Long Term Investing & Retirement: The second best time is now

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Long Term Investing & Retirement: The second best time is now

Josh Lyman: May 24, 2009

I�m starting a federal government job in a couple weeks and their version of a 401k is the Thrift Savings Plan which also comes in regular and Roth forms.

I�ve always heard that you should use a Roth 401k/IRA, but it seems that your income would actually be lower in retirement than your late 40s and 50s. It seems that the main benefit of Roth is that your capital gains over those 20-30 years is tax-free. Is that interpretation correct?

I�m a fairly active stock trader so my preference has always been to just have my �retirement money� in a brokerage account that doesn�t have rules or penalties for withdrawals. But since I can withdraw my contribution from a Roth IRA penalty-free, I should probably set one up right?

Josh Lyman fucked around with this message at 08:29 on Apr 18, 2018

# ¿ Apr 18, 2018 08:09

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# ¿ May 3, 2024 16:57

Josh Lyman: May 24, 2009

Anaxite posted:

If you want flexibility, that sounds about right. Going Roth means you should both enjoy tax-free capital gains, and have no particular rules or penalties for withdrawals after a certain age. The TSP looks like it also has the funds you'd really need. You might as well do this, and you can of course do a rollover later if you really need to.

My main concern is being able to make withdrawals for big purchases before age 59 1/2, though I guess that defeats the purpose of a retirement account. I guess the 10% penalty on an early withdrawal is better than the 15-25% ordinary income tax I'd pay on capital gains if I put it into a brokerage account instead.

To avoid over contribution to a Roth 401k due to a mid-year salary increase, should I avoid maxing out my TSP until the end of the year to avoid the penalty? Or should I just max it as early as possible and withdraw the excess before April 15 the following year?

Similarly, if I'm close to the income limit for Roth IRA, should I just do a backdoor Roth right? In that case, would I need to open a new traditional IRA every year and then I could convert it into my existing Roth IRA?

Josh Lyman fucked around with this message at 16:33 on Apr 18, 2018

# ¿ Apr 18, 2018 15:21

Josh Lyman: May 24, 2009

Motronic posted:

Uhhhh....you pay BOTH of those things when you take an early distribution.

Even in a Roth? I know Roth you can withdraw contributions early with no penalties or fees, but what about the earnings?

# ¿ Apr 18, 2018 20:16

Josh Lyman: May 24, 2009

Leperflesh posted:

You guys who have the cash to buy a house outright should do so, and then mortgage it afterward. Your offer will be much more attractive if it lacks a financing contingency, you'll be able to close faster, and consequently you'll be able to underbid the financed bidders and still get the house. Obviously do not waive your inspection contingencies.

A cash-out mortgage with no pressure to close quickly, the luxury to shop around and find the best deal, etc. will be both simpler and get you probably a much better deal.

Why would you take out a mortgage on a home you already own outright? Just to use it as a low interest loan?

# ¿ Apr 22, 2018 12:06

Josh Lyman: May 24, 2009

Should I just open an IRA with TD Ameritrade since my brokerage account is with them already? My plan is to just put the IRA money into VTI or treasury ETF. I'm very close to the Roth contribution limit so maybe I should just open a regular IRA to make things easier.

For background, I currently have 401k withholding into a Roth but my employer match goes into traditional. The last 3% of the match goes into a "savings" retirement account that you can withdraw from after 2 years (savings in quotes because it basically generates no interest). Since it's a retirement account, it's subject to withholding and early withdrawal penalties before age 59 1/2 if I just transfer it to my bank account, hence the desire to open an IRA to avoid those penalties. Since it's just 3%, this is a relatively small amount. I'm almost 38.

Josh Lyman fucked around with this message at 19:04 on Aug 29, 2023

# ¿ Aug 29, 2023 18:58

Josh Lyman: May 24, 2009

KYOON GRIFFEY JR posted:

Don�t open a Trad IRA other than to do backdoor Roth contributions.

So your suggestion is to open a Roth IRA to put the 3% extra match into? Who enforces the Roth contribution limits? That's my main concern. My annual raise is quite small so it's not clear whether I will be above the Roth contribution limit in a few years assuming the limit is raised each year.

# ¿ Aug 29, 2023 19:09

Josh Lyman: May 24, 2009

esquilax posted:

I don't fully understand that savings plan, but if it's the difference between getting no interest for 2 years and being able to invest the money, that's a good reason to open a traditional ira. You can always convert the money to roth later if you want to enable the backdoor.

And I'm pretty sure that anything you open with TDA will be schwab very soon, if they even allow you to open one. Which is fine, I like schwab, but YMMV.

Muir posted:

It's odd that you can't invest the funds from the 3% match that are in a traditional 401(k) account. I likewise have my contributions in Roth 401(k) and my employer contributions in traditional 401(k), but I can invest those in the same funds as my own. Perhaps you can look at doing an in-service rollover to get that money out into an IRA where you can have better choices for investments?

I work for the federal government so I get a 5% match into a 401k (TSP for us but same rules). My agency has an additional 3% match which goes into a retirement plan run by Principal and is supposed to give a savings account-type yield but even with the recent rate hikes, it's extremely low (1.5% this year). I can't move that money until it's vested after 2 years.

So I withhold 8% into a Roth TSP (401k), get a 5% match into a traditional TSP (401k), and 3% match into this "savings" account. That 3% match is what I'm asking about.

I generally like to keep my checking account between 10-15k for credit cards bills and emergencies, and will transfer "extra" money to my TDA brokerage account a few times a year.

KYOON GRIFFEY JR posted:

What match? IRAs don�t have matching. If you�re around the income limit just do the back door up front:

1. Open and Contribute to a trad IRA - lump sum is most convenient.
2. Convert this in to a Roth IRA leaving zero trad balance.
3. Indicate that you have done this on your taxes.

1. This gets back to my question about who enforces whether you can open/contribute to a Roth IRA. Should I just open a Roth IRA while it seems like I'm eligible?
2. After I do this for the first time, can I contribute to my existing trad IRA and move it to my existing Roth IRA once/year? Or does the trad IRA no longer exist after the convert and I have open a new trad and Roth IRA every year and then combine the Roths at some point?

# ¿ Aug 29, 2023 20:26

Josh Lyman: May 24, 2009

raminasi posted:

I can't speak to anything specific to your weird savings plan but these are general questions with general answers:

1. There aren't ever any limits on opening a Roth IRA - the limits are on how much you can contribute to them. There's no need to open one preemptively.
2. When you convert traditional IRA money into Roth IRA money, you pick a destination Roth IRA. It can already have money in it, so most people doing backdoors just have one Roth IRA that they convert into every year. If you convert all of the source account you typically have a choice between closing it and leaving it open with $0 in it. Most people doing backdoors opt for the latter so they don't have to open a new account every year.

Thanks, this clears up some of my specific process questions.

With respect to the contribution limit on a Roth IRA, if I'm over the MAGI limit, do I end up paying a penalty when I file my tax return? Seems like neither your employer nor IRA administrator would know whether you're over the MAGI limit, except if your wage alone is above it then your employer would know. But even then it's not clear to me that HR would bother blocking you from withholding into a Roth 401k.

Should I just go ahead and open a Roth IRA with TDA and move over the 3% that's vested (around $4200)?

Josh Lyman fucked around with this message at 20:59 on Aug 29, 2023

# ¿ Aug 29, 2023 20:57

Josh Lyman: May 24, 2009

My employer does an 8% 401k match (I contribute 8% to a Roth 401k). 5% goes to a 401k but the remaining 3% goes to a 401a which is like a traditional, pre-tax 401k except it's a terrible savings account with 3 year vesting. I rolled over my vested amount into a traditional IRA that I opened in December, which I�m thinking of converting to an empty Roth IRA. My understanding is that for Roth conversions, the deadline for a given tax year is the end of the calendar year, so any conversion would apply to 2024 taxes so there's no hurry. Upon conversion, my understanding is the value of my Trad IRA would be added to my AGI to determine my tax burden.

It was pointed out to me that a Roth and Trad IRA are mathematically equivalent if you have the same tax rate in retirement as you do right now. Since I'm near the income limit for Roth contributions without any prospects to significantly increase my income, I suspect I will be in a similar tax bracket in retirement, so maybe I shouldn't even bother with the conversion. However, everyone expects tax rates to be higher in the future, plus a Roth has the advantage that you can withdraw contributions without penalty (not that I plan to), so maybe the conversion does make sense.

1) I didn't get a tax document for my traditional IRA. Is that because I did a rollover or because I didn�t have any distributions? Does this mean I can deposit $6500 into my Roth IRA for 2023?

2) Since I'm near the income limit for a Roth IRA, should I just withhold into my Roth 401k in the future? I suppose I might be able to contribute a couple thousand into the Roth IRA but it seems easier to just withhold into the Roth 401k. (Note: I'm a federal employee and technically all the 401k stuff I've been talking about is the TSP but it functions identically to a 401k).

Josh Lyman fucked around with this message at 13:31 on Mar 17, 2024

# ¿ Mar 17, 2024 10:20

Josh Lyman: May 24, 2009

Antillie posted:

1. A rollover is not considered to be a contribution and is a non event from a tax perspective. So if you haven't contributed any money to an IRA for 2023 then you can still do so assuming you meet the income requirements.

2. A traditional IRA is only mathematically equivalent to a Roth IRA if two assumptions are true:
a. You are in the same tax bracket in retirement that you are in now. This is not the case for most people. Most people are in a lower bracket in retirement. This is a point in favor of traditional over Roth
b. You take the money from the tax break from investing in a traditional IRA and invest it somewhere else. This gives you more total dollars invested. Practically nobody does this. This is a very strong point in favor of Roth over traditional.

Also, the 401k vs IRA decision often comes down to what investment options you have in the 401k. Get the match obviously. But past that it comes down to expense ratios, the asset allocation you want, how much you can afford to save, and if the IRA income limits apply to you. Ideally you can max out the 401k or nearly so and invest that money in low cost index funds while at the same time maxing out some type of IRA and using that account to round out or just supplement your portfolio. People who are past the IRA income limits often use the back door Roth IRA strategy.

In my case I have a Roth 401k with a traditional match as well a small traditional IRA and a larger Roth IRA. I keep the Roth dollars in my 401k in the S&P500 and the traditional dollars in a US bond index. My traditional IRA is also in a US bond index and my Roth IRA is mostly VTI with some VXUS. This gives me a three fund portfolio (I consider VTI and the S&P500 to be functionally the same thing) with the bonds in traditional and the equities in Roth. I max out my Roth IRA each year because I cannot fully deduct traditional IRA contributions and I personally believe that it is likely that tax rates will be higher in the future.

If I wanted exposure to real estate I could hold a REIT index in my Roth IRA since my 401k does not offer any real estate based investment options. But I don't so instead I use it to house my international position since my 401k's international options aren't great even though its US options are pretty stellar.

Thanks for your thoughts. Because my employer offers a 401k and I make more than 83k, I wouldn�t be able to deduct the contributions to a Trad IRA, so I�d already be taxed on the income I use for contributions ad well as distributions in retirement. That said, Trad vs Roth 401k is a different question.

I decided today to max out my HSA and Roth IRA for 2023 since I had some money sitting around in my checking account.

Going forward, I think I might want to withhold more into my Roth 401k (after maxing HSA and Roth IRA) even beyond the 8% matching because my expenses aren�t likely to go up that much but I get a decent raise each year. Though at some point I�m gonna need to replace my 2008 Prius�I suppose I could withdraw from my Roth accounts for a down payment.

Josh Lyman fucked around with this message at 06:41 on Mar 18, 2024

# ¿ Mar 18, 2024 05:37

Josh Lyman: May 24, 2009

Part of my employer match goes to a 401a (which has vesting; most of it goes to 401k). There's no difference between rolling it to an IRA vs the 401k right? It doesn't count toward my contribution limts and the tax treatment is the same--I get taxed on distributions in retirement. My 401k has very limited options so I just leave it in a S&P 500 fund, but the IRA at least lets me buy QQQM.

Another motivation is to consolidate accounts but if it's all buy and ignore, maybe I shouldn't in order to have more investing options. Even with required minimum distributions, it seems like that's based on the value of the account and the IRS's life expectancy tables, so whether everything is in my 401k or spread out between multiple accounts, my total RMD (and therefore taxable income) would be the same.

Josh Lyman fucked around with this message at 22:09 on Mar 22, 2024

# ¿ Mar 22, 2024 21:54

Josh Lyman: May 24, 2009

My work's student loan repayment program got suspended this year because of Congress' budget shenanigans (I work for a federal agency).

I have $4k remaining at 6.55% interest and could pay it off, but I wonder if I should wait and hope they reinstate it next year, especially since I don't have any payments due until November 2025 and I'll likely get a better return on the S&P 500.

# ¿ Mar 28, 2024 21:11

Josh Lyman: May 24, 2009

One thing that�s missing from this discussion is that there are income limits in order to deduct contributions to a traditional IRA if you�re eligible for an employer sponsored retirement plan.

So for the average person whose work offers a 401k, if their MAGI is more than $77k in 2024, they start to lose the ability to deduct contributions to a traditional IRA, phasing out entirely at $87k. So for those people, a traditional IRA doesn�t make any sense, unless it�s just to do a backdoor Roth.

# ¿ Apr 23, 2024 09:54

Josh Lyman: May 24, 2009

drk posted:

For those still thinking about buying I Bonds at the current rate, now is the time. The fixed rate will likely remain similar, but the variable inflation rate is going down.

TIPS are also currently looking very attractive with all 2025+ maturities having a real yield over 2%.

Is there a reason to go with I Bonds over SGOV or USFR?

# ¿ Apr 25, 2024 20:17

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# ¿ May 3, 2024 16:57

Josh Lyman: May 24, 2009

Antillie posted:

As a general rule inflation protected bonds like IBonds and TIPS are the better choice if inflation turns out to be above what the market is expecting going forward. While nominal bonds (things like BND, SPBO, GOVT, ect...) are generally the better choice if inflation turns out to be below what the market is expecting. Obviously its impossible to know which will be the case before hand. So the usual "the future is unknowable so just diversify" argument applies here. Its worth noting that if you are going to hold TIPS (or a TIPS fund/ETF) you *really* want to hold them in some kind of tax deferred account (IRA, 401k, 403b, ect...) due to the unique way they are taxed. Personally I would *never* hold TIPS in a taxable brokerage account. IBonds don't have this specific issue but unlike TIPS they have a yearly purchase limit and some other unique fiddly restrictions.

Equities tend to be a much better hedge against inflation than bonds over longer periods of time but they do this at the cost of much higher volatility.

I see SGOV and USFR as being roughly equivalent to a high yield savings account. I wouldn't expect them to keep pace with inflation over the long term.

Why do you recommend holding SGOV/USFR in a tax deferred account? Because of the monthly dividend?

As a way to stash money that you don�t want to put into a VTI/VOO type vehicle, they feel about the same to me, with the benefit of SGOV/USFR being liquidity in case you do decide to move the funds to VTI/VOO. But the returns on I Bonds, SGOV, and USFR seem pretty similar.

I haven�t really thought about the tax implications but from what I can tell, the interest on all 3 are subject to federal taxes as ordinary income and exempt from state taxes.

# ¿ Apr 25, 2024 21:29

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Long Term Investing & Retirement: The second best time is now