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Harry posted:That's a big assumption. Yes, I get that, but read the quote I was replying to: quote:You should probably only go with a traditional IRA if you expect your taxes to be much lower in the future; with a Roth IRA you don't have to pay taxes on the earnings, which can be considerable and can even exceed your principle, so with a traditional IRA there's a chance that you're cutting off your nose to spite your face (because you pay taxes on everything with a traditional IRA, whereas with the Roth IRA you only paid taxes on the contributions). That's what I don't understand. He seems to be saying there's additional benefit to a Roth IRA even if your tax rate is the same or slightly lower in the future, but I can't figure out how that's the case. edit: Personally, I don't know if my tax rate will be more or less, since I can't predict the future, so I diversify and invest in both a Roth IRA and a 401k. SlightlyMadman fucked around with this message at 15:44 on Jun 19, 2012 |
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Jun 19, 2012 15:42
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SlightlyMadman posted:I'm honestly confused every time I hear this argument, and haven't been able to get anyone to explain it to me. I've heard all sorts of analogies, like "if you're planting a field, would you rather somebody take a portion of the seeds or the crops" but I don't see how it's any different. If you pay the taxes up-front, your earnings are still less, so assuming tax rates are the same, the end result doesn't change. When you say you contribute either $5000 to a Roth or $5000 to a traditional those are very different things. The money in a Roth is now post tax. Where as the traditional is pre-tax. This means if two people who contribute the same amount every year to IRAs, one traditional one Roth, the Roth person will be in much better shape at retirement. If you want to match the amount of savings on a post-tax basis (which ultimately is all the really matters) you'd need to put $5k in a traditional IRA and then invest another $1-1.5k you saved on your taxes into a taxable account. Essentially what a Roth does it let you get tax-free earnings on MORE post tax dollars. Of course, this argument is only valid if you are planning on maxing out your annual contribution. The effect of this can be quite substantial depending on your assumptions about capital gains rate.
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Jun 19, 2012 15:48
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Daeus posted:When you say you contribute either $5000 to a Roth or $5000 to a traditional those are very different things. The money in a Roth is now post tax. Where as the traditional is pre-tax. This means if two people who contribute the same amount every year to IRAs, one traditional one Roth, the Roth person will be in much better shape at retirement. If you want to match the amount of savings on a post-tax basis (which ultimately is all the really matters) you'd need to put $5k in a traditional IRA and then invest another $1-1.5k you saved on your taxes into a taxable account. Essentially what a Roth does it let you get tax-free earnings on MORE post tax dollars. Of course, this argument is only valid if you are planning on maxing out your annual contribution. The effect of this can be quite substantial depending on your assumptions about capital gains rate. Sure, but $5000 pre-tax and $5000 post-tax are two different amounts of money. I guess that makes sense if contribution limits are literally your only limit to the amount of money you can invest, but if you're in that situation then why are you reading the internet for advice, when you should be calling your financial advisor from your private jet? Most of us can only afford a certain amount of money off each paycheck to invest, so paying taxes on that now actually reduces the amount you can invest.
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Jun 19, 2012 15:53
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SlightlyMadman posted:Sure, but $5000 pre-tax and $5000 post-tax are two different amounts of money. I guess that makes sense if contribution limits are literally your only limit to the amount of money you can invest, but if you're in that situation then why are you reading the internet for advice, when you should be calling your financial advisor from your private jet? You've got it right. The roth lets you save more. On the other hand, you can adjust this later. A traditional to roth conversion lets you pa taxes with outside money which is like an additional contribution to your IRA. So tax rate is all tha matters. A big advantage of roth is certainty. You know your tax rate now so you know what you pay and you know what's yours. With a traditional, you can only estimate how much of that is being invested on behalf of the government. But your instinct is right that the seeds/crops analogy (or quarkjets point) is pointless and it really comes out to tax rates now vs later (later being whenever you retire or when you convert). 80k fucked around with this message at 16:28 on Jun 19, 2012 |
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Jun 19, 2012 16:24
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SlightlyMadman posted:Sure, but $5000 pre-tax and $5000 post-tax are two different amounts of money. I guess that makes sense if contribution limits are literally your only limit to the amount of money you can invest, but if you're in that situation then why are you reading the internet for advice, when you should be calling your financial advisor from your private jet? Er, it is possible to make enough to want to put in employer 401k match and 5k into an IRA every year and not be *filthy* rich.
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Jun 19, 2012 16:37
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SlightlyMadman posted:Yes, I get that, but read the quote I was replying to:
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Jun 19, 2012 16:49
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silvergoose posted:Er, it is possible to make enough to want to put in employer 401k match and 5k into an IRA every year and not be *filthy* rich. Yeah, this is exactly what I was going to say. I almost maxed out my Roth and hit my employer match last year, living on a salary of 35k (in Boston no less). I was decidedly not rich.
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Jun 19, 2012 16:57
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silvergoose posted:Er, it is possible to make enough to want to put in employer 401k match and 5k into an IRA every year and not be *filthy* rich. Right, but a 401k match still isn't a limit. You're free to keep contributing until you've hit the hard limit (which is what, like $17k?). My specific question is this: once I've maxed out that 401k match (which I think we all agree is the best thing to do first), do I then put the rest of my money in the 401k or in a Roth IRA? As far as I can tell, the only thing that determines which of these two specific options will work better is whether or not my tax rate is higher or lower when I retire.
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Jun 19, 2012 17:08
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SlightlyMadman posted:Right, but a 401k match still isn't a limit. You're free to keep contributing until you've hit the hard limit (which is what, like $17k?). My specific question is this: once I've maxed out that 401k match (which I think we all agree is the best thing to do first), do I then put the rest of my money in the 401k or in a Roth IRA? As far as I can tell, the only thing that determines which of these two specific options will work better is whether or not my tax rate is higher or lower when I retire. It also matters whether or not your 401k investment options are any good. An IRA gives you total freedom over investments.
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Jun 19, 2012 17:10
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evilalien posted:It also matters whether or not your 401k investment options are any good. An IRA gives you total freedom over investments. Absolutely, I agree with you here, but my question is really really simple (and seems to have already been answered, but I think some people are confused): people talk about a Roth IRA as if there's something magical about it that makes it always the better choice over a pre-tax contribution. I don't think this is true, as it seems to me that it's only a better choice if you expect your tax rate to be higher upon retirement (or as you said, if all your other options are lovely funds). Is this correct, or am I missing something? I'm not saying people shouldn't contribute to a Roth IRA. I contribute to one, because I'm already contributing to a 401k so I figure it's smart to diversify my investment.
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Jun 19, 2012 17:15
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SlightlyMadman posted:I don't think this is true, as it seems to me that it's only a better choice if you expect your tax rate to be higher upon retirement (or as you said, if all your other options are lovely funds). Is this correct, or am I missing something? Yes. quote:I'm already contributing to a 401k so I figure it's smart to diversify my investment. Also yes. Given uncertainty about future marginal rates (from a legislative perspective only, that is - based on your career trajectory, expected SS benefit, marital status, etc, it gradually becomes easier and easier to predict your future marginal rate), it is sensible to diversify the tax treatment of investments just like you would diversify your asset allocation.
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Jun 19, 2012 18:15
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1) You aren't forced to withdraw your money at a certain time. 2) If you really need it, you can withdraw your contribution without penalty. 3) You aren't constrained to whatever plans your 401k is in. 3) If your employer has a 401k, you can't deduct IRA contributions over a certain (somewhat low) amount so you'd be putting in post tax dollars anyway.
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Jun 19, 2012 18:17
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Whoa, ok I had no idea about 1 & 2, that's very very interesting. So my Roth IRA is effectively a savings account, and I can withdraw from it without restriction if I want to, and pay no penalties or taxes on it? I had never heard that before, and that would change things quite a lot.
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Jun 19, 2012 18:19
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In a sense. But if you take out let's say $30,000, you can't put it back in after 60 days.
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Jun 19, 2012 18:31
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There are also some added benefits if you plan to leave remaining funds to a child or grandchild down the road. They won't be hit with a tax bill and while I believe they have to start making distributions right away, the amount is based on their average life expectancy. So if you die and leave it to your 18 year old grandchild, they'll be able to receive distributions tax free every year for 50+ years while the money continues to grow tax-free for decades. Basically it works as a nice little insurance policy for children.
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Jun 19, 2012 23:32
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Can you withdraw your contributions to a Roth 401k at any time as you can with a Roth IRA?
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Jun 20, 2012 01:00
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You can, but it counts as income and there's a 10% (or around there) penalty fee as well. You can take out a loan, but you have to pay interest (to yourself) and if you quit/get fired you have to pay it all back within 30 days or you face the above. This is all off the top of my head so some of the numbers might be wrong.
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Jun 20, 2012 01:46
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Harry posted:You can, but it counts as income and there's a 10% (or around there) penalty fee as well. You can take out a loan, but you have to pay interest (to yourself) and if you quit/get fired you have to pay it all back within 30 days or you face the above. That applies to my contributions alone, not employer match or earnings?
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Jun 20, 2012 01:51
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Everything I believe.
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Jun 20, 2012 02:35
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Does anyone have any opinions on the Vanguard Large cap fund offerings? I basically have a really silly allocation right now where I have too much small cap and growth domestically. Its not something I would be doing anything other than buying and holding and I can go with anything with a 10,000 minimum or less. It seems like going a higher dividend route might be wrong for tax purposes, I have no need for the income derived off it at this point in time as it would only be reinvested.
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Jun 20, 2012 06:43
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Is there any good bond etf that holds investment grade bonds with low expenses ratio? I'm looking for something like PCY, but with investment grade corporate bonds instead.
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Jun 20, 2012 16:35
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Shrinkage posted:Is there any good bond etf that holds investment grade bonds with low expenses ratio? Did a quick google search. Are you looking for something like EMCB or CEMB? 0.6% expense ratio though. VCLT for non-EM investment grade bonds, expense ratio 0.14%
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Jun 20, 2012 16:42
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shensterz posted:Did a quick google search. Are you looking for something like EMCB or CEMB? 0.6% expense ratio though. VCLT is exactly what I'm looking for, except I was wondering if there's anything higher yielding but with bond holdings rated at least BBB.
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Jun 20, 2012 16:49
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Shrinkage posted:VCLT is exactly what I'm looking for, except I was wondering if there's anything higher yielding but with bond holdings rated at least BBB. So you want something higher yielding with better quality bonds?...
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Jun 20, 2012 17:23
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Chin Strap posted:So you want something higher yielding with better quality bonds?... No, of course not. This is the current asset allocation of the VCLT fund according to their credit rating.  As you can see they have the majority of their asset on bonds with higher than BBB rated bonds and what I'm looking for is something that is more heavily weighted towards the BBB rated bonds, therefore lower quality bond than VCLT, with a higher yield, yet with a rating that is still considered "safe" as investment. Shrinkage fucked around with this message at 18:08 on Jun 20, 2012 |
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Jun 20, 2012 17:59
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So you want a fund that has an average credit rating of about BBB instead of somewhere between BBB and A? How about JNK? bam thwok fucked around with this message at 18:14 on Jun 20, 2012 |
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Jun 20, 2012 18:10
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bam thwok posted:So you want a fund that has an average credit rating of about BBB instead of somewhere between BBB and A? Yeah that's what I'm looking for. 99% of JNK's bonds are rated below BBB, but that kind of yield sure do tempts.
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Jun 20, 2012 18:46
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Shrinkage posted:Yeah that's what I'm looking for. How about VCIT e: I guess the yield is lower, obviously. So not quite what you're looking for. e: EMB is an interesting take on your goal. (expense ratios suck though) e: Really, you're probably better off mixing an AAA and a junk/high yield fund to get the risk you want. (or just replace high yield with a portion of equities, since high yield corporates tend to be pretty highly correlated with equities) Unormal fucked around with this message at 19:07 on Jun 20, 2012 |
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Jun 20, 2012 18:57
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Unormal posted:
That's a good idea, I might have to do the math on the right mix of the funds though.
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Jun 21, 2012 03:11
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yeah i think you might just wanna mix a junk bond : investment grade bond etf to get the yield and risk you want.
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Jun 22, 2012 13:10
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Shrinkage posted:what I'm looking for is something that is more heavily weighted towards the BBB rated bonds http://us.ishares.com/product_info/fund/overview/QLTB.htm
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Jun 22, 2012 13:43
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It's yielding about the same amount as the VCLT though?? So my current allocation is currently: 10% JNK 10% PCY 50% Cash (To purchase more stock/bond over the next couple of months) 30% Stocks (Divided pretty evenly between TEF, FTE, APA, HPQ and WDC) I'm leaning towards a 60% stock 30% bond 10% cash position after I'm done with my purchase.
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Jun 22, 2012 15:53
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Is this for long-term investing? Why are you buying individual stocks instead of stock-based mutual funds? (Not an attack, I'm genuinely curious how you are planning your diversity.)
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Jun 22, 2012 18:42
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Shrinkage posted:It's yielding about the same amount as the VCLT though?? Can't check now, but what are the durations on each fund? That's the most likely reason for any discrepancy.
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Jun 22, 2012 18:45
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Question about IRAs here. My wife and I both have Roth IRAs that we opened in college. However, we both started new jobs this week and our combined incomes will put us over the income limit to be eligible for a Roth IRA. Since we're both starting this week and she was unemployed prior to this, it's unlikely that our 2012 income will be over the limit. My question is, when are we forced to make the switch over to traditional? Our 2013 income will probably be over the limit, so do we have to open a traditional at the end of 2012 and stop contributing to our Roth IRAs? Or can we keep doing a Roth IRA through 2013 until we file with the income that disqualifies Roths? Should we do the backdoor Roth IRA each year starting with 2012?
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Jun 22, 2012 19:19
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Shrinkage posted:It's yielding about the same amount as the VCLT though?? AreWeDrunkYet posted:Can't check now, but what are the durations on each fund? That's the most likely reason for any discrepancy. Yup, that's exactly what it is. Duration on QLTB is 6.4 years Duration on VCLT is 13.6 years It looks like you're trying to do some pretty hands on portfolio management. When looking at fixed income, make sure you are aware of maturities and the implications thereof.
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Jun 22, 2012 19:58
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So, we met with our financial adviser yesterday. He pushed maxing out IRA's(which we hold with him/Ameriprise) before trying to max out 401k's(to which we don't get a match from our employers). what say you BFC braintrust?
lord1234 fucked around with this message at 21:01 on Jun 22, 2012 |
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Jun 22, 2012 20:58
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Leperflesh posted:Is this for long-term investing? Why are you buying individual stocks instead of stock-based mutual funds? (Not an attack, I'm genuinely curious how you are planning your diversity.) Yes it is long term. No I'm not planning to diversify that much, my plan is to pick cheap stocks of company that I think will be there for the next 20 years and if the market drop, I will just pour more money into this blackhole called my "investment" portfolio. AreWeDrunkYet posted:Yup, that's exactly what it is. Ah okay, I assume shorter maturity = less risk = ETF selling at premium? Correct me if my assumption is wrong there.
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Jun 22, 2012 21:30
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lord1234 posted:So, we met with our financial adviser yesterday. He pushed maxing out IRA's(which we hold with him/Ameriprise) before trying to max out 401k's(to which we don't get a match from our employers). what say you BFC braintrust? General rule of thumb for order of maximizing contributions: - Max your 401k employer contribution match, if you have one - Max your Roth IRA - Max 401k and/or other investment vehicles So if you don't have a 401k match, then yes it generally makes sense to prioritize your RIRA before your unmatched 401k contributions. Not always, but generally. The biggest benefit of an IRA aside from the tax advantage is that you have full control over it and what it is invested in. It's also debatable whether it's better to actually max out your annual 401k contribution or to diversify with other individual brokerage accounts even if they are not tax-advantaged, since a lot of 401ks have pretty limited and expensive investment options. Of course, maxing out your 401k is rarely going to be a "bad" decision since if you can afford to do that you're ahead of most of the population already. Guinness fucked around with this message at 23:09 on Jun 22, 2012 |
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Jun 22, 2012 23:03
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If I'm at the point where I could max my 401k (but no employer match), how do I evaluate whether the 401k investment options are worthwhile or if I'm better off taking my money elsewhere? For what it's worth, I don't mind being risky with my money but I also don't do a whole lot of research and thus far just have money in a Vanguard Target Retirement account and an index fund.
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Jun 22, 2012 23:26
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