Confusion on investments for retirement

[Rich Parsons]

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First I understand the issue of giving advice for financial investments. I am only bringing this up for general discussion.
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This Link got me thinking about the types of retirement investment.

401K through Work
Personal IRA
Personal Roth IRA

Now there is a Roth IRA through work as well, that has the same limits (* from my readings and understanding *) as the 401K via work.

So, if I take advantage of works plans for 401K and I max it out. (* *) What would be my other options? I cannot do the Personal IRA as I have monies in the work 401K. So now I can do the Roth IRA if I want to save more. Yet if I make more than a certain amount (* $100,000 for single - Yeah right like I make over that *) I cannot contribute to the Roth account. So obviously that would be the way to go for me.

Yet for sake of arguement and the article I linked in, should I be looking at the IRA's so I can then take advantage of the 2010 conversion to Roth that is Tax Free?

Also why are these new Roth IRA's Tax Free while the other ones are not/ i.e. you pay tax on the earnings of the investments?


Thank you for your time and discourse.

 

[michaeledward]

The ROTH programs are funded with 'after tax dollars'. Because you are contributing to the Roth program with money that the Federal Government has already taken its share, you don't pay taxes on the money when it is distributed. AND ... most importantly ... the earnings are also tax free.

I believe there are some benefits to the withdrawl time periods with the ROTH programs.

If you are maxing out your employer 401(k) ... you are in good shape. What's the limit this year ??? $13,000.00 ?? If you have additional money to invest after you have maxed out your 401(k) ... or at least reached the employer match completely, I would suggest you look at investments that do not have the time line stipulations attached to them.


I would suggest that if you have maxxed out your 401(k) ... then open a brokerage account. Put your additional investment money into something more liquid than a retirement fund.

And ... just as an aside ... I think Suze Orman is a dope.

 

[shesulsa]

I'd really like to see Flatlander comment on this thread.

 

[Rich Parsons]

The ROTH programs are funded with 'after tax dollars'. Because you are contributing to the Roth program with money that the Federal Government has already taken its share, you don't pay taxes on the money when it is distributed. AND ... most importantly ... the earnings are also tax free.

I believe there are some benefits to the withdrawl time periods with the ROTH programs.

If you are maxing out your employer 401(k) ... you are in good shape. What's the limit this year ??? $13,000.00 ?? If you have additional money to invest after you have maxed out your 401(k) ... or at least reached the employer match completely, I would suggest you look at investments that do not have the time line stipulations attached to them.


I would suggest that if you have maxxed out your 401(k) ... then open a brokerage account. Put your additional investment money into something more liquid than a retirement fund.

And ... just as an aside ... I think Suze Orman is a dope.

michaeledward,

I understand that the ROTH is after tax, yet you still pay taxes on the money you earn. So, how is there a NEW ROTH that gets you 100% tax free?

And this year it is $15,000 max for 401k. My Smile should have been with the (* I wish *) , so not bragging here, I am trying to understand how things work and how to get something TAX FREE is I am cheap that way.

 

[Don Roley]

I'd really like to see Flatlander comment on this thread.

Me too.

I did a search. As I understand it, the money you put into the account is taxed. But any money (interest, capital gains) is then tax free. So you do not have to pay tax on interest ever. But with a normal IRA you merely put off the taxes.

If this is wrong, I would like someone to correct me. And can taxpayers outside the US set up a Roth IRA?

 

[michaeledward]

I understand that the ROTH is after tax, yet you still pay taxes on the money you earn. So, how is there a NEW ROTH that gets you 100% tax free?

I am pretty certain that this is incorrect. The new Roth is not 100% tax free. The growth is tax free.

You pay taxes on the money before it is invested. There is no tax benefit on the front end of the ROTH programs. The earning ... the appreciation, accessed at the time of distribution (or withdrawal) is free from tax burden.

A bit of reading tells me the difference between the ROTH IRA and 401(k) is primarily about contribution limits. You are able to contribute more money into the 401(k) version of the ROTH. There are some other differences as well ... but if you consider both of these retirement vehicles, rather than short term savings plans, those differences are less important.

 

[Ping898]

michaeledward,

I understand that the ROTH is after tax, yet you still pay taxes on the money you earn. So, how is there a NEW ROTH that gets you 100% tax free?

Rich you don't pay any taxes on the money after it goes into the ROTH that is the benefit of it. With a 401k, IRA, 403b the money goes in pretax, grows unrestrained and is taxed only once you take it out (at what rate I am not sure, I think your normal salary rate) and I think you have to start withdrawing by 69 ro 70 or penatlies are levied.
With a ROTH the money goes in after taxes are paid on your salary, there is a limit to how much you can put in based upon your age and earning and the money is free to grow unrestrained and untaxed even after you take it out. It is never taxed again after you put the money in it. I don't know what if any penalties apply to non-withdrawl.

 

[Rich Parsons]

Rich you don't pay any taxes on the money after it goes into the ROTH that is the benefit of it. With a 401k, IRA, 403b the money goes in pretax, grows unrestrained and is taxed only once you take it out (at what rate I am not sure, I think your normal salary rate) and I think you have to start withdrawing by 69 ro 70 or penatlies are levied.
With a ROTH the money goes in after taxes are paid on your salary, there is a limit to how much you can put in based upon your age and earning and the money is free to grow unrestrained and untaxed even after you take it out. It is never taxed again after you put the money in it. I don't know what if any penalties apply to non-withdrawl.

Thank you everyone for your replies.

IRA Traditional - I put in $2000 I can take that off of my Gross income and thereby not pay taxes on that portion up front. I then have to pay taxes on anything taken out at the current tax rate when withdrawn. There is the requriemetn to take out a minimum begining I believe in the January of the year following you turning 69.5 years of age. (* This sticks in my mind as that seems a wierd number and age. *)

401K - Put you money in pretax usually with the employer so the same is true above and also the taxes are not taken out, so the employee see the benefit immediately with less taxes to be paid up front.

403B (* Thank you for mentioning this Ping as few know of it and I also contribute on a monthly bases a I like to take advantage of oppurtunities. *) - My understanding for the 403B is Company contribution (* possible *) and employee contribution. I understand that that it also goes in pretax and is taxed later.

Here is my misunderstandings - I have not been clear.

Roth IRA is put in post tax - and I thought one paid taxes on the earnings - But nwo I guess I am wrong.

The Roth is Post tax and no tax later with 59.5 being the age of oppurtunity with othe options of taking money out early for certain reasons.

I think I now understand is that is people have any IRA today, or can start to contrubite to them today then in 2010 then can convert them to Roth IRA's. This allows a person to put the money away tax free today through 2010 and then convert in 2010 to Roth where the earnings are tax free. I seem to remember part of the initial article that says there will be a tax on the earnings of the IRA froms today to 2010.

So there comment about 100% tax free is not correct, but it looks like one can contribute up front tax free, and then pull it out later tax free after the conversion.

Thanks

 

[michaeledward]

I see what you are talking about ..

Converting your Traditional IRA to a Roth IRA.

There is a procedure to do this, if you meet certain requirements. I understand that procedure is set to expire in 2010.

I don't know the specifics ... but I can not believe that the proceedure will allow you to take the tax advantage on the Traditional IRA today, and then convert it to a ROTH tomorrow to take advantange of the ROTH programs tax advantages tomorrow without incurring the tax burden somewhere along the line.

EDIT - http://personal.fidelity.com/accounts/services/content/convertinga.shtml.cvsr

This link explains that when you convert your Traditional IRA to a Roth IRA - you must pay the tax on the growth of your Traditional IRA. END EDIT.



Remembering that I am just a knucklehead with a computer .... I would say that if you aren't maxxing out your company sponsored 401(k), there is really no motivation to be working with other IRA's.

Mike's Plan For Retirement 101 ...

A - Have no credit card debt.
B - Have three months expenses in cash at your local bank.
C - Contribute as much as feasible to your company sponsored 401(k) - keep it in an S&P 500 Indexed Fund.

D 1 - If you max out your 401(k) ... contribute to either the ROTH IRA, if you meet the requirements or a Traditional IRA if you don't.

D 2 - Fund a brokerage account for mid-term goals; a boat, a trip to Europe, a vacation property.

I wouldn't even consider D1 or D2 unless I was contributing at least 10% of my gross to my 401(k).

It's not a very sophisticated plan ... but over time, I think it will be as successful as anything more complicated, until my portfolio has 7 digits.

​

 

[Rich Parsons]

I see what you are talking about ..

Converting your Traditional IRA to a Roth IRA.

There is a procedure to do this, if you meet certain requirements. I understand that procedure is set to expire in 2010.

I don't know the specifics ... but I can not believe that the proceedure will allow you to take the tax advantage on the Traditional IRA today, and then convert it to a ROTH tomorrow to take advantange of the ROTH programs tax advantages tomorrow without incurring the tax burden somewhere along the line.

EDIT - http://personal.fidelity.com/accounts/services/content/convertinga.shtml.cvsr

This link explains that when you convert your Traditional IRA to a Roth IRA - you must pay the tax on the growth of your Traditional IRA. END EDIT.



Remembering that I am just a knucklehead with a computer .... I would say that if you aren't maxxing out your company sponsored 401(k), there is really no motivation to be working with other IRA's.

Mike's Plan For Retirement 101 ...

A - Have no credit card debt.
B - Have three months expenses in cash at your local bank.
C - Contribute as much as feasible to your company sponsored 401(k) - keep it in an S&P 500 Indexed Fund.

D 1 - If you max out your 401(k) ... contribute to either the ROTH IRA, if you meet the requirements or a Traditional IRA if you don't.

D 2 - Fund a brokerage account for mid-term goals; a boat, a trip to Europe, a vacation property.

I wouldn't even consider D1 or D2 unless I was contributing at least 10% of my gross to my 401(k).

It's not a very sophisticated plan ... but over time, I think it will be as successful as anything more complicated, until my portfolio has 7 digits.

​

Mike if I may, I agree that it seems hard to believe, but yes you can put money away today pay the tax on the earnings only when you convert and hten take all future earning and original investment tax free. The issue as the quote of 100% tax free and then some taxes being in there. But it is 100% tax free on the initial investment. It is a loop whole, I believe.

Mike's Plan For Retirement 101 ...

A - Have no credit card debt. - Check

B - Have three months expenses in cash at your local bank. - Check
C - Contribute as much as feasible to your company sponsored 401(k) - keep it in an S&P 500 Indexed Fund. - Check

D 1 - If you max out your 401(k) ... contribute to either the ROTH IRA, if you meet the requirements or a Traditional IRA if you don't. - I hope to do this in the future and hence my questions.

D 2 - Fund a brokerage account for mid-term goals; a boat, a trip to Europe, a vacation property. - I got plans on this as well.

I wouldn't even consider D1 or D2 unless I was contributing at least 10% of my gross to my 401(k). - D1 & D2 are not an option for me until I max out the dollar amount.

It's not a very sophisticated plan ... but over time, I think it will be as successful as anything more complicated, until my portfolio has 7 digits.

Yes it works and over time you see it grow from nothing to 5 digits and then sometime later it is 6 digits. It might take a little longer to get to 7 digits.

I did ask a retired millionaire how he did it. His reply was a ltitle at a time over time, it is the first $100,000 that is difficult then from there it is the first $1,000,000 that is difficult. Take it in steps.

What I recommend is to figure out your raise (* If any *) and take 50% of the raise and add it to your savings retirement plans. this way you see some increase in your check and also increase in your retirement funding.

 

[Ping898]

sponsored 401(k) - keep it in an S&P 500 Indexed Fund.

ewwwww....if the option is presented to you to invest in other things you shouldn't just dump it all in a s&P 500 index....

 

[Don Roley]

Ping may have a good point.

One big advantage of a S&P 500 index fund is that it is very tax friendly. The turnover of new stocks is low, so there is little to pay in capital gains and so you mainly have to pay for the dividends.

If you never have to pay for the taxes, you might want to park it in a more active fund with a history of greater performance. Or you might want to put it in something that pays great interest or dividends.

 

[Ping898]

Ping may have a good point.

Ping ALWAYS has a good point. If you are like more than 10 years from retirement you should be invested at least a little bit aggressively. S&P 500 is really just a mid cap fund, you miss huge sections of the market if you only invest in that....like an international fund or a large cap fund...

 

[Rich Parsons]

Ping may have a good point.

One big advantage of a S&P 500 index fund is that it is very tax friendly. The turnover of new stocks is low, so there is little to pay in capital gains and so you mainly have to pay for the dividends.

If you never have to pay for the taxes, you might want to park it in a more active fund with a history of greater performance. Or you might want to put it in something that pays great interest or dividends.

I agree, I have some investments taht are doing just fine and are way out producing S&P 500. Yet as always there is risk in any investment.

 

[michaeledward]

It's not a matter of fees, but more a matter of performance. Pick your market index .... doesn't matter which one. As I understand it, the indexes out perform managed funds more than 80 % of time. Those seem like pretty good odds to me. There is a problem with the index funds being behind the market trends. But, if you're picking managed funds, you have to pick the right 2 out of 10.

Of course, as I was approaching retirement, I'm talking 15 years and counting down, I would begin to migrate away from a completely indexed account to something with a bit less volitility.

 

[Rich Parsons]

It's not a matter of fees, but more a matter of performance. Pick your market index .... doesn't matter which one. As I understand it, the indexes out perform managed funds more than 80 % of time. Those seem like pretty good odds to me. There is a problem with the index funds being behind the market trends. But, if you're picking managed funds, you have to pick the right 2 out of 10.

Of course, as I was approaching retirement, I'm talking 15 years and counting down, I would begin to migrate away from a completely indexed account to something with a bit less volitility.

Mike et al,

I agree with your comments here. In the mid-late 90's with the technology bubble I did most of my investment in the S&P 500 as I did not have much to invest and was working 65 hours a week as well, so little time for reserch. I out performed all those that tried to gues and day trade ot week trade as they got hit with the fees and also that 401K trades go through at the end of the day not the moment they are placed.

I have S&P 500 Indea equivalent fund and I like it, but I also have monies else where and I keep track of trends and have been doing quite well so far for the year. I am just over 15% for rate of return minus the investment through the year of course.

Diversity helps, and growth over time helps, with Mid Cap being less risky and income and cash type funds being the least risky with the least return, but not a bad idea if one is worried about maintaining their value.

 

[michaeledward]

S&P 500 is really just a mid cap fund, you miss huge sections of the market if you only invest in that....like an international fund or a large cap fund...

Also, this didn't seem right when I read it ... I just checked. The S&P 500 is comprised of mostly of Large Capitalization Stocks. It is not a mid-cap fund. S&P does have the mid-cap 400 index.

I believe it does not cover international stocks.

From the S & P Web Site

Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market.

 

[Ping898]

Also, this didn't seem right when I read it ... I just checked. The S&P 500 is comprised of mostly of Large Capitalization Stocks. It is not a mid-cap fund. S&P does have the mid-cap 400 index.

I believe it does not cover international stocks.

From the S & P Web Site

My mistake...There are so many index's it is easy to get confused.... in the end though my original point is still true, that the s&P 500 just covers a small section of the areas that can be invested in and it's biggest deficiency is a lack of international companies....

 

[Don Roley]

It's not a matter of fees, but more a matter of performance. Pick your market index .... doesn't matter which one. As I understand it, the indexes out perform managed funds more than 80 % of time. Those seem like pretty good odds to me. There is a problem with the index funds being behind the market trends. But, if you're picking managed funds, you have to pick the right 2 out of 10.

I have to agree with you.

But.....

Since the S&P 500 index fund run by folks like Vanguard are so tax friendly even for folks like me that can't get an IRA, it might be an idea to use the tax free funds for the deversification that the experts tell us we should do and stick things like high yeild corporate bonds (maybe even the treasuries) and small cap indexes since their turnover is greater. And if you get the urge to speculate on one or two stocks that you are made aware of, you can use the IRA for that and keep the index fund outside of it. That way, you can cash out the stock without fear of taxes ever and use the cash for something else.

If I could open an IRA that might be how I would do it. As it is, I don't have as much bonds as I should due to the fear of taxes on their yield. I can't get into a REIT fund or anything like that for the same fear.

 

[Flatlander]

I'd really like to see Flatlander comment on this thread.

Sorry, I'm late to the party. However, due to my really poor knowledge of US Tax Code, I think it would be best for me to remain silent on the specifics of Rich's question. However, a few general pointers:

- As has been suggested, be mindful of lump sum liquidity in your planning. You don't want to end up on a fixed income in retirement, either borrowing or saving from your fixed income in order to make larger ticket purchases. You'll want a pool of money to dip into for that type of thing.
- Always diversify your equities internationally. Low correlations between geographic performance gives the investor the opportunity to enhance growth through rebalancing. Have a very specific geographical allocation mandate and stick to it.
- Consider the potential value of leverage, if your time horizon is greater than 10 years. Have a thorough understanding of the risks involved.
- Regarding the performance of managed funds vs. indices, one thing to note is that a professional manager will tend to leave the junk out of their portfolio. The thing that really kills returns is moving your money from fund to fund. A quick search found a number of US Equity funds that have outperformed the S&P 500 over the last 10 years. Taking a longer time horizon approach to performance comparisons tends to eliminate the occasional winners, and allows more of the quality funds to the surface. As always, do your due diligence, try not to market time, and stay invested. It will pay off.