Where to put retirement money

coloradobluesky said:
Roth IRA and traditional IRA are the same if your tax rate is the same when working as when retired. If your tax rate is higher when working, then it favors traditional IRA. If tax rate is higher when retired, then it favors Roth IRA.

Example Roth:
Taxable Income when working 50,000, tax rate 15%, tax 7500
Growth of Rothed 10000, 100% over the years grows to 20000 not taxed when taken out.

Example Traditonal IRA
Taxable income when working 40000, tax rate 15%, tax 6000
Growth of Traditional 10000, 100% over the years grows to 20000, 10000 taxed at 15% = 1500 tax when taken out

In both cases you pay taxes of 7500 and have 10k invested and 20k taken out.

Bottom line, if you are working, since you don't know your tax rate when retired, it doesn't matter. Some people do one of each type.

Stock market is the place to put long term money (more than 10 years), IMO.
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Everything is taxed as ordinary income when it comes out of a Traditional IRA (or 401k). So in your example, the tax on the Traditional IRA would be 3000.
 
eman1200 said:
I'm not gonna pry but if u bought $10k worth at 27 and sold at 40 you'd still be far off from calling that a plane fund. Maybe u should call it your avgas fund.
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not the entire fund. Just a portion I was comfortable risking. I asked to put our life savings in but she said "no"
 
Some pretty good advice there...

The only good thing about a 401k is if you have a company match. The worst things are there is a lag between the time you put in changes and the time the actually go through that can be substantial, and they can have restrictions on how frequently make changes. However, I pretty happy with how my 401k's have done since 2008. I may actually be able to retire someday.
 
weilke said:
Not quite. The Roth leaves the compounded interest untaxed. Even with identical rates it is often preferable.
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Well actually no. With Roth you have 15%(from the example above) less money invested to begin with(given all other things being equal)

Basically if you have 10,000 Gross income that you want to invest. 15% taxes now and after retirement. 5% annual yeld. 30 years.

With Traditional: All 10,000 invested, value at 30 years: 44,677.44. Less 15% tax: 37975.824
With Roth: 10000 - 15%= 8,500 invested, value at 30 years: 37,975.83

Calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Same thing.
 
genna said:
Well actually no. With Roth you have 15%(from the example above) less money invested to begin with(given all other things being equal)

Basically if you have 10,000 Gross income that you want to invest. 15% taxes now and after retirement. 5% annual yeld. 30 years.

With Traditional: All 10,000 invested, value at 30 years: 44,677.44. Less 15% tax: 37975.824
With Roth: 10000 - 15%= 8,500 invested, value at 30 years: 37,975.83

Calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Same thing.
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If you are maxed out at the contribution limit for both, there is no 15% that you 'lose'. You put in whatever the tax man allows you to either way.

Many of the Roth vs Traditional calculators assume that you put the 'additional' money that you would have had to pay on taxes in a Roth into a non tax advantaged account. It makes the Traditional look better than it is in most peoples hands.

Another thing. A Roth doesn't have a minimal withdrawal. So if you have other things that pay your way for the first couple of years, you can leave the Roth money to continue growing until you need it later.

Also, if need be, you can withdraw contributions from a Roth without incurring a penalty. While it is rarely a good idea to pull money out of retirement, sometimes you just have to pay for a new Cirrus or something.
 
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genna said:
Well actually no. With Roth you have 15%(from the example above) less money invested to begin with(given all other things being equal)

Basically if you have 10,000 Gross income that you want to invest. 15% taxes now and after retirement. 5% annual yeld. 30 years.

With Traditional: All 10,000 invested, value at 30 years: 44,677.44. Less 15% tax: 37975.824
With Roth: 10000 - 15%= 8,500 invested, value at 30 years: 37,975.83

Calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Same thing.
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Its more like, you pay the extra $1500 now to convert the $10,000, then you get back the whole 44,677 later vs. losing the $6000+ on withdrawal, no?
 
weilke said:
If you are maxed out at the contribution limit for both, there is no 15% that you 'lose'. You put in whatever the tax man allows you to either way.

Many of the Roth vs Traditional calculators assume that you put the 'additional' money that you would have had to pay on taxes in a Roth into a non tax advantaged account. It makes the Traditional look better than it is in most peoples hands.

Another thing. A Roth doesn't have a minimal withdrawal. So if you have other things that pay your way for the first couple of years, you can leave the Roth money to continue growing until you need it later.

Also, if need be, you can withdraw contributions from a Roth without incurring a penalty. While it is rarely a good idea to pull money out of retirement, sometimes you just have to pay for a new Cirrus or something.
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Sure. You can invest more money with Roth. And you will make more money. And you are left with less "cash". That is always true. In order to invest the same amount with Roth, you have to start with more cash.

That, however, has nothing to do with how the compound interest is taxed. You calculate a tax comparison on the same gross investment. In case of Roth it is simply taxed before you even made that money. And the government gets to collect the compound interest on these taxes.

Basically, yes. If you max out, Roth may have some advantages in that you are allowed to invest more money, but on apples-to-apples taxation comparison, same taxes are paid(if rates remain the same).
 
A retirement planner once put it to me this way: Old people want to pay cash for everything. Suppose you want to buy a car for $30k (or insert airplane here). With a traditional IRA you withdraw $30k plus extra to pay for the income tax on the whole withdrawal. With a Roth IRA you withdraw $30k.
 
Roth and Traditional IRA are fundamentally the same. If you don't understand that, you don't understand it. It is the same as if you take (A + B)*C is the same as A*B + B*C. CPA verified.

The only differences are inheritance and picky little rules. The fundamentals are identical if the tax rates are the same.
 
coloradobluesky said:
Roth and Traditional IRA are fundamentally the same.
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Yeah, but . . .

In the Roth, you invest with after tax dollars and neither principle nor interest (growth) is taxed further. IOW, you withdraw everything tax free.

In a traditional IRA, contributions are tax deferred, and you pay taxes on all of it when you withdraw.

Given a long investment timeline, a Roth IRA will give you more spendable dollars when you withdraw, all other things being equal.
 
Something is wrong with my example, but they are basically the same if the tax rates are the same. I know that is true. I cant find my mistake though, so Ill admit I currently lack credibility. My numbers are wrong because of a long winded explanation...

I know they are basically the same though....Its just simple math.
 
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coloradobluesky said:
Something is wrong with my example, but they are basically the same if the tax rates are the same. I know that is true. I cant find my mistake though, so Ill admit I currently lack credibility.
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Genna did the math I think you are looking for in #46.

Two things lead me to the Roth 401k option (well 3): 1) I max out the 401k and see this as a way of "putting more" money in by putting in after tax $ vs per-tax, 2) who knows what taxes are going to be 20-30 years from now, but I think its more likely that the Roth will remain tax free (vs. ordinary rates being above or below what they are now), and 3) I've contributed to a traditional 401k for a number of years and I kind of like having both vehicles.
 
graduate+plastics.jpg
 
A lot of people will have lower tax rates in retirement if they own assets that are taxed on capital gains when they sell them due to having losses to write them off and lower taxes on capital gains than earned income (when you are working)....It all depends.

Trick is to get your income into cap gains rates, not earned income rates if...yada yada
 
SixPapaCharlie said:
No but it looks like there is a way to get the IRA and then convert it to Roth. The fact that this is possible suggests to me that Roth is preferred?
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The search term you're looking for is "Back door Roth". Could always be closed off as a loophole, but for now it can be done.

SixPapaCharlie said:
So I guess that begs another question. The 401 accts have grown in value consistently even though I'm not contributing. let's say I put $1 in an IRA, $1 in a 401k, $1 in a Roth IRA. And never touch them or added to it would one grow faster than the other?
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Depends on what they're invested in more than anything.

Matthew said:
There are some catches if you want to retire early, there are ways to withdraw from a 401(k) before you turn 60 and avoid the 10% penalty. But those rules are confusing enough that you'll need to do some research on your own. If you quit working after you turn 55, you can withdraw early from a 401(k). I'm not sure if that can be ANY 401(k) or ONLY the 401(k) from the last company you worked. I think it's called Rule 72(t)?
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72(t) can be applied to IRAs also.

kayoh190 said:
Do you guys have people actively managing your retirement accounts? My 401(k) is with Fidelity, just hanging out in a target date fund that's probably costing me ton of money in fees. I've thought about having them actively manage my account (for something like 0.3 - 1.4%), but just haven't gotten around to pulling the trigger on it.

FWIW, I also have an IRA over at Betterment. Not sure what to do with that either.
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I have a manager -- he takes a pretty big chunk but he's always beat my self-directed more than 50% of the time so I just hold him to being worth what he charges. He hasn't slipped yet, but someday he will and it'll move to self-directed index funds when he does. Where he's better than I want to take the time to be is knowing what's going on internationally and investing some percentage outside of the US through US funds, not directly.

Not a fan of "targeted date" funds. They have a tendency to suck compared to just keeping track of how much risk you're willing to take at different stages of your life and moving funds to appropriate funds or stocks in the correct classifications. Just my opinion. YMMV.

GlennAB1 said:
Some pretty good advice there...

The only good thing about a 401k is if you have a company match. The worst things are there is a lag between the time you put in changes and the time the actually go through that can be substantial, and they can have restrictions on how frequently make changes. However, I pretty happy with how my 401k's have done since 2008. I may actually be able to retire someday.
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Additionally the choices inside many 401k plans blow chunks. A number of us at a previous employer pressed for years to get the 401k manager to allow self-directed investing *inside* the 401k. They eventually did and I didn't even have to try hard to beat their heavily loaded funds they pushed at company meetings all the time. (Fidelity by the way...)

Also keep in mind you might qualify to have a self-directed 401k.

Another risky but interesting ability of IRAs is that some can hold real estate. Not an accounting game for the feint of heart. Or beginners in real estate. It's a great way to screw yourself hard without lube. But I mention it because there's alway interesting business options when you work with pros who know how to do things correctly, but to make them make money they have to be good enough deals to pay the pros for their assistance. Real estate "dabbling" isn't where to do that. As this article agrees...

https://www.google.com/amp/amp.kipl...an-ira-is-a-poor-shelter-for-real-estate.html

But often people don't realize IRAs can hold things other than "traditional investments". I don't play in this stuff because I don't like investing in ways I don't understand -- and that's good advice for anyone. If someone offers you an ROI you can't figure out, it's probably not going to happen. Including the schmucks at investment management companies who say you'll make X% and forget to mention they'll suck off 1/4 of that in their fees.

Even those nice company wide 401k meetings to sign folks up and do the rah-rah stuff are really making someone else money -- two ways -- the high investment people in the exec offices of the company are limited on what they can put in their 401k account and tax shelter by how much money is put in by employees, that's number one. Number two are the fees charged by those nice people from the management company on the dollars you invest, annually and forever. Nothing. Nothing. Nothing is free in the financial biz. Ever.

If you have large personal debt, smash it. Hammer it. Kill it. It's a guaranteed massive rate of return immediately. Paying interest above the rate of inflation is bad.

Paying off debt and saving for retirement work together. You have to do the math on that to see how best to maximize the utility of your income. But keep in mind if you pay off everything now the decisions are all good. Pre-spending income (loans) means a loss of options and you're stuck with that decision for however long you don't pay it off.
 
Where all the comparison calculators fail is in accounting for the common situation that someone is able to contribute to a Roth early in their career but manage to top out within a couple of years. So rather than a continuous payment into the Roth that the calculators tend to assume, it is typically a couple of years worth of contributions made while in a low income tax bracket. That money can sit there until you die or be withdrawn without tax consequences at any point. If you have a need to pull a bunch of money from a 401k or traditional IRA, you may bump into a higher tax bracket.
 
I've made all of my 401(k) and IRA contributions with pre-tax dollars until recently. Now I'm starting to do some Roth contributions as well. I figure that will give me some degree of control after retirement -- I can draw from whichever source is most advantageous depending on our situation and tax rate. Given what I project we'll have in our IRAs and 401(k) by the time I retire, I don't think the RMD from the simple IRAs and 401(k) will be a tax problem.
 
SixPapaCharlie said:
So the current job is great. Only 1 downside. No 401(k)

I have two 401(k)s from prior employers. Is is best to just leave them as they are, merge them into one, put them into an IRA?

I am not sure what to do but you are pilots which means masters of managing money right?
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roll them into an IRA at Vanguard or Fidelity
Invest it in VTSMX and don't sell it until you're almost retired
 
I am generally an advocate of paying taxes now, not later, but that is based on my own financial situation and my assessment that I may be more of a tax target in the future. If you're young and saving now, the same may apply to you, too.

For long-term investing, Vanguard likely can't be beat. Very low expense ratios on their funds, and low management fees if you don't want to self-direct. You can put everything into a target date fund, but I'd recommend talking with one of their CFPs to determine whether that is the best option for your situation. A portfolio diversified across multiple index funds may match up better with your goals and tolerance for risk. If you don't want to self-direct (or don't want to self-direct everything), they will assign you to a CFP to manage some or all of your accounts. You will likely pay them a fraction of what you'd pay most other outfits, and receive the same or better results.


JKG
 
I have rolled my previous 401Ks into an IRA with Ed Jones. As my 401K fund options with my current employer are terribly limited, I preferred not to roll previous 401Ks into the new one. Over the years (which is not that many), the performance of the 401k v. IRA has gone back and forth a bit, so I'm convinced that it doesn't really matter all that much which one you put it in, unless you or your IRA manager is wicked good at doing stocks. Be aware though that the rules for brokers is going to change in 2017. Going forward, the fees charged by each fund is going to be flat rate for everyone, so financial managers can't just put you in funds that pay him the most. The rules are meant to help keep brokers from screwing you over. I thinks it's a good thing overall, and will help build a little trust with financial managers. YMMV, but I've had a good relationship with my Ed Jones guy for a few years, but he is a close personal friend, and treats my account as he would his own (I know because I've seen his own account). He's not making be a butt load of cash, but we've made a little money through some relatively rough times.

If you can swing it, buying property is always a good investment too. At least it is in my parts.
 
Matthew said:
I think the growth rates should be the same, the difference will be in the taxes you have to pay when you withdraw. Either you paid the taxes up front, or you pay when you withdraw.
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And taxes will be going up, drastically, in the very near future.
 
Until Nov 9th, the answer where to put your retirement money is: In a shoe-box.

If you are planning to move money around e.g. through a 401k rollover, consider moving everything into a liquid form like a money market fund within your retirement account. Wait until the turbulence and uncertainty subsides and invest based on the new normal that hopefully crystalizes within a year or so. You dont want to be invested in too much international equities once the 'great trade war with everyone' starts on Jan 21st (or in healthcare stocks if the alternative happens).
 
Something about a hermetically sealed jar under Funk and Wagnell's porch? :D
 
SixPapaCharlie said:
So the current job is great. Only 1 downside. No 401(k)

I have two 401(k)s from prior employers. Is is best to just leave them as they are, merge them into one, put them into an IRA?

I am not sure what to do but you are pilots which means masters of managing money right?
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Invest the money in airplanes. Airplanes will gain value unless you buy junk. When you get old sell the planes, until then enjoy flying them.
 
Many 401Ks charge a maintenance fee. When you leave an employer, always roll your 401K into an IRA, most IRAs do not have a maintenance fee. I favor stock index funds, and have accounts with Fidelity and Vanguard, both of which have treated me well.

If you want to convert some or all of your IRA to a Roth IRA, you can do that, but will have to pay taxes on it this year.

As far as mutual funds go, there are thousands of them but they're not really all that different. For the average investor, you have stocks vs. bonds, US large company, medium company, or small company, and international. In the international side of things, you have developed markets (Europe, Japan, Australia) and less developed markets, which can be risky. I wouldn't put my retirement money in a developing market fund.
 
Whatever you choose... choose something that has very low fees. Over time those fees add up and detract from compounded interest.

I read something once about high dividends/low fees being the keys to success more than company growth but yeah.

Mine are in a 457 and I recently switched to a target date fund since I got tired of moving my money around. I figure if I'm barely treading water by shuffling money and getting the same return as the target date funds, I can save myself time and research by just putting it into auto mode.
 
deonb said:
If you're in a situation where your tax rate is about to be raised, you are WAY over the earnings limits for a Roth IRA, so then this discussion is moot.
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The 'rich' people who will get socked make 110k or more. Contribution limit for ROTHS is 194k. Lots of room in between.
But then, if the collectivists get their way, we will see withdrawal taxes on well funded Roths and other 'Cadillac retirement plans'. Got to contribute to the common good, you know.
 
deonb said:
If you're in a situation where your tax rate is about to be raised, you are WAY over the earnings limits for a Roth IRA, so then this discussion is moot.
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I'm not considering a Roth. I'm self employed, and I can shelter a lot of income in a SEP. BTW, EVERYONE'S tax rates will go up if you-know-who is elected.
 
Beanie babies, Chia pets, and those collectible coins on TV. But you better hurry, quantities are limited.
 
I have a IR and a Roth IRA and a 401(k)-type employment plan. Next year I will start receiving my Reserve Retirement check and not be able to contribute to my Roth because of income limits. I've been reading about Roths and here are some important points:
You can't take your money out until it is five years old, so start one early.
You can hold real estate in a Roth. If you move money to a Roth, then buy a house and rent it out, the profits/losses go to the Roth, then when you turn 59.5 you can move in and pay no taxes.
Finally, some investment advise:
Buy the smallest house in the neighborhood-its value will increase more than your neighbors; don't smoke nor eat out excessively; always pay off credit cards each month; never put your stuff in a storage unit for more than a month; but mutual funds and close your eyes-better yet buy targeted funds, they "conservatize" automatically.
 
paflyer said:
I'm not considering a Roth. I'm self employed, and I can shelter a lot of income in a SEP. BTW, EVERYONE'S tax rates will go up if you-know-who is elected.
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If you-know-who is elected, then everyone will convert to agricultural banking in the middle of the night...
 
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