Personal Retirement Funds

[PC800]

Any more recommendations on roth ira companies?
And no, I don't care about skilled or unskilled home care.....

Okay, I'll stop beating that dead horse.:0

There can be a "gotcha" for small mutual fund accounts-- flat fees, far out of balance to your earnings. For instance, we rolled over a $1200 401k into a Fidelity Roth, where it earned about 4% in each of the two years we left it there (which we felt pretty good about, since CD's were paying less than 2% at the time).

Unfortunately, I failed in my due diligence, and didn't realize that Fidelity had a $40 annual fee, AND a $50 fee to close the account-- which ate up all of the earnings, and part of the principle, when I moved the money to a different account!

If you're looking to invest less than $3000, and you can't find a "no fee" account, you might want to just buy a CD for now. If you're a member of AOPA, MBNA will offer you a slightly increased rate (link available from the AOPA members area), and IIRC, there is no annual fee. Once your balance gets to a point where the earnings will support any fees and still give you an acceptable profit, you can roll it over to a mutual fund account.

 

[satpak77]

With IRA's and 401K's its very easy to retire a millionaire if you start early.

as a high school student you are clearly an expert on retirement planning

 

[GVFlyer]

It's really hard to know what to do. First of all, the federal government charges you either $40,915.50 plus 33% of the amount over $182,800 or $88,320 plus 35% of the amount over $312,450 keeping you just short of a tax revolt and putting a box of tea in the trunk of your car and driving to Massachusetts to throw it into Boston Harbour. This is before paying state tax, which if high enough, will qualify you to pay Alternative Minimum Tax and before paying the first nickle of sales tax or buying the first gallon of highly taxed gas. Most of our effective marginal tax rates are over 50%.

Roth IRAs are not available if you earn over $159,999, you can only contribute $10,000 to a 401K if you are considered "highly compensated" or $15,000 if you are over 50. If you have a 401K Restoration Plan, the amount that 10% of your salary equals over $10,000 (or $15,000 as appropriate) will go into that before taxes, but in the grand scheme of things, that's insignificant. Clearly, tax avoidance becomes a major objective in any retirement savings plan.

Profits from non qualifying stock options or equities held less than a year are taxed at your marginal tax rate. Dividends and profits from equities held over a year are taxed as captital gains at 15%. Bonds, in their state of issue are exempt from state and federal taxes, but can be called if the interest rates change. It seems to me that 1013 property exchanges should be a part of your investment diversification program as taxes for like kind exchanges are deferred.

GV









~

 

[JediNein]

So I read something and jumped to conclusions. I love reading how clever I am when I spew verbal diarrhea across the page. Boy this internet is great, it's just like being back in grade school. Neener neener.

What part did you two not understand about 20% of everything going to one's debts? The debt part? How about 20% of the income? "Goes to" as another phrase meaning "paid to"?

Now pay attention this time so you can comprehend the message.

#1 cause of personal bankruptcy in this country is overwhelming medical expenses. You think folks ENJOY having to decide between food or medicine and then finding out they can't work? Or once they've recovered enough to resume work, the job is no longer there? This is great fun (sarcasm here). I wouldn't wish it on you two (no sarcasm here), even if you were my worst enemies.

Go ahead Dangerkitty, spout off some more about LTC and Life policies. They weren't there when my father needed them. His claim was denied because the insurance co said he wasn't disabled, no appeal. So someone that can barely put his shoes on in the morning has to figure out how to get the lawyers to take his case (pay up front only) to force the insurance company to do what it promised and he paid them to do. He's going down the path of overwhelming medical bills, not enough retirement funds (401K already spent on medicines), and social security not enough to cover the current crop of medical bills or special food needs. You know what happens when you can't afford treatment or food? You die painfully.

Bankruptcy is legal, and most of the major airlines are in bankruptcy. They are openly not paying a whole bunch of folks, including some of the other members on this board who thought they had pensions. However, the airline can continue to operate, screw a whole bunch of folks, and not a single person is docked as responsible for the bankruptcy.

Now, step over to the personal side, declare bankruptcy and you've just earned a minimum 10 year stain on your credit history that dooms you to paying the highest interest rates, allows bank to run you through the mill before you can purchase a home, and some will even refuse to conduct business with you. There is no debtor's prison, but life can be hell when you can't meet your obligations.

Make your credit card payment with plenty of time to spare, and watch the credit card company openly credit your account late. Welcome to a 7 year stain on your credit history and a 19.99% interest rate. The debt doubles very quickly. Have the credit card company do it again and enjoy 25-30% interest rates. First USA, CITI, and a few other companies have had class action lawsuits where they settled instead of admitting to doing what they were doing. The payback for those folks? $0.43. No reversal of charges, incredible interest rates, or credit history stains.

A little tale: Joe Average Airline Pilot finds himself laid off, without a job, without an income. He immediately finds work at McD's paying 1/10th his former income. All of a sudden the daughter's cancer treatments are a whole lot more expensive. He can't make full payments on anything, doctor bills or credit cards. The companies quadruple or quintuple the interest rates leaving Joe with even less hope of paying down debt than before. Finally, the treatments are so expensive that Joe can't pay the credit cards. Joe puts his daughter first, not the credit card. He starts getting calls from the companies. He sends them letters stating what is going on and promises to pay as much as he can each month. He does it. The companies don't give a hoot and send him to collections. Joe's credit is seriously stained.

Collection agencies paid little attention to the laws about harassment and assault, therefore we had new legislation called the Fair Credit and Collection Act. Collection agencies pay a little more attention to it, knowing that if they don't they can end up paying the debt themselves.

Joe can put up with endless nights of harassing phone calls, or he can cease the callers. "Put it in writing and don't call me again." And his daughter can sleep through the night.

Now the banks take Joe's debt as a write-off against their taxes. Our tax law has just compensated the bank for the loss from Joe. This is business, not feel-good emotions, and shoulda-woulda-couldas.

Lucky Joe pulls through this without declaring bankruptcy, but ends up with a list of unpaid debts that have gone into collections. His daughter pulled through, too, but it's been a long haul. The day after the daughter is considered cured, the airline calls. It's been five long years since Joe has flown, but the job pays more than the McD manager job. Joe goes flying.

Now with his income back to level, Joe considers his obligations, three credit card write-offs about to expire off his credit history, two hospital bills in the several thousands, and some more immediate items like the upcoming bills for the dental treatment he needs that he skipped to save money. The collection agencies want lump sums, no payments, so Joe starts saving.

Six years from the date of write-off, Joe finally has enough to satisfy his debts. If he makes a single payment, he has just re-aged his accounts and will suffer the charge off account on his credit history for another 7 years. He'll have paid off everyone, but be treated worse than a new bankruptcy because there are five charged off-settled lines on his credit history. It doesn't matter if Joe pays in full what the 24% interest rate would have been for the last six years, it's still charged off-settled. Joe will be medically retired before he sees interest rates below 10% for anything, if he can even get credit. Other companies can legally deny him a job based on his credit. If his airline folds, another can use his loss of job to deny him one that would make him able to pay those bills.

All of us are one medical away from retirement. If it happens unexpectedly, and one ends up going to debtor's hell, there is a way out. One way out also happens to be a way to prevent going to this hell in the first place. That is pay 10% to yourself first, 20% to the debts, live off the rest.

There's one more part to this. Expect no one to be there for you. Save enough to pay for yourself and your family through retirement and one or two 50,000 dollar illnesses.

Good luck,
Jedi Nein

 

[smellthejeta]

I sent JediNein a pm on the issue, but he's right. I stand a very real chance of losing my medical sometime in my career. Hell, I can't even get it right now. Knowing this, the *only* way I can keep myself financially solvent is keep my debt as low as possible AND save money. I *must* do both. If I lose my medical, debt free and savings free, I have to take a crappy job and probably still take out a personal loan to pay the mortgage or an educational loan to go back to school. You know what? The rates on personal loans are just as bad as credit cards, but if I have significant savings, I can go back to school and live debt free. OOpps, my bad. With a personal loan, I'd probably have to have documented income to pay the loan -- if I don't have a job or savings, I won't have much to put up for the loan.

 

[BluDevAv8r]

A 401k match should only be made when all debt is paid off.

What if the return on the 401k (coupled with the tax savings) is greater than the interest paid off to service the debt?

-Neal

 

[BluDevAv8r]

When you retire the government will take 30%-40% of all money withdrawn from a 401k.

If you retire with $1,000,000 for example the government could take up to $400,000.

What makes you think that they wont increase what they take out of 401ks?

Your logic makes no sense.

What makes you think they won't decrease what they take out of 401k's? Are you 100% confident that when I retire my effective tax rate for the withdrawal of my 401k is going to be 30% to 40%? How do you know it won't be lower (Based on my deductions, etc)? What if they change the tax rates?

-Neal

 

[BluDevAv8r]

Neal,

I would have PM'd you a little more detailed information but my ability to PM has been stripped as I have been deemed a threat to Neal and flightinfo.com

Smellthejeta basically stated what I was going to state. Here is the way I would do it:

1. Invest in the 401k up to the company match and nothing more.

2. Then max out the Roth IRA.

3. If anything is left over then invest in a traditional IRA.

401k's grow tax deferred. So you get the tax benefit NOW but have to pay Uncle Sam later. With a Roth you pay with after tax money but it grows tax free.

So lets say you retire with $1 million in a 401k and $1 million in a Roth and you are in the 30% tax bracket.

With the Roth you keep every last cent. With the 401k you owe uncle same $300,000 over the life of withdrawing the 401k.

The tax benefit you get now is not enough to make up the taxes you pay later in the 401k.

DangerKitty,

I understand the tax implications of a Roth IRA versus a 401k. You make a lot of bold assumptions such as what the tax rates will be and how the money in the Roth will be better invested there than with the tax savings (and then the compounding over time) of the 401k. There is no perfect solution.

Here is a copy of a post by SmellTheJetA and my response to him...from another thread.

-Neal

Quote:
Originally Posted by smellthejeta
So... What I've concluded is this: How much to save and what to do with it are dependent on your savings goals, age, and how close to retirement you are. I'm young; I'm saving for short term (moving, house purchase) and long term (retirement). I'm in a fairly low tax bracket now, compared to where I will be when I'm closer to retirement. Somebody closer to retirement has different goals than I do, and therefore they should invest/manage their money differently.


I agree 100%. Also, someone who is 25 has a different risk level than someone who is 55.


Quote:
Originally Posted by smellthejeta
Let's start with me and where I'm at. Conventional wisdom states that I should fund my 401(k) to my company max and no more. Why? The company match is free money, and is essentially a 100% ROI. Guaranteed. Nothing can beat that.


I agree to a point...but there is no such thing as "conventional wisdom" here. I have read many personal finance books and for many of these big issues, there always seems to be good arguments made for both sides of the issue. Another big issue is whether or not to prepay extra mortgage payments versus holding the biggest longest mortgage possible and only make the minimum payments. But I do agree that at the very least, employees should be contributing the minimum to receive the maximum amount of matched company money.


Quote:
Originally Posted by smellthejeta
But here's the catch: Since my contribution is before taxes, I am opting NOT to pay taxes while I'm in the 17% bracket (or whatever it is I'm at). However, my withdrawls (or capital gains or whatever) will be taxed -- when I am more likely to be making more money and thus in a higher tax bracket. IOW, I am opting to NOT pay income taxes while I'm in the 17% bracket in exchange for paying taxes on a lot more money while I'm in the 50% bracket.


For starters, there is no 50% bracket that I am aware of, but I could be wrong. Secondly, you and I have no clue what the tax rates will be 20-30 years from now.


Quote:
Originally Posted by smellthejeta
The company match and compounding and hopeful growth will make up for the higher tax rate. However, anything put into a 401(k) beyond the company match is questionable, because I will be paying more taxes on it later at the expense of less taxes on it now.


I disagree. You leave it out the fact that by contributing more of your own money pre-tax, you are saving on taxes today. If you invest those savings, they will compound over the long term. Don't ignore the compounding of money over time. That invested savings may very well beat out the tax savings that you are talking about downstream. Of course, in order to model this correctly, we'd have to make certain assumptions about the tax rate downstream, income growth, contribution rates, inflation, rate of return on your investment, etc. It is obviously a very complicated investment model when you get down to the facts.


Quote:
Originally Posted by smellthejeta
So, let's look at the Roth IRA. My contributions are after taxes -- that means that I'm paying taxes on my contribution NOW, while I'm in the 17% bracket. Later on, when I'm in the 50% bracket, I pay nothing on my withdrawls.


Again, you have no clue what the tax rate will be 30 years from now nor do I know of any 50% tax bracket. You also have no clue what kind of adjusted income you will have 30 years from now - in other words, you have no clue what your taxable earnings will be nor do you know what your effective tax rate would be.


Quote:
Originally Posted by smellthejeta
For more on the tax thing... Money you put into the 401(k) and the Roth CAN be taken out early for emergencies, but there's a catch. Under most circumstances, early 401(k) withdrawls will hit you (or expose you) to a lot of tax consequences, such as income taxes and early withdrawl penalties. The principal of the Roth can be withdrawn at any time with no tax consequence.


Of course. I'm well aware of these facts. I'm also aware that you can take a loan from your 401k and when you pay interest on that loan, it goes to you...not some bank. That said, there are some very serious implications of taking a 401k loan that anyone should consider.


Quote:
Originally Posted by smellthejeta
Also, in regard to taxes: You talk about the tax break, but what are you trying to gain? For me (and most regional pilots in their early years), I get a deduction on student loan interest, a credit for going to school, and my medical benefits are pretax contributions. I'm not doing poorly at tax time, and in fact, usually get a fat check. Again, I'm in a lower tax bracket, so I just don't pay that much in taxes. Essentially, for every dollar I owe income taxes on now, I pay $0.17 in taxes. Later on, every dollar I owe taxes on I will pay $0.50 in taxes. It doesn't make sense to me to save that seventeen cents to pay fifty cents on it later. I'd rather pay the seventeen cents now than pay fifty cents later.


As I said above, don't ignore the opportunity cost and power of compounded money over time. The goal is obviously to pay zero taxes...and contributing as much to your 401k (get as close to 14,000 this year as possible) will lower your taxable income by that amount. In the perfect world, one can afford to max out both the 401k as well as the ROTH IRA. Also don't forget that your earnings level will grow after year 1 at a regional and also, there are income limits on the ROTH.

The bottomline is that there is no blanket solution or right answer here. It is all subject to a bunch of variables and it would be incredibly difficult to model out the correct decision without a very good CFA. There are pro's and con's to both arguments.

-Neal

 

[BluDevAv8r]

Debt is debt. I could care less (to a certain extent) what the interest rate it. Pay the debt off now and the then double up on retirement savings. Most people could have their debt paid off in under 2 years if they really kicked some tail and attacked the debt. That is what I am talking about.

That is a dangerous view on finance if you ask me. The interest rate (and cost of capital, opportunity cost, etc) is critical to the analysis at hand. Paying off high interest debt is important...but what about 3% school debt? What if you could earn 8% in the market? Wouldn't it be smarter to stretch out the school debt since your money is doing better for you in the market? Remember the power of compounded money....20% interest on a credit card versus 8% in your 401k is a no brainer. But paying off a 5.5% mortgage early when you could earn 8% in the market is just stupid...especially when you factor in the tax savings of the deductions from your mortgage interest expense.

-Neal

 

[smellthejeta]

I missed your response in the other thread, but since it's pretty much dead and this one is alive:

For starters, there is no 50% bracket that I am aware of, but I could be wrong. Secondly, you and I have no clue what the tax rates will be 20-30 years from now.

Okay, I guess I'm had there. I heard a millionaire radio host in the LA market talking about taxes and this and that one day and he mentioned that's he's effectively at a 50% tax rate. My bad. Although I have no clue what tax rates will be, I don't expect them to go down. I really don't.

I disagree. You leave it out the fact that by contributing more of your own money pre-tax, you are saving on taxes today. If you invest those savings, they will compound over the long term. Don't ignore the compounding of money over time. That invested savings may very well beat out the tax savings that you are talking about downstream. Of course, in order to model this correctly, we'd have to make certain assumptions about the tax rate downstream, income growth, contribution rates, inflation, rate of return on your investment, etc. It is obviously a very complicated investment model when you get down to the facts.

Let's make this assumption: Invest for 20 years at 8% interest. Tax rates now are known, tax rates down the line are not. If I invest tax deferred now in the 17% bracket and invest the tax savings, I am essentially investing $1.17, to be taxed at an unknown rate later. If I invest in a Roth now, I am investing $0.83, not to be taxed later. The roth will yield me $4.11, and for the tax differed $1.17 to yield more than the roth, my tax rate will have to be less than 28%.

Again, you have no clue what the tax rate will be 30 years from now nor do I know of any 50% tax bracket. You also have no clue what kind of adjusted income you will have 30 years from now - in other words, you have no clue what your taxable earnings will be nor do you know what your effective tax rate would be.

I know I will be retiring from my next job in about 31 years. That date is set in stone, just like a pilot at age 60. Okay, let me rephrase that; nothing is ever ever set in stone, but you have to make some realistic assumptions when you plan, with some contigencies in case things change. I plan on retiring at age 57. In that case, I hope to have $1million in the bank and live off of the interest. Cluelessness aside, you have to make some realistic assumptions about retirement otherwise you can't plan.

Of course. I'm well aware of these facts. I'm also aware that you can take a loan from your 401k and when you pay interest on that loan, it goes to you...not some bank. That said, there are some very serious implications of taking a 401k loan that anyone should consider.

Yeah, but you better need that loan, because it's expensive. I don't know all of the details because I haven't (and shouldn't) need a 401(k) loan, but it's not cheap, and you lose the benefits of having that money compound. I guess responding to this point isn't providing much information, because you just admitted you know there are serious implications.

Also don't forget that your earnings level will grow after year 1 at a regional and also, there are income limits on the ROTH.

-Neal

Yeah, I forgot about that. As your tax rate rises, it actually makes more sense to put in a tax deffered account