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Roth IRA Income Limitations Question: I see that if you make above $110k/year but below $125k/year there is a graded limitation on how much you're allowed to contribute to a Roth IRA for a year. My job's estimated annual income is right at the lower edge of that range, so presumably overtime or some tax deductions would push my Adjusted Gross Income up by a hard to predict amount. So the meat of my question is: how do I avoid over-contributing to my Roth IRA if I don't know what my limitation will be until I file taxes for that year? Wouldn't it already be too late to contribute at that point?
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Dec 3, 2011 06:41
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So as I understand it Index Funds are golden because they have minimal expense fees and automatically diversify you well, correct? If so which of these index type funds in my 401k options would you recommend? FID US EQ INDX - which looks like 90% S&P500, 10% other The Northern Trust Collective All Country World Index ex-US Investable Market Index Fund - um, some sort of International Index? Its only like 2 months old apparently. Vanguard Balanced Index Fund Institutional Shares - looks like 60% US stock 40% bond index Vanguard Total Bond Market Index Fund Institutional Shares - bond index Everything else in my 401k option list looks like a mutual fund with +0.5% expense ratios, so I should generally just avoid those I think? e: I suppose this would help: 26 years old, make about $100k annually, willing to park money and think longterm. Subvisual Haze fucked around with this message at 00:00 on Feb 12, 2012 |
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Feb 11, 2012 21:33
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Daeus posted:1) 401k up to match amount Where in this very helpful chart would you put paying off student loans with 6% interest rate? I'm guessing after maximizing the ROTH IRA but before maximizing the 401k?
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Feb 22, 2012 05:17
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I would like to offer my heartfelt thanks to the suggested reading section of the OP. Particularly after reading "The Four Pillars of Investing" I now feel confident in the really simple yet effective indexing strategies laid out in the book. I'm also now perfectly comfortable ignoring every piece of advice the insurance company guy (who I was referred to by otherwise intelligent people at work) gave me. Thanks for the unnecessary waste of money whole life and mutual fund with a load rear end in a top hat. Took those off auto-deposit almost as soon as I finished the book. My biggest question regarding index fund investing is ETFs. Most of the Bernstein/Bogle type books recommend Index mutual funds over ETFs based primarily on the transaction fees that exist for ETFs. However, now Fidelity and Vanguard offer their own index-type ETFs with transaction-free trading. Since ETFs are sold by shares they seem to have an advantage over the mutual funds in that there is essentially no minimum investment correct? You could theoretically just buy 1 fund of an ETF if you want? Looking at this helpful site: http://investingguy.blogspot.com/2010/01/comparison-of-vanguard-charles-schwab.html it appears that for Vanguard for example their ETF version of most funds has a better Expense Ratio than the normal index mutual fund (but not quite as good as the Admiral Funds, which unfortunately have a $10k minimum). Am I off base here, or does it make more sense to invest in ETFs until you reach the portfolio level where you can afford Admiral mutual funds?
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Mar 9, 2012 00:51
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SlightlyMadman posted:So what's the deal with the income-based cut-offs for Roth IRA contribution? I'm having a hard time finding up-to-date information with real numbers. Roth IRA income limits are actually meaningless due to a loophole that is widely exploited called the "backdoor Roth IRA". I'd recommend you google that and learn to ignore pesky income limits. It works roughly like this: 1) Open a traditional (non-Roth) IRA and fund it with $5,000 post-tax (this is the annual funding limit to all IRAs). 2) Let it settle for a couple days (may not actually be necessary) 3) Convert your entire traditional IRA account into a Roth IRA 4) Normally here is where you'd pay taxes for the conversion, however your money has sat for so short in the traditional IRA that you have virtually no earnings to tax. 5) Rinse and repeat every year. So even though your income might prohibit you from directly contributing to a Roth IRA, with a little workaround you end up funding the Roth IRA regardless.
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Jun 7, 2012 01:31
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Unormal posted:Fundamentals I honestly can't recommend this book enough. I came out of college knowing practically nothing about investing, and now I feel perfectly comfortable where my investments are. Feel free to kind of glaze through the first quarter or so of the book. The author spends a fair amount of time on math that helps establish his later theories, but having an absolute understanding of it isn't really necessary. The book seems to become a lot more practical (and less theoretical) once you're through the first quarter or so.
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Jul 7, 2012 21:27
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flowinprose posted:Yes, to a degree. You will probably have to pay brokerage commissions when you buy the ETF (this depends on whether your account is actually with Vanguard). If you didn't have to pay commissions then it would almost always be better to own the ETF as the expense ratio will be smaller. Most of the big brokerages will let you trade their personal ETFs commission free to a certain amount. I know Fidelity and Vanguard for certain do. For that reason I actually find ETFs preferable (having a lower ER) at least until your account is large enough that you can buy into the mutual funds with the really low ER.
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Jul 14, 2012 21:37
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Torpor posted:Yeah I have a tiny bit of money in a money market fund, which brings up a good point, that I should remove that money from the money market fund, since it'd be more useful if I turned it into cash and hid it under my matress. One of the most important rules of investing that is explained very well in The 4 Pillars of Investment is the relationship between risk and return. Essentially, if you aren't willing to watch your funds drop occasionally in the short term, they have no chance of rising high in the long-term. If you want something with no volatility, odds are it will barely keep up with inflation.
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Jul 19, 2012 00:10
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The odds of you finding an investment that consistently makes 6.8-7.9% annually are extremely small. I'd advise aggressively paying down the student loans instead of investing into a 401k. The amount you'll save on future student loan interest will likely exceed the gains you would make from the 401k.
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Jan 13, 2013 21:13
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cowofwar posted:Mutual funds are generally free to purchase and can be found as "no load" with reasonable MERs. ETFs have transaction fees just like shares in stocks but have lower MERs. If you're working with a small amount of money you'll want to focus on mutual funds as the transaction costs of ETFs will murder your returns unless you're working with > $15,000. Vanguard and Fidelity both have transaction free trading of some of their ETFs.
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Jan 15, 2013 01:41
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I use Fidelity for convenience because my job's 401k is through them. Just in December Fidelity dropped a lot of the minimums and fees on their Spartan Index mutual Funds. You can now get investment class shares for $2500 and advantage class shares for $10k (which, while a fair amount, is a big drop from the previous $100k). Advantage class has expense ratios that are very competitive with Vaguard. This press release has a really nice table of some of their best index options: http://www.fidelity.com/inside-fidelity/individual-investing/fidelity-lowers-costs-for-index-fund-shareholders
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Feb 2, 2013 19:14
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Student loans or 401k maxing first? I already have a 6 month expenses fund, fund a Roth IRA each year, and pay up to the match on my 401k, but I keep waffling on where is the best place to put money after that. My income is too high to get a student loan interest deduction, and my student loans are currently at a 6% interest rate. My 401k is pretty well run investment-wise, and has some pretty great index funds for domestic and international stocks, and total bonds. I guess the main way I look at it now: Student loans first: guaranteed 6% return on investment (which is pretty good). Less debt hanging over me equals more financial security. Seeing these completely paid off would just emotionally feel great. 401k first: I can never go back and regain the years that I didn't max my 401k. Also, I can always max the 401k then do the student loans with whatever is left. Any thoughts?
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Aug 10, 2013 20:12
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The Agent posted:I have a 403(b) retirement account through my employer and I just received a notice that the funds in my account were (automatically) rebalanced about a week ago. I am in a target date retirement fund and am somewhat familiar with the concept of rebalancing from reading "The Four Pillars of Investment". I am a little concerned about the frequency of the rebalancing and incurring capital gains taxation if the shares are not held for a long period before selling. I called and spoke to a representative who said that rebalancing can occur anywhere from every 3 months to yearly (depending on what, she wasn't able to say). The Four Pillars is actually in favor of regularly rebalancing your account. It's a natural way of selling stocks that were doing well and buying more of index segments that were doing poorly. Outside of the tax protection of a retirement account this would burn you with fees and taxes, but inside the 403b your money is "protected".
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Aug 13, 2013 01:31
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Popete posted:It seems a Roth IRA is the way to go over a traditional as you pay the taxes now instead of in the future when (likely) taxes would be higher. Is there something I'm missing or is Roth the way to go? The real benefit to the Roth IRA over the traditional IRA is flexibility. You can pull out your full principal investment (but not earnings) at any time penalty free from the Roth IRA. You can't do this with a Traditional IRA. You also aren't required to start taking distributions at any point from a Roth IRA, but with the traditional you're required to start taking a certain amount of money out at age 70 or you pay a heavy penalty. For that reason I'd recommend a Roth IRA over a Traditional IRA in the large majority of situations. 401(k)'s are the more variable situation. Here there really isn't much of any difference in the rules between pre-tax (traditional) plans or post-tax (Roth) plans, it just boils down to whether you want to pay your taxes now or when you take the money out of the account later. If you think you'll be taxed more now than the future lean towards a Traditional 401(k), if you think you'll be tax more in the future than now lean towards a Roth and pay the taxes now. You could also just go 50/50 between the two options.
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Oct 30, 2013 03:41
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Crabby Abby posted:It's been a while since I read the four pillars, but earlier this week I picked up the intelligent asset allocator. I wanted to revisit my 401k allocation, and I was hoping it would be more in depth than the four pillars. I suppose it is, but when you get down to it the take-aways are the same: Understand the connection between risk and reward. Own a diversified portfolio of low cost index funds consistent with your tolerence for risk, complexity, and divergence from the major indexes. Don't try to time the market. Those sound like pretty lovely funds. I get my funds through Fidelity, so maybe these numbers are even lower on Vanguard, but the Fidelity Emerging Market index Expense Ratio is 0.20-0.32% (depending on the amount you're investing, the smaller number requires $10,000 in the fund), and the Small Cap index Expense Ratios is 0.19-0.33%. Your situation sounds similar to mine (a 401k with a few index funds, and many more actively managed funds). What I do is use my 401k to invest in the few index funds available (SP500 and a general bond fund for mine), then use my Roth IRA to invest in the more exotic funds like a Small Cap index.
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Jan 3, 2014 03:37
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theHUNGERian posted:As I said, it's an after tax contribution from my checking account. Exactly. It's a pretty sweet deal, this is my third year doing the trick. If you convert right away you'll end up owing essentially nothing in taxes.
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Feb 12, 2014 02:46
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theHUNGERian posted:When should I convert? Right after (same day) making my contribution? What is the penalty for waiting a couple of months between making a contribution and making the conversion? Convert as soon as it will let you. I only mention this because Fidelity made me wait a week or so for the money to "settle" before it would let me convert it into a Roth. That also ties into the taxes thing. You'll only end up paying taxes on earnings that you convert, not the principle. At least in Fidelity my Traditional IRA money was held in a FDIC bank account by default, so one year when I waited a few months before converting it actually accumulated a small amount of interest that would be taxable. I don't think it had any significant impact on my taxes, but if you convert it quickly that's just one less thing to worry about. Also, you chose correctly, do NOT withhold taxes.
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Feb 12, 2014 19:05
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Mouse Cadet posted:For someone in their 30's making 50K, would a IRA or Roth IRA be better? Without taking into account current vs. future tax rates (because it is really hard to guess what congress will set future tax rates at) the Roth IRA is an all around better plan than a Traditional IRA just due to the flexibility it offers. Roth contributions can be withdrawn at any point without a penalty, Traditional IRAs cannot until age 59.5. You can use this factor to treat your Roth IRA as a super emergency fund. On the flip side Roth IRA's do not require you to start receiving distributions at any point, Traditional IRAs have required distributions at age 70.5. You can make too much and fail to qualify for a Traditional IRA, however with the Backdoor method Roth IRA's have no real income restrictions. Finally Roth IRA's allow you to put away more relative money. Although both Traditionals and Roth are capped at the same contribution amount for the year, the Roth amount is already taxed. $5500 that you've already paid the taxes on is more than $5500 that you haven't yet.
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Feb 17, 2014 05:43
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razz posted:So there's a thread on Reddit where a lot of people are speculating that "the government", in order to deal with the growing deficit/screw people over/etc, will change the rules for Roth IRAs sometime in the nebulous future so that your earnings will be taxed. So essentially you will be taxed twice on your Roth IRA money (once before you put it in, again on the earnings when you take it out). There were a shocking number of replies along the lines of "I know this is going to happen, that's why I don't have a Roth IRA" There's also the potential that the government will tax all your income and savings 100% to pay for things, and then enslave you in a FEMA camp. Or they could devalue the currency with hyperinflation so all your american dollars are worthless. Or Obama could declare himself King of America, and state that we're all just borrowing his money. Or they could insert government mind control waves in our fluoridated water. Clearly the only solution is to spend all your money on purchasing physical gold, firearms, and bottled water to stock your bunker. I wouldn't recommend structuring your financial plans around crazy worst case scenarios about what the government could potentially do. Subvisual Haze fucked around with this message at 07:39 on Feb 23, 2014 |
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Feb 23, 2014 07:36
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Henrik Zetterberg posted:Thank you, this is awesome! Google "backdoor Roth ira". It takes a couple extra steps, but you can generally avoid the income limitations entirely.
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Feb 27, 2014 02:24
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Hashtag Banterzone posted:Personally I used Schwab's Portfolio Builder and picked the Aggressive Plan. It does like 5% Cash, 50% US Large Cap, 20% US Small Cap, 5% Emerging Markets Equity, and 20% International Equity. (I ignored their 5% cash recommendation) Regarding the "cash" recommendation, remember that you're looking at your portfolio on the whole. That 5% can include simple things like your bank savings account. Also I'm pretty sure most Mutual Funds carry some level of cash when you look at their detailed composition. So really that 5% cash should take care of itself.
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Feb 27, 2014 17:35
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It's a pretty bad hybrid of life insurance and a lovely mutual fund. Buy term life insurance if you want life insurance, and leave the investing to your IRA's and 401k's first.
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Apr 19, 2014 01:25
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Sand Monster posted:I'm trying to decide how to allocate for my 401k. Any suggestions? I think the choices are a little weak, but, I'm no expert. Those are loving awful. Seriously, an S&P500 Index with an ER of 0.85%? What kind of match are you getting?
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May 29, 2014 00:12
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As Warren Buffet said, "Never invest in a business that you can't understand". Annuities in general are bizarrely complex products that can be very effective at hiding fees.
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Jun 7, 2014 23:09
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Not a Children posted:There's a lot of His article on why you should not contribute to Roth IRAs make me think this guy is a government hating yahoo and a financial idiot, and that everyone should ignore anything this crazy person says. Seriously, just read (or don't) this article http://www.financialsamurai.com/disadvantages-of-the-roth-ira-not-all-is-what-it-seems/, almost every point he makes about Roth IRAs is financially wrong or raw government hating paranoia. He fails to mention: the likelihood of tax rates changing between now and retirement, the ability of high income makers to use the backdoor Roth IRA method, the greater flexability in controlling withdrawals from a Roth relative to a Traditional, and most of his other points are just "gently caress the government".
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Jul 19, 2014 17:23
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ing at the government on this site, and this guy's insistence that you drop $17,500 into your 401k with zero qualifications (while foregoing ROTH contributions) makes me suspect that the average person is not the target audience.
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TwoSheds posted:So have anybody else's portfolios been making GBS threads the bed recently? My 401k went from ~15% rate of return in July to .26% return this morning. The SP500 is down to what it was two months ago, it's been on a pretty consistent slide for 3 weeks. In the large scheme of things it's nothing, but you're definitely not alone in seeing your accounts dip.
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Oct 11, 2014 18:30
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MJP posted:We've been above the income limits for IRA contributions for a couple years. We did contribute when we were below the limit, so we have IRAs, just haven't contributed to them in a while. Are you saying you previously contributed to a Traditional IRA and took the tax deduction from doing so? And now the money is still in a Traditional IRA? If so, then doing a backdoor Roth does become messy. When doing a Traditional to Roth conversion you need to pay taxes on the earnings (not contributions), and you can't just specify you only want to convert the contribution money unfortunately. Subvisual Haze fucked around with this message at 23:19 on Jan 28, 2022 |
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Jan 28, 2022 23:16
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My own workplace just enabled after tax 401k contributions and in-plan Roth conversions, which means now Mega Backdoor Roth is now a possibility. It seems like such an obvious flaw in the tax code, but so far the feds seem to have no interest in fixing it. 1) I contribute after-tax dollars from paycheck to my 401k (which inexplicably doesn't count towards the Traditional/Roth yearly contribution limit) 2) My plan instantly converts the after-tax 401k dollars into Roth 401k dollars. Since this was done instantly, no tax from earnings during the conversion.
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Jan 28, 2022 23:28
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Motronic posted:Wait until you can hear about the ones really wealthy people get to use! When the discussion forums talk about starting a corporation addressed in Puerto Rico and using that to pay myself salary/benefits I know I've dug too deep.
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Jan 28, 2022 23:52
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Something silly I just learned about backdoor roth contributions is that even having money with earnings in Traditional IRAs can be worked around. You can transfer your Trad IRA into your work 401k, at which point it stops mattering for purposes of future Roth IRA conversions.
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Jan 31, 2022 18:45
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obi_ant posted:I'm currently in the middle of doing my taxes and stupidly, did not set any money aside for the money I owe. I received a 1099-DIV and my overall taxes is much larger than what I'm used to. What do I need to do in the future, to prepare for something like this, aside from just randomly saving money to pay my taxes. Try to keep your higher dividend stocks inside a tax protected retirement account if possible. Beyond that not a lot you can do, dividends are generally treated as normal taxable income. If they're qualified dividends, that income may be at a lower tax rate, but you'll still be paying taxes on them. The way the tax code treats dividends versus capital gains is silly. It goes a long way to explaining why so many corporations now prefer buying back their own stock instead of paying out dividends, buying back shares will increase the price of the stock but won't trigger taxes until the shareholders choose to sell.
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Feb 7, 2022 18:41
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I was wondering if someone who is knowledgeable about arcane Roth IRA withdrawal rules could confirm my line of thought here. From what I've read, for purposes of withdrawals Roth IRA funds are classified and taken out in order of 1) Contributions -> 2) Conversions -> 3) Earnings. Even if taken before age 59 1/2, there are no taxes or penalties if you take out contribution funds (if you've had the Roth IRA open at least 5 years), however there frequently taxes and penalties if you take out earnings. With conversions (including funds from Backdoor Conversions) there is no taxes or penalties as long as the funds were converted at least 5 years ago? Website guides seem a little unclear on that last point.
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Feb 10, 2022 20:06
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moana posted:Yep, you can read up on the 5 year "seasoning" on lots of the FIRE blogs. They like to create a Roth conversion ladder, where each year you convert another chunk and then you can withdraw it in 5 years penalty free. Ah, good to know, thank you! One more: Roth 401k funds can be rolled over into a Roth IRA with relatively little hassle after you leave a job from what I understand. In that case, those Roth 401k funds retain their contribution/conversion amounts as they mix into the Roth IRA, correct? My workplace just allowed after-tax 401 contribution and in-plan conversions. So I could theoretically: 1) right now contribute after tax dollars into my 401k 2) my plan does an automatic "in plan conversion" to convert that money into converted Roth 401k funds 3) At a later date I leave my job and I rollover the Roth 401k into my Roth IRA 4) The previously converted funds can be withdrawn tax/penalty free as long as they've seasoned for 5 years, following the Roth IRA rules
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Feb 10, 2022 21:32
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hobbez posted:It's a mix of both. I'm not an expert at reading a 1099 but it looks like there was a lot of dividends and also a lot of "proceeds" above cost basis. Never hold mutual funds in a non-retirement account. By their very nature they'll generate long-term capital gains that you'll get stuck paying taxes on. ETFs were "designed" specifically to avoid this problem. Mutual funds are still fine in tax protected accounts, but in taxed funds an ETF that invests in the same things will always be better for taxes. I'm sorry your family is fleecing you 
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Feb 14, 2022 17:19
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Ah, apparently Vanguard in particular are wizards and figured out a way to avoid taxes on their mutual funds https://www.bloomberg.com/graphics/2019-vanguard-mutual-fund-tax-dodge/quote:Like flipping a light switch, Vanguard Group Inc. has figured out a way to shut off taxes in its mutual funds. I've definitely been stung by Capital Gains distributions from non Vanguard mutual funds though. Good to know Vanguard is still very much on top of things though.
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Feb 14, 2022 18:07
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Mu Zeta posted:Yes, but it's because Vanguard forced everyone into it by selling existing holdings for new ones. So people that held target date funds in taxable accounts got a nasty surprise last year. Wow, reading up on the huge distributions hitting targeted funds held in taxable accounts in 2021 is pretty crazy. https://www.whitecoatinvestor.com/vanguard-target-retirement-distribution-disaster/ It sounds like Vanguard rather intentionally left individual investors holding the bag to attract more institutional investors. Especially now that Bogle himself has passed on, it's probably naïve to continue to expect Vanguard to behave very differently than their competitors.
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Feb 16, 2022 20:24
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Good-Natured Filth posted:Quick backdoor Roth question. I've successfully rolled my Traditional Rollover IRA into my 401k and have zeroed out my Trad IRA amounts. Does it need to be zero for a set amount of time or can I go with the backdoor ASAP? Should be fine, the Form 8606 only uses end of year data for Trad IRA basis. https://www.marottaonmoney.com/qa-can-i-do-a-backdoor-roth-and-a-reverse-rollover-to-a-401k-in-the-same-year/ gives an overly detailed answer, but seems to agree. I did enjoy their obscure observation that trying to rollover non-deductible Trad IRA contributions into a 401k will cause a divide by zero error on the Federal 8606 form.
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Feb 19, 2022 06:28
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withak posted:Luckily six cents rounds to zero for tax purposes! I foolishly let my Trad IRA leftovers accumulate to over $0.50 one year. Curse you $1 of extra taxable income.
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Feb 19, 2022 06:36
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Leperflesh posted:And not to undercut your point, but someone who bought in just before the 1929 crash and held for 30 years did just fine. Except it was impossible to invest in an sp index fund (or any other index fund) until 1975. And a lot of our backward looking returns data suffers heavily from survivorship bias when calculating returns. So in the 1929 example you likely would have been invested in individual stocks which do have the potential to go to zero.
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Feb 22, 2022 21:37
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doingitwrong posted:The question that goes unanswered is: What % of active investors do you need to have to ensure price discovery persists? How high could you crank the ratio of passive investors before there gets to be serious structural problems? Remember, passive investors are price-takers. They don't particularly affect the prince on a daily basis because price discovery happens at the margins. At the same time that you have a massive passive investment base, you have these algorithmic traders riding the edge of instants to scrape fractions of a penny of profit. It's an excellent question, but we won't know the answer to it until the system does (or doesn't) breakdown and cause the next financial crisis. Even John Bogle, who practically invented passive index funds, was wondering aloud about the potential effects of passive funds becoming such a big part of the pie. It does seem logical though that at a certain point if passive funds become too predominate that you have a "bots replying to bots" type situation you see on social media, where automated responses trigger further automated responses. I would be shocked honestly if some of the smarter investment funds haven't yet devised strategies to front run passive fund rebalancing. Truly weird stuff might start happening if a relatively small float stock gets listed on an important index and sees its shareprice dramatically increase. What happens if over 90% of the tradeable shares are "locked" into passive funds and then new investment money continues to inflow into the pertinent ETF? Would you get a positive feedback loop where the passives squeeze the price to infinity trying to secure finite shares?
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Feb 24, 2022 22:41
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