Author Topic: Looking to Grow a 'Stash  (Read 919 times)

acidforbrains

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Looking to Grow a 'Stash
« on: November 30, 2017, 01:59:15 PM »
Hi all,

I'm quite late to the party. I'm 29 years old, almost 30. I make around $30,000/yr, after taxes and not including my 401k contribution. I am single. I rent, and I've paid off my car, that I plan on having for at least 5 more years.

My current finacials:
  • $4,975 in my 401k, contributing 5% with employer match
  • $1,592 debt on a credit card, fortunately with no interest fee
  • $500 in my checking account

I didn't open my 401k until this year in February (regrettably, but at least I have it now). This was long before I began reading MMM and developing an interest in a 'stash, that only happened about 2 months ago.

I've recently reduced my budgets significantly (within the last 2 months), to only spending about $1,100 a month. I'm hoping to cut it down even further, but even if I keep it there, I will begin growing a significant savings compared to the basically nothing that I currently have.

Besides regularly cutting budgets and being mindful of spending, my next plan of action is to pay off my credit card debt. It is a rewards card that I use for all expenses now, but going forward I plan to have it paid off every month. Then, I plan on saving up ~$6,000 in a basic savings account as an emergency fund (this would cover me for about half a year of expenses).

I'm looking for advice on what I should do after that with my money? I'm not positive if I should try to max out my 401k, get a Roth IRA, or start investing into Vanguard index funds. I've been trying to do this research on my own, and I'm slowly grasping some concepts, but still struggling. I see a lot of suggestions on the forum for people to max a 401k or Roth IRA, but I thought those types of accounts are mostly for late retires in their 60's? I'm still doing a lot of research on my own (and I love to read and learn!) but I figured dropping a post in here may help.

Any advice on what moves I should do next besides paying off my credit card debt and saving a small emergency fund would be much appreciated! I'm excited to begin on this journey :).

« Last Edit: November 30, 2017, 02:01:09 PM by acidforbrains »

Louisville

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Re: Looking to Grow a 'Stash
« Reply #1 on: November 30, 2017, 02:20:29 PM »
The first thing you should be focusing in is how to make more money.

GnomeErcy

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Re: Looking to Grow a 'Stash
« Reply #2 on: November 30, 2017, 02:23:43 PM »
401(k)'s and IRA's are retirement accounts that you use to fund your retirement, but they're self funded...meaning YOU need to be the one putting the money in there. Putting money in there earlier rather than later will let the money grow so that you have enough to retire.

So while it's something people in their 60's may use, it's something that should be added to all along the way in your working career.

there are ways you can tap that money early if that's your goal, so I'd say don't worry about that right now.

Priority #1 for me if I were in your position would be to get a bit of a larger Emergency Fund and then focus on ways to increase your income. It'll likely be difficult to max your 401(k) if you're only bringing in $30k/year

ixtap

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Re: Looking to Grow a 'Stash
« Reply #3 on: November 30, 2017, 02:35:26 PM »
Does you employer have a match for your 401k? If so, it should be a priority to max out that match.

robartsd

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Re: Looking to Grow a 'Stash
« Reply #4 on: November 30, 2017, 03:29:20 PM »
You're doing pretty well. $1,110/mo exepnses isn't bad. That's only $13,200/yr. I agree with spending this low already and earning under $50k, you'll probably get more return on your efforts looking into how to increase your earning.

My recommendation is to build your emergency fund in a Roth IRA Savings account ($5500 in 2017 contributions by 4/15/18). If you don't end up needing the money, you'd be able to roll it into a Roth IRA investment account for tax free growth after establishing your taxable emergecy fund savings account.

Not clear on your income. What is your gross pay (including taxes and 401k contributions)? I'm guessing it is closer to $40k/yr if your take home is $30k/yr after withholding and 5% salary contribution to your 401(k). If this is the case you should be able to come close to contributing the max to both your 401(k) ($18,000/yr) and an IRA ($5,500/yr) once you're debt and emergency fund goals are met. With your low income/spending, Roth is likely a good choice for your IRA. You can start an investment account Roth IRA with your 2018 contribution.

robartsd

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Re: Looking to Grow a 'Stash
« Reply #5 on: November 30, 2017, 03:39:38 PM »

Check2400

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Re: Looking to Grow a 'Stash
« Reply #6 on: November 30, 2017, 03:56:54 PM »
Make a new case study in the Case Study Section.
https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

I'd look through 3-4 case studies first to see how the formats are done to make things easy to grasp for people to give input. 

As for your spending, you'll likely avoid a lot of the basic responses you'll also see in the other case studies (cell phone, rent, food, etc.) since you can't really trim much more from 1100 a month.

But putting together the case study is a great exercise to get your mind right along with, imo, setting up a mint account if for nothing else to track your gains for positive reinforcement (Ahh those sweet green bar charts on Net Worth...).  This also will help visualize how getting a job or side hustle paying an extra 12,000 will really push you into overdrive.

Specifically, it sounds like you need to:

-Pay off CC bill--sounds like you can do this in a month.  Having a monthly balance is not having debt--using CC's responsibly to accumulate points is a good thing. 
-Get EF up from $500.  Having a 2-3 grand is fine, but as mentioned, your Roth is also an EF (see below).
-Contribute to your 401k match
-Max Roth IRA at $5,500--the gains on this you cannot access until retirement, but the contributions you can.  i.e. you can always pull out the yearly $5500 contribution in an emergency, but not the gains on the $5,500.  Be aware once pulled out, you can't put it back in in excess of the annual contribution.
-Max HSA if you have one (I don't and didn't but pretty unanimous this is a good idea because doctorz).
-Max 401K
-Start taxable account.

You probably are thinking, why do 401k and Roth if I want to retire early?  I was the same way. 
Read this:  https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
Then realize that frontloading the investment for the back end of your retirement not only ensures your future, but trains you to live on less.  I've always said the best thing about maxing my 401k early when it hurt was that every raise after that was mine mine mine.  Coupled with the fact that my early years needed as many artificial barriers to lifestyle inflation as I could impose on myself, maxing the 401k made complete sense.  Plus knowing that I got 1500 in savings a month from foregoing 1100 or so in after tax paycheck money made it easier. 


Once you've got the case study up and running come back and post it so we can go punch your face! :)


acidforbrains

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Re: Looking to Grow a 'Stash
« Reply #7 on: November 30, 2017, 04:13:25 PM »
Hi all,

Thank you so much for the information so far. I made a mistake by trying to take the taxes and 401k contribution out of my income.

In 2016, my gross wages were about $47,000 from my job. It is reasonable that I will make about that much again this year (I think I'm currently at $44,000), +/- 1 or 2 thousand. It varies a bit because I get paid overtime and in 2016 I happened to work a ton of overtime.

When I said 30,000, I had taken the taxes out and rounded down in order to look at my income as 'harshly' as possible, but that was obviously a mistake! Regardless, I would like to make more income, and am working on that.

I am currently contributing 5% to my 401k and my employer does match the 5%, that is the max that they will match.

So after I get maybe about a $10,000 emergency fund (slightly higher as you all suggested), then I should entertain the idea of putting $18,000 into my 401k per year while simultaneously opening up a Roth IRA account and put the max of $5,500 per year into that? I'll do some heavy research about these accounts and such so that I fully understand this.
Edit: I did more research and reviewed your post and understand this better now. Instead of trying to begin with a $10,000 emergency fund and then max contributions on a Roth IRA, I'm just going to max Roth IRA contributions for the get-go, and open an account soon.

If I am able to do that and still have some extra money floating around (I know this is thinking very long term), what should I do with that money? Just pile it up in my savings account?

I again apologize for how I originally reported my income. Thanks again to everyone who has responded!

P.S. While writing this post I saw your post Check2400. I love this idea - this weekend I will try to make a case study section. Thank you for your detailed explanations, a Roth IRA sounds amazing, how you explain it. If I had it for two years or more, can I only pull out a given year's contributions? In other words, on my third year, assuming I put 5,500 in the first two years, could I take out 10,000?

Also now that you mentioned it, my employer recently introduced a new provider this year, and HSA is an option. I'm going to look into that a lot closer now.. my original feeling was to just go with the cheapest insurance. I'm excited to go back and research.
« Last Edit: December 04, 2017, 07:34:06 AM by acidforbrains »

Laura33

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Re: Looking to Grow a 'Stash
« Reply #8 on: December 01, 2017, 09:01:32 AM »
FWIW, I would look closely at the benefits of a traditional IRA/401(k) vs. a Roth.  You probably know about the "pay tax now vs. pay tax later" distinction, so a lot of the decision is tax bracket arbitrage.  But your low expenses and relatively low income give you a great ability to whack your taxes.

Big caveat that who knows what tax brackets will be next year, so you will need to do the math yourself going forward.  But for 2017, the lowest tax bracket for single filers (10%) goes up to about $9300 AGI, and then you pay 15% on any additional income between that and about $38K.  But you also get personal exemptions and standard deductions that add up to about $10,400.  So that means that, basically, you can earn up to $19,700+/- before you exceed the 10% tax bracket.

You currently make about $47K/yr.  If you were able to fully fund your 401(k) ($18K) and a traditional IRA ($5500), that would allow you to knock that income down to about $23,500; if you can do an HSA, that will knock that down further, to maybe a little over $20K.  In other words, doing the traditional options means that under the current federal tax code, all or almost all of your income would be taxed at 10%, which is pretty freaking awesome.  And with your low expenses, you could easily live on the $20K you'd be taking home after your taxes and contributions (note that I don't know what other payroll deductions you have, like health insurance, or what your state taxes are). 

OTOH, if you do the Roth IRA and save the rest of the money in a regular savings account, then only your 401(k) contributions are deducted from your income for tax purposes.  And because your income under the first scenario puts you right at the threshold of the 15% bracket, that means that all of that extra income you are reporting under this scenario is taxed at the 15% rate, not the 10% rate (and the higher taxes you will pay means you won't have as much left to save after covering your expenses).  So the real question is whether it is worth it to save that extra 5 percentile points in taxes to allow you to put more money in your pocket and your accounts now, vs. saving on the taxes down the road when you take it out.

For many folks here, the tIRA/t401(k) route works best, because your low cost of living now and desire to FIRE usually means that your post-FIRE tax bracket is going to be the same as or lower than your current tax bracket, and the Roth ladder gives you a way to convert your traditional accounts to a Roth anyway while keeping your tax rate low.  So the ability to use the tax break to max out your savings now is usually much more valuable than the possible tax break from a Roth later.

But obviously, YMMV.  You have received very good advice about the value of a Roth IRA as an EF (something you can't do with a tIRA), which you should weigh carefully.  And of course there is all the tax brouhaha now that will change this analysis in some yet-to-be-determined way.  So you should evaluate the pros and cons of all of the various options.  But regardless of whether you do a tIRA or a Roth, I would argue that the very next thing you do is max out whatever other tax-sheltered accounts you have available to you -- HSA, 401(k), etc.
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robartsd

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Re: Looking to Grow a 'Stash
« Reply #9 on: December 01, 2017, 12:12:23 PM »
Big caveat that who knows what tax brackets will be next year, so you will need to do the math yourself going forward.  But for 2017, the lowest tax bracket for single filers (10%) goes up to about $9300 AGI taxable income, and then you pay 15% on any additional income between that and about $38K.  But you also get personal exemptions and standard deductions that add up to about $10,400.  So that means that, basically, you can earn up to $19,700+/- before you exceed the 10% tax bracket.
Laura33 is right that pretty much all of your tax advantaged space is likely to fall in the 15% bracket (or higher if you income increases). There's no reason you can't fund a Roth IRA savings account as your emergency fund right now, then open a Traditional IRA investment account when you've met your emergency fund goals. Predicting taxes in retirment is hard. Roth contributions effectively lock in your 15% income tax rate for that money: if your marginal tax rate in retirement is higher you win, if it is lower you lose.

The other thing to consider with Roth vs traditional IRA is wether or not you might want to take advantage of backdoor Roth contributions later (this could apply if your AGI exceeds $118k as a single filer in the future).
« Last Edit: December 01, 2017, 12:17:08 PM by robartsd »

acidforbrains

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Re: Looking to Grow a 'Stash
« Reply #10 on: December 03, 2017, 06:50:26 PM »
Thank you all so much for the very informative replies. I'm going to parse this information and do some heavy research, and eventually make a post in the case study forum. I've been cramming for my calculus final this weekend and hadn't had time to get all of my information together just yet. I just wanted to reiterate that I am reading through all of this and am so happy I have this information now. Thanks again!

Finances_With_Purpose

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Re: Looking to Grow a 'Stash
« Reply #11 on: December 03, 2017, 07:21:57 PM »
First off, great job!  I wish I had been where you are at your age - I'd be a millionaire today and set.  You're going to do well. 

Also, I agree with Laura33.  I'd also check out MadFientist's post on traditional v. Roth accounts.

I generally recommend the traditional route (401k, IRA), like MadFientist does, for two reasons:
1.  You may well be better off - even with a low tax bracket - because you get more principal to start with and your gains are tax-free.  (As a bonus, there are some clever ways to move money out of there as needed without penalty, too.) 
2.  Roths get taxed today.  You're in your 20s, so I'd hesitate to rely on politicians' promises that they won't eventually tax you again.  Roths could (like 401ks) always get taxed again later.  I prefer to take my tax break today, when possible - especially if it's a close case. 

FWIW, I have both, because I thought taking a Roth one year would be a good idea.  But now, years later, eh, I would have probably done it as a 401k.  I keep a smidge of my savings (NOT my emergency fund, though, to be clear) as a Roth. 

Keep up your drive on this and you'll do well - even if you could have chosen a better tax-advantaged account at some point, or whatever.  You learn more as the years go on.  You're doing the basics right and that's what matters most.  (Except the credit card: knock that out, but you said you plan to, so I won't go on about that.) 

robartsd

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Re: Looking to Grow a 'Stash
« Reply #12 on: December 04, 2017, 09:16:24 AM »
1.  You may well be better off - even with a low tax bracket - because you get more principal to start with and your gains are tax-freedeferred.

2.  Roths get taxed today.  You're in your 20s, so I'd hesitate to rely on politicians' promises that they won't eventually tax you again.
Tax law changes will come (just look at the current thread about the Republican tax plan); how that affects the trade off between Roth and traditional swings both ways. I find it highly improbable that politicians would tax money in a Roth account as income upon withdraw, but there are other ways the money could be taxed - most likey to happen is as sales tax when spent. An income tax cut paid for by a sales tax would effectively subject Roth funds to double taxation, but might be subtle enough to get passed/upheld.

Most people seem to agree that current governmental deficits are not sustainable. I personally think that overall taxation is likely to go up which starts me off leaning towards Roth. It wasn't until I came across analysis like the MadFientist's post on traditional v. Roth that I realized that I was only thinking of part of the picture. Pretty much everyone is better off picking only Traditional than picking only Roth. If by the time you retire you've maxed your tax advantage savings and still have 5+ years expenses in taxable accounts (including any HSA funds you can claim for out of pocket medical expenses) foregoing tax-deffered traditional contributions for Roth was almost certainly a mistake. In my case, I don't currently project significant taxable savings for retirement, so I will probably benefit from some Roth in the mix (figuring out how much is tricky - since I started with just Roth, I'm currently just doing Traditional contributions). It gets more complicated if your income is ever high enough to not be able to directly contribute to a Roth and not be able to deduct Traditional contributions.

Forgoing tax advantaged space to build up an emergency fund that you don't end up using is also almost certainly a mistake which is why I am so quick to recommend Roth IRA Savings accounts to people who still need to build an emergency fund. Another advantage of the Roth IRA Savings account as an emergency fund is that is is slightly less tempting to spend it, so it may help some people make more optimal choices to cut/delay spending rather than declaring emergency and drawing down savings.

acidforbrains

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Re: Looking to Grow a 'Stash
« Reply #13 on: December 04, 2017, 03:00:25 PM »
Hi guys, this information is wonderful :). Thank you so much!

I'm beginning to grasp what I should do.. definitely max out my 401k to put in $18,000 per year, and then generally I think I want to go with the traditional IRA account for the majority of my savings, after reading the MadFientist post.

For my emergency fund, should I build up $5,500 next year into a Roth IRA, and just leave it as an emergency fund that I can tap into if ever needed? Maybe the year after that I'll do the same thing and max my emergency fund at $10,100 (which I think is sufficient), and then never contribute to it or withdraw from it again, except for an emergency?

Meanwhile, I'll put the rest of my savings into a tIRA, which will be the main account that I want to build up with savings (not emergency fund).

My line of thinking here is since I can't withdraw from a tIRA without penalty for an emergency, it is not a good option for an emergency fund, and that I should instead make use of a Roth IRA for the emergency, and tIRA for actual savings? I'm still a little confused where I should put my emergency fund that I can freely withdraw from in case of emergency.

EfficientEngineer

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Re: Looking to Grow a 'Stash
« Reply #14 on: December 04, 2017, 03:33:30 PM »
Some great advice in this thread!  I'd also like to mention that side hustles are great and you should definitely look into them.  You could find part time work on craigslist doing a variety of things or could use some of the gig economy apps to deliver food or perform tasks for people. 

robartsd

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Re: Looking to Grow a 'Stash
« Reply #15 on: December 04, 2017, 04:06:35 PM »
My line of thinking here is since I can't withdraw from a tIRA without penalty for an emergency, it is not a good option for an emergency fund, and that I should instead make use of a Roth IRA for the emergency, and tIRA for actual savings? I'm still a little confused where I should put my emergency fund that I can freely withdraw from in case of emergency.
Emergency fund should be in a FDIC insured savings account (which could be held as a Roth IRA). If you have the ability to built up emergency fund in addition to making the max contribution to all tax advantaged accounts, that is preferred, otherwise I recommend using a Roth IRA Savings account as an emergency fund. I like to keep about 1 month's expenses in a regular savings account as a buffer to avoid paycheck to paycheck cashflow issues - I'd establish this before contributing to a Roth IRA Savings account emergency fund.

Check2400

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Re: Looking to Grow a 'Stash
« Reply #16 on: December 04, 2017, 04:36:15 PM »
So.  I'm going to post an answer to your question.  But I am not the person to trust point blank on this--hopefully some others will chime in and correct me when I'm wrong.

I'm beginning to grasp what I should do.. definitely max out my 401k to put in $18,000 per year, and then generally I think I want to go with the traditional IRA account for the majority of my savings, after reading the MadFientist post.

Meanwhile, I'll put the rest of my savings into a tIRA, which will be the main account that I want to build up with savings (not emergency fund).

I don't think this is an option for you.  You get one tax advantaged employer sponsored retirement plan--you sound like you have a 401k, so you can use that.  But a Traditional IRA, if it is not offered, is not the same as a taxable account for surplus money to then put extra money into. 


For my emergency fund, should I build up $5,500 next year into a Roth IRA, and just leave it as an emergency fund that I can tap into if ever needed? Maybe the year after that I'll do the same thing and max my emergency fund at $10,100 (which I think is sufficient), and then never contribute to it or withdraw from it again, except for an emergency?

You're mixing a bit of advice here.  A Roth IRA is the second tax advantaged savings account you can save into, up to $5500 a year, but no more.  It is independent of employment, hence why you can also do this in addition to your 401k.  You can withdraw from that in case of an emergency, so it serves a dual purposes.  The point, however, isn't to use it only as an emergency fund. 
Instead, the point is to save tax advantaged savings while still having access to the money as bridge while you build up a real EF. 

My line of thinking here is since I can't withdraw from a tIRA without penalty for an emergency, it is not a good option for an emergency fund, and that I should instead make use of a Roth IRA for the emergency, and tIRA for actual savings? I'm still a little confused where I should put my emergency fund that I can freely withdraw from in case of emergency.

If I'm right, you will only have the 401k and ROTH.  This eats up $23,500 for 2017.  Planning for 2018, it will be $24,000 (cap increase).  That means that any money you want to invest after that $24,000 next year will have to be in a standard taxable account--not a tIRA or other vehicle. 

That extra money is going to be your emergency fund.  Yes, you can withdraw from your Roth, but treat that as a bridge until you have an actual emergency fund (at your spend rate, 3-4 grand seems like plenty, but if 6 is what gives you the feels, go for it).  At a certain point you can't put more money into additional ira's and 401ks (saving comments on sep's, HSA's, etc for later). 

So, you want tangible advice?  It seems like the following plan would be a good one after wiping any long term CC debt.   
(*You're at 100 level classes.  Once you get the basics down we can start optimizing, but this will get you 85%+ of the way there)

First, find a way to make your 2017 Roth IRA contribution ASAP.  The earlier you do this, the more dividends and growth.
Second, set your monthly 401k withholding for 2018 to max out on your last paycheck (we can talk frontloading later, when you understand more/get an answer on minutiae of company match policies problems) 
Third, build up the $6,000 in your EF.   At this point in your early investing life, just put it in a bank account.  Yes, you can use any Roth contributions in a true emergency, but with certain exceptions, once you take it out, you can't put it back in to continue growing. 
Fourth, max out your 2018 Roth IRA of $5500.  Again, the earlier you do this, the more dividends and growth. 
Fifth, either get a Vanguard account to invest in index funds or, since you're entitled to have goals outside of investing optimization, start setting aside money to buy a house/woo a spouse/improve your health/fund a side hustle/buy the good acid.

Once again, I don't have tIRA experience, but I think I'm right on the fact it is an either or proposition between the tIRA and 401k, with the ROTH as a secondary option regardless.  If so, this plan will set you up nicely, and there isn't anything in it you would be doing wrong, just a few things you could be doing more right.  If this is all you did for the next 20 years of your life, you're still staring down ringing in your 50th birthday a millionaire. 



Finances_With_Purpose

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Re: Looking to Grow a 'Stash
« Reply #17 on: December 04, 2017, 08:25:15 PM »
1.  You may well be better off - even with a low tax bracket - because you get more principal to start with and your gains are tax-freedeferred.

2.  Roths get taxed today.  You're in your 20s, so I'd hesitate to rely on politicians' promises that they won't eventually tax you again.
Tax law changes will come (just look at the current thread about the Republican tax plan); how that affects the trade off between Roth and traditional swings both ways. I find it highly improbable that politicians would tax money in a Roth account as income upon withdraw, but there are other ways the money could be taxed - most likey to happen is as sales tax when spent. An income tax cut paid for by a sales tax would effectively subject Roth funds to double taxation, but might be subtle enough to get passed/upheld.

Most people seem to agree that current governmental deficits are not sustainable. I personally think that overall taxation is likely to go up which starts me off leaning towards Roth. It wasn't until I came across analysis like the MadFientist's post on traditional v. Roth that I realized that I was only thinking of part of the picture. Pretty much everyone is better off picking only Traditional than picking only Roth. If by the time you retire you've maxed your tax advantage savings and still have 5+ years expenses in taxable accounts (including any HSA funds you can claim for out of pocket medical expenses) foregoing tax-deffered traditional contributions for Roth was almost certainly a mistake. In my case, I don't currently project significant taxable savings for retirement, so I will probably benefit from some Roth in the mix (figuring out how much is tricky - since I started with just Roth, I'm currently just doing Traditional contributions). It gets more complicated if your income is ever high enough to not be able to directly contribute to a Roth and not be able to deduct Traditional contributions.

Forgoing tax advantaged space to build up an emergency fund that you don't end up using is also almost certainly a mistake which is why I am so quick to recommend Roth IRA Savings accounts to people who still need to build an emergency fund. Another advantage of the Roth IRA Savings account as an emergency fund is that is is slightly less tempting to spend it, so it may help some people make more optimal choices to cut/delay spending rather than declaring emergency and drawing down savings.

Good point re: tax-deferred.  That's what happens when I post while exhausted and on cold meds. 

I'm going to write a blog post on the Roth thing and my reasons for avoiding them.  This seals the deal.  I'm doing that, then will post a link (rather than copy it all here, basically).  It's for you guys.  This is the second time this has come up lately.

Finances_With_Purpose

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Re: Looking to Grow a 'Stash
« Reply #18 on: December 06, 2017, 09:27:41 PM »
1.  You may well be better off - even with a low tax bracket - because you get more principal to start with and your gains are tax-freedeferred.

2.  Roths get taxed today.  You're in your 20s, so I'd hesitate to rely on politicians' promises that they won't eventually tax you again.
Tax law changes will come (just look at the current thread about the Republican tax plan); how that affects the trade off between Roth and traditional swings both ways. I find it highly improbable that politicians would tax money in a Roth account as income upon withdraw, but there are other ways the money could be taxed - most likey to happen is as sales tax when spent. An income tax cut paid for by a sales tax would effectively subject Roth funds to double taxation, but might be subtle enough to get passed/upheld.

Most people seem to agree that current governmental deficits are not sustainable. I personally think that overall taxation is likely to go up which starts me off leaning towards Roth. It wasn't until I came across analysis like the MadFientist's post on traditional v. Roth that I realized that I was only thinking of part of the picture. Pretty much everyone is better off picking only Traditional than picking only Roth. If by the time you retire you've maxed your tax advantage savings and still have 5+ years expenses in taxable accounts (including any HSA funds you can claim for out of pocket medical expenses) foregoing tax-deffered traditional contributions for Roth was almost certainly a mistake. In my case, I don't currently project significant taxable savings for retirement, so I will probably benefit from some Roth in the mix (figuring out how much is tricky - since I started with just Roth, I'm currently just doing Traditional contributions). It gets more complicated if your income is ever high enough to not be able to directly contribute to a Roth and not be able to deduct Traditional contributions.

Forgoing tax advantaged space to build up an emergency fund that you don't end up using is also almost certainly a mistake which is why I am so quick to recommend Roth IRA Savings accounts to people who still need to build an emergency fund. Another advantage of the Roth IRA Savings account as an emergency fund is that is is slightly less tempting to spend it, so it may help some people make more optimal choices to cut/delay spending rather than declaring emergency and drawing down savings.

OK, so after some thought, I decided to go ahead and respond here instead, especially since I promised you a response on this.  (I don't like posting re: political topics, even generically, in general.  Especially on the blog.) 

First off, good point about tax increases.  Whatever else we are, you and I are (both) off in the weeds speculating here, making the best educated guess we can in a world marked by uncertainty. 

With that said, I still don't go for Roths, and here's why.  Though I will caveat one thing: I think it's fine to own some, especially as part of a balanced portfolio - why not hedge your various tax-bucket bets?  Especially if you already have a Roth. 

So, why do I think Roths are politically vulnerable?

Let's imagine another recession.  No crazy inflation, no bank runs.  Just a nasty recession.  Unemployment tops 10%, say 15%, and Congress (i.e. a body of politicians) really has to come up with some money.  As you mentioned, the debts we have can't hold forever.  Plus, this body of politicians can't drop interest rates much - they're already near zero.  As unemployment soars, people are in the streets, others are dying, it's ugly, as recessions are. 

Eventually, the body of politicians looks at revenue increases: it's either that, or slash some beloved benefit programs. 

They decide upon some tax increases, but then someone points out: hey, there's a big bunch of folks who are drawing money from tax-free accounts - huge sums - while everyone else is having to suffer.  (Think Romney and all his Bain shares held in his Roth.)  Maybe we could avoid increasing rates as much if we just tax them.

I get that Roth account holders will be upset by this.  But how big of a group is that, really?  If someone is taking some pain, they'll generally avoid high taxes on the elites (the wealthy/donor class), as far as possible, and the broad public, as far as possible.  Unlike 401ks, very few people have Roths relative to the general public.  In fact, most adults in this country don't even know what a Roth account is. 

This is why I think 401ks and IRAs are safer.  They may be bland, but everyone has one.  They're extremely popular, employers love them, and they're widespread.  So, if our politicians change them, they know they will upset millions of people immediately.  With Roths, that political risk just isn't there.  In fact, Roths are vulnerable - they only affect a small group.   

If everyone else is starving, the handful of guys who are eating a tax-free lunch are going to get some jealous looks. 

And also, a 401k gets an immediate tax advantage.  Our body of politicians may want to go back in time and tax that money, but they realistically can't.  You get the free lunch now, and earn money on it.  When dealing with governments and politicians, I prefer that approach. 

At worst, the government could jack with tax rates.  But at least I had far more starting principal.  And they can't easily double-tax you.  To put it another way, your downside risk is much higher with a Roth.  You get a little upside - maybe it'll rock if taxes are higher someday (and Roths still exist/aren't taxed!).  But you trade a significant downside risk.

As for your point, tax increases would likely hit Roths too if they end up being taxed.  To put it another way, I think you have to first consider whether Roths get double-taxed.  As it could give you a triple hit: you get taxed again, AND at the new higher rates. 

And your outcome (higher taxes) also makes it even more likely Roths will get hit with taxation again.  First, let's say you're right, and Roths aren't taxed immediately.  At that point, it's all the more likely that they will be - when everyone knows that a few wealthy folks have untaxed accounts while everyone is paying 40-80% tax rates. 

Can you imagine our body of politicians trying to justify major spending cuts elsewhere - to benefits, for instance, which impact millions - while a group of wealthy folks hold piles of cash in untaxed accounts and the rest of the country pays 40-80% rates?  I mean, it could happen, but Roths being to look like awfully low-hanging fruit for taxes.  They become extremely hard to justify at that point. 

Most of the Congressmen/politicians who promised Roths and ran on that stuff will be gone by then.

Now, to really take it home: consider the likelihood that, if you're 20, there are several recessions ahead of you before you're likely to draw down your Roth (using the average, which is about one recession per decade).  So, the politicians face at least three more temptations - maybe more - to steal back what they once promised.

Maybe you trust them.  I don't. 

(To be fair, I'm just being punchy here at the end.  I know you don't either - we just see different ways how we think they're likely to hose us.  So we're more agreed than not: they'll want to hose us somehow, since they can't manage the collective finances well.) 

That's why Roths are a less optimal plan for the future.  If you're nearer retirement, though, they may be a good idea.  And maybe they have some value as part of a multi-bucket plan to hedge against tax woes.  But at least for me, I am done with them. 

robartsd

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Re: Looking to Grow a 'Stash
« Reply #19 on: December 07, 2017, 09:21:32 AM »
First off, good point about tax increases.  Whatever else we are, you and I are (both) off in the weeds speculating here, making the best educated guess we can in a world marked by uncertainty. 

<snip>

They decide upon some tax increases, but then someone points out: hey, there's a big bunch of folks who are drawing money from tax-free accounts - huge sums - while everyone else is having to suffer.  (Think Romney and all his Bain shares held in his Roth.)  Maybe we could avoid increasing rates as much if we just tax them.

I get that Roth account holders will be upset by this.  But how big of a group is that, really?  If someone is taking some pain, they'll generally avoid high taxes on the elites (the wealthy/donor class), as far as possible, and the broad public, as far as possible.  Unlike 401ks, very few people have Roths relative to the general public.  In fact, most adults in this country don't even know what a Roth account is. 

This is why I think 401ks and IRAs are safer.  They may be bland, but everyone has one.  They're extremely popular, employers love them, and they're widespread.  So, if our politicians change them, they know they will upset millions of people immediately.  With Roths, that political risk just isn't there.  In fact, Roths are vulnerable - they only affect a small group.   
This argument is not convincing to me. Affect a small group of people, but generate significant revenue = tax the elite. Even if an income tax on Roths was passed I would not expect it to last very long. Affected elites would lobby for repeal and find some poster examples of non-elites who are suffering from the double taxation to get widespread support. I do see the potential for increasing taxes by passing a consumption tax and not accounting for the taxed already status of the Roth even if income taxes are lowered as part of the plan.

In discussing Roths in this thread I came accross the idea that Roth has no advantage for someone holding investments that primarily give off long term capital gains and qualifying dividends if they will never be in a tax bracket where those are taxed.


Bracken_Joy

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Re: Looking to Grow a 'Stash
« Reply #20 on: December 07, 2017, 09:34:34 AM »
So.  I'm going to post an answer to your question.  But I am not the person to trust point blank on this--hopefully some others will chime in and correct me when I'm wrong.

I'm beginning to grasp what I should do.. definitely max out my 401k to put in $18,000 per year, and then generally I think I want to go with the traditional IRA account for the majority of my savings, after reading the MadFientist post.

Meanwhile, I'll put the rest of my savings into a tIRA, which will be the main account that I want to build up with savings (not emergency fund).

I don't think this is an option for you.  You get one tax advantaged employer sponsored retirement plan--you sound like you have a 401k, so you can use that.  But a Traditional IRA, if it is not offered, is not the same as a taxable account for surplus money to then put extra money into. 


For my emergency fund, should I build up $5,500 next year into a Roth IRA, and just leave it as an emergency fund that I can tap into if ever needed? Maybe the year after that I'll do the same thing and max my emergency fund at $10,100 (which I think is sufficient), and then never contribute to it or withdraw from it again, except for an emergency?

You're mixing a bit of advice here.  A Roth IRA is the second tax advantaged savings account you can save into, up to $5500 a year, but no more.  It is independent of employment, hence why you can also do this in addition to your 401k.  You can withdraw from that in case of an emergency, so it serves a dual purposes.  The point, however, isn't to use it only as an emergency fund. 
Instead, the point is to save tax advantaged savings while still having access to the money as bridge while you build up a real EF. 

My line of thinking here is since I can't withdraw from a tIRA without penalty for an emergency, it is not a good option for an emergency fund, and that I should instead make use of a Roth IRA for the emergency, and tIRA for actual savings? I'm still a little confused where I should put my emergency fund that I can freely withdraw from in case of emergency.

If I'm right, you will only have the 401k and ROTH.  This eats up $23,500 for 2017.  Planning for 2018, it will be $24,000 (cap increase).  That means that any money you want to invest after that $24,000 next year will have to be in a standard taxable account--not a tIRA or other vehicle. 

That extra money is going to be your emergency fund.  Yes, you can withdraw from your Roth, but treat that as a bridge until you have an actual emergency fund (at your spend rate, 3-4 grand seems like plenty, but if 6 is what gives you the feels, go for it).  At a certain point you can't put more money into additional ira's and 401ks (saving comments on sep's, HSA's, etc for later). 

So, you want tangible advice?  It seems like the following plan would be a good one after wiping any long term CC debt.   
(*You're at 100 level classes.  Once you get the basics down we can start optimizing, but this will get you 85%+ of the way there)

First, find a way to make your 2017 Roth IRA contribution ASAP.  The earlier you do this, the more dividends and growth.
Second, set your monthly 401k withholding for 2018 to max out on your last paycheck (we can talk frontloading later, when you understand more/get an answer on minutiae of company match policies problems) 
Third, build up the $6,000 in your EF.   At this point in your early investing life, just put it in a bank account.  Yes, you can use any Roth contributions in a true emergency, but with certain exceptions, once you take it out, you can't put it back in to continue growing. 
Fourth, max out your 2018 Roth IRA of $5500.  Again, the earlier you do this, the more dividends and growth. 
Fifth, either get a Vanguard account to invest in index funds or, since you're entitled to have goals outside of investing optimization, start setting aside money to buy a house/woo a spouse/improve your health/fund a side hustle/buy the good acid.

Once again, I don't have tIRA experience, but I think I'm right on the fact it is an either or proposition between the tIRA and 401k, with the ROTH as a secondary option regardless.  If so, this plan will set you up nicely, and there isn't anything in it you would be doing wrong, just a few things you could be doing more right.  If this is all you did for the next 20 years of your life, you're still staring down ringing in your 50th birthday a millionaire.

I'm not sure I'm reading Check's post correctly, but I don't think he is correct. You can contribute $5500 into an IRA each year- whether roth, taditional, or both, they must add to $5500. The question is, based on income, if you can deduct traditional IRA from your taxes Here's the IRS publication on that for 2017 if you ARE covered by a work plan (you are, because of your 401k): https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work And then the second question is whether you should choose roth or traditional for the tax benefits.

I also wanted to address a misconception I saw in your first post:
You asked: "I'm looking for advice on what I should do after that with my money? I'm not positive if I should try to max out my 401k, get a Roth IRA, or start investing into Vanguard index funds."
It's possible you just meant "investing into Vanguard index funds" as shorthand for after tax, non retirement, not tax advantaged accounts? But I want to clarify in case that wasn't it. Your 401k and your IRA are just BUCKETS. They are names on accounts, and change how taxes and withdrawl rules happen with that account. But you still invest the account in the way you choose. Now, a 401k you're limited based on who your company went through, but you still generally get to choose between different funds. Your IRA, *you* choose where you invest it. You can open it up at vanguard, and fill it with index funds. It is just a bucket.

I hope that helps.
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acidforbrains

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Re: Looking to Grow a 'Stash
« Reply #21 on: December 10, 2017, 06:50:24 PM »
Hi all,

Sorry to post again in a thread that's pushed all the way to the second page. I just wanted to say thank you for everyone who replied in this thread. I feel like I've learned a lot! I still have more to learn, but I'm rather excited about what I already know. Thank you guys again. Even in your debates, as a novice reader, I get to absorb both sides of the coin, and it helps me understand things even more. I definitely know that there's no silver bullet approach and that everything has its own pros and cons. Each individual's plans will be different.

I still plan on writing a case study, but probably not for a few weeks. I looked over the guidelines and I'll need to do quite a bit of research, and with this being my final week of fall semester in college (I take two classes with tuition reimbursement and still work full time), I need to focus on that right now. But I've marked it in my calendar to get one posted at last by the end of January.

My short term plan is:
  • Open Roth IRA (done!)
  • Change 401k contribution to contribute $18,500 by the end of 2018. I'm doing this as soon as my credit card debt is fixed, which will be in a couple of weeks.
  • Contribute $5,500 to Roth IRA before mid April for 2017. Do it again the next year, and every year going forward.
  • Decide if I want to open a tIRA once my Roth IRA emergency fund has been set up, and contribute to the tIRA while my AGI is slow. This decision will affect the previous bullet point.
  • Build up a basic emergency fund in my savings account, eventually equalling ~$6,000. This will stop me from draining the Roth IRA in case of emergency.
  • Fix my w4 form so that I 'break even' come tax time rather than getting a large refund (which I will be getting this year).
  • Research what should make up my investments in my Roth IRA and 401k to make them a mixture of efficient and safe.
  • Obviously continue to keep my monthly expenses to ~$1,000 - $1,200 per month.

I ultimately decided to go with a Roth IRA as opposed to a tIRA. I could do a tIRA because, in 2017, I do make under $62,000, but since this seems to change every year and ultimately I may make more than that (I have major promotion opportunities at my job once I've finished my degree), I just feel it will be 'cleaner' to go with a Roth IRA and not need to potentially have to move money around later. Maybe this is laziness on my part and please punch me in the face if you think so. Edit: Looking back through the posts above, I'm going to research this further. Maybe once I get $5,500 in my Roth IRA, and my emergency fund is set in my savings account, I will open a tIRA and begin contributing to that.

One question I do have is that I want to save up to own a house. I currently live in an apartment with a roommate (hence my very low expenses). I wouldn't want a large/expensive house - my plan is to just watch the market and not even consider buying until it is down, and then do some searching a find a nice, small home for myself. However, with my aforementioned plans of such intense saving into retirement accounts, I'm not really sure how to balance also saving a downpayment for a home.

I could ease my contribution a little on my 401k to contribute sub $18,500 in 2018 in order to save more for a house, but it's hard to judge if that would be wise. I don't think I'd ever forego not putting $5,500 into my Roth IRA, since it seems it takes so long to build it up in the first place. I would never want to withdraw from it either.

I know my emergency fund will be growing very slowly throughout 2018, and I guess once it is built up, anything extra will slowly accrue to a downpayment on a house for myself.

For now, a house for me is more of a 'want' than a 'need'. My current living situation isn't going to change anytime soon, and my rent before utilities is a measly $440, so living where I do is allowing me to save a ton of money. But a house is an investment I want to make for my future, because I don't want to live in an apartment with a roommate forever.

Thanks again!
« Last Edit: December 10, 2017, 07:03:42 PM by acidforbrains »