Financial question

[capt. megadeth]

Everything I have read says:
1. Pay off credit cards due to high interest rates.
2. Have 6mos living expenses liquid in savings/brokerage acct.
3. Max 401k to reduce taxible income plus get company match
4. Max Roth Contribution so money can grow tax free
5. Contribute to IRA or personal brokerage account
6. If you wanna keep the late J.C. happy, give 10% to your church.
7. Buy lottery tickets, loud motorcycles, old airplanes, muscle cars, and every Motley Crue and David Allen Coe CD on the market.

Sounds good but you got the 6 and 7 mixed up.

 

[CitationLover]

The secret is to push off taxes as long as you can.

best piece of advice.

your tax rate will be lower when you retire (unless you had some really good investments).

 

[semperfido]

subscribe to and read the WSJ

 

[D-Bo]

Also remember, in regards to the Roth, that you'll reach a point in the future where you'll make to much money to legally contribute to it so if you want to take some sort of advantage of it, do it before it's too late.

D-Bo

 

[radarlove]

Also remember, in regards to the Roth, that you'll reach a point in the future where you'll make to much money to legally contribute to it so if you want to take some sort of advantage of it, do it before it's too late.
D-Bo

This is a good point and it doens't just apply to the Roth. I was very surprised when I was going to purchase a rental property and my accountant told me that it better be cash-flow positive, since my household adjusted gross income was too high to take depreciation as a tax deduction. There are all sorts of other "gotchas", like the Roth (again, by the time you could comfortably afford to fund it, you probably make too much to qualify).

I've never been hit by the Alternative Minimum Tax, but that pretty much wipes out ALL deductions, from mortgage on down. The AMT is an effective tax increase for those who get nudged into it.

The advice you're hearing is good, BTW. Well, not the advice to max our your Roth first, but the other guys here.

 

[Jim Smyth]

I spend most of my money on fast cars and loose women. The rest I just blow.

Hey Jim, thanks for the beers in SAT.

No problemo! You should of had a dinner too!

 

[capt. megadeth]

If your employer does not match on the 401k at all, what would you all suggest? Max out the Roth and then put some into the 401k? What do you think?

 

[radarlove]

Max out the 401(k) then max out the Roth if you can afford it and qualify. Problem is, you probably won't max out your 401(k) until you earn close to $100k and if you are married, by the time you want start contributing to a Roth, you're probably over the income limit for the Roth.

Company contributions to 401(k)s are nice, but don't just put in the minimum to recieve the match, put in all $14k if you can. $14k/year is not really all that much to save toward retirement so put it all away, tax-deferred. The Roth is nice, too, if you can afford the change to drop into it, but if you have an employer 401(k), use all of it you can.

And put the 401(k) in index funds. Since it's such a long-term investment, you have a better than 85% (gets closer to 100% the longer the time) chance to beat all of the mutual funds if you just act passively.

 

[bluejuice787]

Fellas and Chicas-

I'll try to back up my opinion with a little math...not sure if it is correct though.

401k up to match first to take advantage of 100% return.

Sencond, consider maxing out your 401K. Pre tax dollars grow at rate great enough to offset the taxes when you retire. To demonstrate this go to savings calculator web site (there are many) and calculate a thirty year savings goal. Input values that reflect pretax (401k) and post tax (Roth) ammounts. For example if you want to contribute $100.00 of your gross salary every month. 401k would be all $100.00 and the Roth would be around $72 for the average tax payer. I'll assume an 8% rate of return for both.

Here goes: Roth= $864 per year, APR 8% for 30 years = $97877 tax free on the end. 401K= $1200 per year, APR 8% for 30 years = $135,000 with 25% tax of $33985 (probably not going to be anywhere near this high because of retirement) = $101955

The advantage goes to 401k every time, however, Roth offers the ability to invest in any thing you want. In other words you are not limited to the few funds your company may have.

 

[Jim Smyth]

Even if your employer doesn't match your 401K. The money you put in there you don't pay tax on. It is held seperate from the company and they can't get there fingers on it if times get bad! It grows tax deferred and compounds for your whole career. The idea is that when you retire your tax base will be lower and then when you tap it, you wont pay as much tax due to your lower income. I would recommend getting turbo tax. Its a great tool to use. Once you get used to using it you can run through it pretty quick. Do a whole year and plug the numbers in without putting any money into the 401K. Then do the same year and change the numbers to where you max out what you can put away in the 401K. You will notice that in the end there isn't much of a difference in take home pay. Because the scenario where you max it out, it doesn't get taxed on what you legally put away. Then you times that by your career and when you hit the golden age your will hopefully have enough to retire on comfortably. Plus lets say in 20 years your company has trouble and goes out of business. Your money is safe and secure and is held somewhere else. Plus once you get funds accumulated in there, you can take a loan from yourself if you wish for say a house downpayment, kids college etc. Ours we can take 50K out if you have that much and have 5 years to pay it back to yourself, usually payroll deducted. You usually pay yourself back the interest at prime plus 1 percent. Sure beats using someone elses money at a much higher percentage rate. Some potential downfalls though. You cant take the money out (other than a loan) until you reach 59 1/2. If you do and it isnt a loan your a subject to a 10 percent penalty and the amount you took out gets added to your income for that year and you pay tax on all of it. But all in all its a great retirement saving vehicle.