional 401k per year and half in Roth IRA
 

DaveSimmons

Elite Member
Aug 12, 2001
40,730
670
126
> Max your ROTH first.

No. If you have a 401k with employer matching, get all of that matching money before funding a Roth.

Say your employer offers 50% matching up to 8% of your salary. Then set your 401k contribution level to 8% so you get all of that instant 50% growth in your retirement savings.

If you put that money into a Roth instead it would take several years to catch up.

Once you have the 401k taken care of, then try to also save up enough to also max out your Roth contribution.
 
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ScottFern

Diamond Member
Oct 23, 2002
3,629
2
76
My wife's income is 1099 and I do some 1099 computer side jobs throughout the year so with that income we were better off setting up a traditional IRA. It ended up giving us a +2500 swing on our taxes last year.
 

JDawg1536

Golden Member
Apr 27, 2006
1,275
0
76
You could also set up a solo 401k and contribute as both employers and employees.

You cannot give a blanket recommendation about what plan to max out first, how to split contributions, what savings plans are best, etc.... Everyone will have different incomes, filing statuses, deductions, 401k plans, goals, and needs. This is why, as much as most of you love to crap on advisers, a good one is worth every penny. Lots of bad and wrong advice given in this thread..... go to an expert.
 

zinfamous

No Lifer
Jul 12, 2006
110,439
28,989
146
You could also set up a solo 401k and contribute as both employers and employees.

You cannot give a blanket recommendation about what plan to max out first, how to split contributions, what savings plans are best, etc.... Everyone will have different incomes, filing statuses, deductions, 401k plans, goals, and needs. This is why, as much as most of you love to crap on advisers, a good one is worth every penny. Lots of bad and wrong advice given in this thread..... go to an expert.

good advisers exist, but the problem is they are far from the norm. Far too many for far too long have been steering people towards crappy funds with exorbitant expense ratios because they work on commission, and often keep their clients in crappy stock packages with ridiculous management fees.

The truth is that the absolute basics for retirement savings are pretty simple to figure out and the same general advice does apply to most people. Once you personalize depending on the individual's access--if they have a 401k, w or w/o matching, age of the individual to determine roth or tr/rollover IRA, it's pretty much gravy. There's little to no reason to not put retirement into index funds (individually or through targeted retirement funds) and after that, there's basically a handful of options that will cover nearly everyone's needs.

Any good company or employer will have account representatives for their employees to talk to that are free--hopefully, such people aren't going to try and steer those employees to creepy high-fee funds, which is way too common. I personally don't see any real value in paying an adviser when any person can put the work together in about 1 week to get themselves 90% there.

Salient:

 

Mai72

Lifer
Sep 12, 2012
11,578
1,741
126
I'm going to go a different route than what most of the people are saying here, because there are many different ways to prepare for retirement.

I'm a huge follower of Grant Cardone and he suggest not to invest in 401ks, because in his opinion the 401k was a scam perpetrated on the middle class. He makes a case that the wealthy dont have 401ks. And they don't. So, I'm going to say save your money and invest in real estate.

This is what Grant has done. His portfolio has nearly $500m worth of real estate. Not just any real estate either. He's invested in multi-family apartments. That means he has multiple doors paying him a paycheck. In his case, 4,000 plus doors paying him anywhere from $800 -1k a month. That's the type of investment that interest me. Not a 401k. You can't even touch your 401k unless you want to incur fees which is bullsh*t because it's your money!

Just a thought. The tax codes benefit people who own real estate. Why? Because many of the wealthy are politicians who own real estate.

I know I'm going to get a lot of hate because what I'm suggesting is different from what many people are saying. But, if you look at the wealthy the one thing you'll find is most own property.

http://grantcardonetv.com/articles/9-reasons-to-invest-in-apartments/