Help me figure out my personal finances

[otc]

Yes to 5 year rule as a minimum. Exceptions might be made if rents are absurdly high relative to purchase prices (which has been happening in some locales following the crash). If you think you might go back to school or get married/have someone move in in the next few years...its probably also too early to buy.

Don't buy a home as investment--it is not, it is a place to live. You might get great returns on it, but keep in mind that (even before the crash), the real estate market lags the stock market over time. And you won't make proper investment decisions about your home. It might be "time to sell"...except you actually like living there, and you don't have a new place, and your kids like their school, etc.. So now you are stuck holding a poor investment for sentimental reasons (and the reverse can happen...it can be definitely *not* the right time to sell, but you just got into B-School across the country or you need room for another kid and now you are trapped ).
I'm not saying home ownership is bad...just that you shouldn't be looking at potential returns. You should instead be looking at the value you get from it and treating any returns in excess of market as a bonus.

To the OP--you don't have enough in your retirement accounts. Up the 401k contribution, and start an IRA (roth or trad...doesn't matter which nearly as much as just having the accounts). You can still make a 2013 contribution until april and then you can make your 2014 contribution--that eats up $11k right there (and might even get you some taxes back if you go traditional and are below the income limits).

 

[MrG]



What are the headaches and suckages that you speak of? My gut feeling is that when you sell your property after a few years, you will not have regretted being a landowner of said property!

I'm posting from my phone, and the response to this requires more space than is practical on one, but I'll try to remember to come back and reply next time I'm at a computer.

Don't put anything extra into 401k besides employer matching.  And nothing in IRA.

Savings in accounts locked up for a good 45 years is not savings. 

For those of us who pay income taxes, this is a profoundly stupid piece of "advice."

 

[otc]

Yeah, it is pretty bad advice.

Also, in the case of a Roth IRA, you can withdraw principal without penalty. So I actually started one while I was still in college--figured I could put extra money in there even if I didn't have a lot of savings since it would still be available in a real emergency (and since there are contribution limits, every year you wait is another $X that you will never be able to deposit).

When you are the OP and have 80+k in cash, you don't need to be worried about locking up money until retirement, and the benefits of no taxation on 35-45 years of gains are immense. Also, you can use IRAs to carry tax-heavy assets (like REITs) and to not have to worry about holding a stock/fund long enough to qualify for cap-gains.

 

[chogall]

I'm posting from my phone, and the response to this requires more space than is practical on one, but I'll try to remember to come back and reply next time I'm at a computer.
For those of us who pay income taxes, this is a profoundly stupid piece of "advice."

So you are willing to save $4,900 (assuming a 28% tax bracket) for $17,500 you might not get back in 45 years. Good for you. I will take my cash now and invest and save.

Yeah, it is pretty bad advice.

Also, in the case of a Roth IRA, you can withdraw principal without penalty. So I actually started one while I was still in college--figured I could put extra money in there even if I didn't have a lot of savings since it would still be available in a real emergency (and since there are contribution limits, every year you wait is another $X that you will never be able to deposit).

When you are the OP and have 80+k in cash, you don't need to be worried about locking up money until retirement, and the benefits of no taxation on 35-45 years of gains are immense. Also, you can use IRAs to carry tax-heavy assets (like REITs) and to not have to worry about holding a stock/fund long enough to qualify for cap-gains.

Its 46.5 years of gain with the current IRA distribution age at 70.5, assuming one enters the workforce at 24. And that distribution age is going higher as well. Tax is going higher as well for investments. Its better to pay your LT cap gain at 0%/15% today then paying LT cap gain at 20% + 3.8% FU tax + all the tax increases they will impose during the next 46.5 years.

On the other hand, if you believe tax rate will be going down and retirement age will be decreasing for the next 46.5 years, go ahead, max your IRA/401(k).

The worst piece of advice is to max out 401k/ira on a yearly basis. The second worst advice is to withhold too much tax resulting in a tax return every year.

 

[otc]

First off...I doubt you are going to wait until you are 70.5 until you pull money. That is when mandatory withdrawals occur--you can start taking out interest without penalty at 59.5. Also, if you are maxing your 401k and an IRA, I highly doubt you are in the 28% marginal tax bracket--some people save that much, but not many.

Second, you only have to pay those taxes once at withdrawal. How do you pay 15% now if you haven't yet earned the interest? What will happen with a taxable account is you will pay 15% now, 15% again when you sell the next fund 5 years form now, 15% again in 15 years, etc. and then 15% when you finally withdraw the money. You have to pay a lot of taxes on the churn. Also, if you think rates will go up...then they will go up for both taxable and non-taxable.

I think you don't quite understand how this stuff works. In fact you are simply wrong and your advice is imprudent.

 

[otc]



The second worst advice is to withhold too much tax resulting in a tax return every year.

I bet half of the people who parrot this line around actually get refunds every year. Its like saying "you should keep a budget!"...something you can throw out there to sound intelligent even though 99% of people won't do it and it doesn't really matter.

Most W2 wage earners don't have enough control over their withholding to even offset their refund. A single dude in his 20's without property is pretty much unable to reduce his withholdings--he can only claim a single allowance on a W4.

Even if he could...it doesn't really matter in the scheme of things. Dude's got a bunch of cash, so he probably makes a decent salary. Depending on his filings, assuming he doesn't have a lot of stuff to deduct after the fact (again, young single dude with simple finances), he is probably going to get ~$1000 back. Even if that were 2% of his income (50k salary)...who cares? Not that big a win. You will get it eventually--sure, you might have missed the chance to earn a little interest, but that money was earned over time, so its not like you would even get a year's worth. So by getting a tax refund, he is missing out on like $10 in interest max.

For $10, it simply doesn't matter--its not worth the time he would have spent figuring out how to not withhold that extra money.

 

[gettoasty]

^I don't understand what chogall means regarding withholding too much tax... I always claim '0' every year and receive a decent amount back come tax return [refund] time.

I know of a client who would actually like to explore paying more to setup a DB plan to contribute more to a savings/retirement plan, and understands it will cost more to run than a simple DC [401k] plan as there will be employee contribution requirements. On the flip side, the government can continue collecting taxes. The client explained rather than owing taxes to the government, the DB plan can help funnel the payments to employees instead. It's just another example based on sentiments and perception.

Another point can be made about high income households where a spouse may forgo working since at such a high tax bracket, the spouse earning a lower income is basically working to pay taxes.

@otc mentioned IRA and REITs (non-traded REITs?)

So you are willing to save $4,900 (assuming a 28% tax bracket) for $17,500 you might not get back in 45 years.  Good for you.  I will take my cash now and invest and save.

Can you explain further what this means because it seems you're saying the same thing except the former has tax savings whereas the latter is non-qualified investments / savings. You do know that you can direct your retirement account similar to if you were investing in a brokerage account, right?

You're really confusing me.

 

[alexvlad]

If I were you I would buy an apartment or invest part of them in gold or land in the country side.

 

[archetypal_yuppie]

Don't buy a condo/house. Just get 10 Attolini jackets instead.
-SF

 

[chogall]

I bet half of the people who parrot this line around actually get refunds every year. Its like saying "you should keep a budget!"...something you can throw out there to sound intelligent even though 99% of people won't do it and it doesn't really matter.

Most W2 wage earners don't have enough control over their withholding to even offset their refund. A single dude in his 20's without property is pretty much unable to reduce his withholdings--he can only claim a single allowance on a W4.

Even if he could...it doesn't really matter in the scheme of things. Dude's got a bunch of cash, so he probably makes a decent salary. Depending on his filings, assuming he doesn't have a lot of stuff to deduct after the fact (again, young single dude with simple finances), he is probably going to get ~$1000 back. Even if that were 2% of his income (50k salary)...who cares? Not that big a win. You will get it eventually--sure, you might have missed the chance to earn a little interest, but that money was earned over time, so its not like you would even get a year's worth. So by getting a tax refund, he is missing out on like $10 in interest max.

For $10, it simply doesn't matter--its not worth the time he would have spent figuring out how to not withhold that extra money.

You can change your withholding liberally but if you withhold too little you will receive a penalty. The worksheet is just a worksheet to let you control your withholdings.

That said, its about having as little money tied up with government regulatory programs as possible to minimize the opportunity cost.

^I don't understand what chogall means regarding withholding too much tax... I always claim '0' every year and receive a decent amount back come tax return [refund] time.

I know of a client who would actually like to explore paying more to setup a DB plan to contribute more to a savings/retirement plan, and understands it will cost more to run than a simple DC [401k] plan as there will be employee contribution requirements. On the flip side, the government can continue collecting taxes. The client explained rather than owing taxes to the government, the DB plan can help funnel the payments to employees instead. It's just another example based on sentiments and perception.

Another point can be made about high income households where a spouse may forgo working since at such a high tax bracket, the spouse earning a lower income is basically working to pay taxes.

@otc mentioned IRA and REITs

(non-traded REITs?)
Can you explain further what this means because it seems you're saying the same thing except the former has tax savings whereas the latter is non-qualified investments / savings. You do know that you can direct your retirement account similar to if you were investing in a brokerage account, right?

You're really confusing me.

1. The best case is to pay no tax by April 15 or receive no tax return at all, which means you are all kosher with the IRS (no low-payment penalty/audits) and at the same time having all YOUR money in YOUR own pocket. But to park a decent amount of YOUR money at the IRS/State Treasury for NO interest, that's called opportunity cost lost at best, or bad tax management.

2. Employers have different incentives than employees.

3. No, spouse earning lower income isn't working to pay taxes; tax is incremental based on brackets so even $100,000 salary at 38% fed + 10% state, the family will still receive $50,000 in post-tax earnings. Its the multiple state income tax that people needs to avoid.

4. Sure, you can direct your IRA accounts or your 401(k) accounts in PCRA (if plan sponsor allowed), but do you really have all the control with "your" money?

Money in 401(k)/403(b)/IRA CANNOT be withdrawn without incurring early distribution penalty. Even those exceptions to early distribution penalties are set up so they could gate as much of your money from you as possible. For example, first-time home buyer, you can only get up to $10,000 without penalty; good luck buying a garage space with that $10,000. Or you can only take out as much medical expense if they are higher than 7% of your AGI; at higher than 7% AGI you are going to be broke from those medical bills either way. Oh, and they are still going to charge you income tax once you start the distribution either for your children's education or when you are too old to use those money for leisure.

Pay your taxes up front, get the cash on hand, opportunities will be much greater.

And if you still are eligible for Roth IRA, your cash is much better used outside of Roth IRA. And if you are not eligible for Roth IRA/401(k), open one and convert all of your traditional into Roth, sit through the 5 year jail time before taken them out for more liberal use.

 

[chogall]

Don't buy a condo/house. Just get 10 Attolini jackets instead.
-SF

I heard those Attolini jackets are lifetime investments.

 

[otc]

I think chogall be trollin'

He must be in some industry that benefits from people making poor financial decisions early in their lives.

 

[chogall]

I think chogall be trollin'

He must be in some industry that benefits from people making poor financial decisions early in their lives.

I can't help you much if you think these are poor financial decisions.

1) Getting as much cash on your paychecks without occurring underpayment tax penalties.
2) Contribute to 401(k) *only* as much as your employer matching program; if they don't match, don't contribute.
3) Convert all Traditional IRA to Roth IRA for tax free growth
4) Free up Roth IRA for liquidity without taking any penalties

 

[gettoasty]

I think Chogall is onto something. Maybe he works IT in the finance industry because PCRA is a technical term linked to Schwab accounts IME, or I think he meant more generally, self-directed brokerage account (window) SDBA that only recently did 401(k) sponsors adopt to their plans. You don't like your target date funds, now you have an option go buy some FB stock!

And for first time home buyers there's always the loan option...

Chogall is making the argument more about opportunity cost rather than efficient tax savings. Though, he does make the point in that if you are efficient with your taxes, the money in hand in lieu of tax-deferred accounts can be better put to use, which then poses the question if you already have your tax obligations covered, one can potential gain more utilizing other investment type/vehicle.

I get the feeling Chogall is just belittling company sponsored and individual retirement plans as a whole, not so much the idea of tax-deferred benefit.

 

[otc]



1) Getting as much cash on your paychecks without occurring underpayment tax penalties.
2) Contribute to 401(k) *only* as much as your employer matching program; if they don't match, don't contribute.
3) Convert all Traditional IRA to Roth IRA for tax free growth
4) Free up Roth IRA for liquidity without taking any penalties

1) I already said that this barely matters. Unless you royally screwed up, you can't really be overpaying that much, and the opportunity cost of letting the feds keep the money for a while is negligible. Obviously if you are way over withholding for whatever reason, you shouldn't be...but getting a $1000 tax refund is not a huge deal if you are already together on your finances (which you probably are if you are dealing with minor stuff like that). In the grand scheme of saving for retirement--or figuring out what to do with a pile of cash like the OP is--whether or not you get a tax refund at the end of the year is a meaningless distinction.
2) I'll come back to this. You *first* retirement investment should be only up to employer match...but that's not the end of it.
3) Roth vs Trad is a personal choice. For many people, Roths are better..but it depends on what tax bracket you think you will retire in. Either one has tax concerns though--you get tax free growth in a traditional (but not tax free withdrawals) which is still a massive benefit. Roth has tax on the deposit (which means less money to grow) but no tax on the growth or withdrawal.
4) I honestly don't know what you mean here.

Back to 2)--you are thinking like a small timer. IRAs max out at $5500. Lets say you make 100k (becaues it is a nice round number that scales up and down and happens to still be eligible for both roth and trad IRAs) and your company matches 3%. Chogall is suggesting only putting 3k into the 401k and then stopping. Then you go max out your roth and have now saved 8.5k for retirement (less than 10% of pretax salary). That's not great, and won't get you to the retirement you want. You can bring that 401k all the way up to 17.5k if you want before you need to start hitting taxable accounts. 401k options tend to not be as good as IRA (though some companies have great 401k options) so your order should be 1: 401k to company match 2: IRA to max 3: 401k with the rest of your retirement saving. Obviously, your shorter term savings and living expenses need get paid too.
And I don't care that you can only have 10k from your 401k for a first time home buyer...that is your retirement fund...your down payment should come from your shorter term savings where you are targeting things like a house. If you need to pull from your 401k, you are either buying too much house or didn't plan your savings correctly.

Finally, the average stay at a job is only a few years these days. Every time you change jobs, you can roll that 401k into an IRA at which point you can manage it however you like without being stuck with the funds your company offers.