Author Topic: A Confused Millennial (Retirement Account Questions)  (Read 5870 times)

Mr. Millennial Mustache

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A Confused Millennial (Retirement Account Questions)
« on: October 25, 2016, 10:01:35 AM »
Hi Everyone,

I’ve been following Mr. Money Mustache (MMM) for some time now, reading the forums at time to better my financial literacy and to find answers and suggestions on how to better prepare for my future.

I have some questions about Individual Retirement Accounts that I can’t seem to get a straight answer on. However, I know the answer is unique to the individual. First, a little about me :

29 yo
Married
Low six figure income
Low six figure savings
No debt

The company I work for just started to offer Traditional IRA’s with a 1% match (American Century Investments - for small business). However, just prior to providing this offer, I was looking to setup an IRA with Vanguard (Traditional or Roth) as I believe they would be a superior company for long term. My questions are this :

1. Am I right to assume that a traditional IRA is better in my case being that I’m at a 28% tax rate?

2. I’m concerned about investing so much money into something that has risk. I can’t seem to shake the idea of “what if the market crashes and I lose $XYZ amount for good”. Any advice?

3. Are there any other options I should be looking into for a retirement account?

4. Should I simply move forward with my company’s offering or set up with Vanguard?

5. Assuming I move forward with one IRA and max out 2016 & 2017 contributions, I’ve been looking into investing in a VTSAX or VFINX per recommendations by MMM and this forum. Good idea?

Thank you for taking a moment to read and reply. I know this has been covered time and time again but would really appreciate some of your wisdom.

Thank you,
Mr. Millennial Mustache

ooeei

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #1 on: October 25, 2016, 10:19:49 AM »
Hi Everyone,

I’ve been following Mr. Money Mustache (MMM) for some time now, reading the forums at time to better my financial literacy and to find answers and suggestions on how to better prepare for my future.

I have some questions about Individual Retirement Accounts that I can’t seem to get a straight answer on. However, I know the answer is unique to the individual. First, a little about me :

29 yo
Married
Low six figure income
Low six figure savings
No debt

The company I work for just started to offer Traditional IRA’s with a 1% match (American Century Investments - for small business). However, just prior to providing this offer, I was looking to setup an IRA with Vanguard (Traditional or Roth) as I believe they would be a superior company for long term. My questions are this :

1. Am I right to assume that a traditional IRA is better in my case being that I’m at a 28% tax rate?

2. I’m concerned about investing so much money into something that has risk. I can’t seem to shake the idea of “what if the market crashes and I lose $XYZ amount for good”. Any advice?

3. Are there any other options I should be looking into for a retirement account?

4. Should I simply move forward with my company’s offering or set up with Vanguard?

5. Assuming I move forward with one IRA and max out 2016 & 2017 contributions, I’ve been looking into investing in a VTSAX or VFINX per recommendations by MMM and this forum. Good idea?

Thank you for taking a moment to read and reply. I know this has been covered time and time again but would really appreciate some of your wisdom.

Thank you,
Mr. Millennial Mustache

That doesn't sound like a great option, but I'd at least contribute the 1% to get the match.  Depending on the fees (which I'm betting will be high), put the rest in a separate Vanguard IRA.  You can have multiple IRAs, the Vanguard one just won't come straight out of your paycheck. 

http://jlcollinsnh.com/stock-series/ is a great read, this post in particular seems right up your alley: http://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #2 on: October 25, 2016, 10:55:17 AM »
The company I work for just started to offer Traditional IRA’s with a 1% match (American Century Investments - for small business). However, just prior to providing this offer, I was looking to setup an IRA with Vanguard (Traditional or Roth) as I believe they would be a superior company for long term.
You employer may be sponsoring a SIMPLE IRA which is completely different than any IRAs you may open for yourself or your spouse. SIMPLE IRA is an option for small businesses in lieu of more complex 401(k) plans. Both SIMPLE IRA and 401(k) plans have similar contribution limits and rules from an employee's perspective. Contributions to these employer sponsored plans in no way impacts an individual's eligibility to contribute to IRAs that the individual opens. You may maximize contributions to a SIMPLE IRA ($18,000 deducted from your pay + employer match) and still contribute $5,500 to both your IRA and your spouse's IRA (and maximize contributions to any employer sponsored plan your spouse may have access to). With your 6 figure income and 6 figure savings, I'm guessing you can and should maximize all possible tax advantaged accounts. Find MDM's order of investments on these forums if you don't feel you have enough to maximize all retirement accounts and want advice on prioritizing which ones to max first.

mskyle

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #3 on: October 25, 2016, 11:10:14 AM »
FIRST OF ALL: You don't have to invest in risky things in an IRA. You can put everything into a money market account or an inflation-adjusted bond fund or any number of very low risk investments. I think such low-risk investments are a terrible idea for a high-income person in his 20s, but don't let "risk" stop you from putting your money in an IRA. You still get the tax benefits and you can always decide to invest it later.

If you can let us know what funds and fees apply to your employer plan that would be great! My employer offers a SimpleIRA through Fidelity. I max it out ($12,500 a year plus 3% match paid by my employer) and also fully fund my Vanguard IRA (I am currently in the "partially deductible" zone so this year I am contributing part of my $5500 to my traditional IRA and part to my Roth).

I often advise people to max out their retirement contributions now and roll over to a better account later. A Simple IRA is actually great for this because, unlike with a 401k (or similar), you can roll over without leaving your job - you just have to have the account open for two years. So even if you have only crappy funds available to you through this Simple IRA (which seems likely with American Century Investments), you can just leave the money in a money market account for two years then roll it over to your Vanguard Traditional IRA. If you have good funds and low fees in your Simple IRA then there's no need to do this, though.

So, basically, I would do both: get into your company's plan at least up to the 1% match but probably maxing it out if it is in fact a Simple IRA, AND ALSO open an IRA at Vanguard - two, actually: a Roth because you might not be able to take a full Traditional IRA deduction at your income level, and a Traditional that you will roll your Simple IRA over to in a couple of years.
« Last Edit: October 25, 2016, 11:12:57 AM by mskyle »

Jack

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #4 on: October 25, 2016, 11:46:43 AM »
2. I’m concerned about investing so much money into something that has risk. I can’t seem to shake the idea of “what if the market crashes and I lose $XYZ amount for good”. Any advice?

Only individual company stocks can drop to $0 value "for good." In order for a mutual fund or ETF to do so, every company held in the fund would have to go bankrupt. The more different companies that are held, the less likely that becomes. For any reasonable index fund, that's exceedingly unlikely and in the cases where it could happen (e.g. catastrophic nuclear war or something), your portfolio value will probably be the least of your concerns. This is the principle of diversification.

The more realistic worse-case scenario is merely poor returns. (For an extreme example, consider Japan.) You avoid that problem using diversification too.

Both SIMPLE IRA and 401(k) plans have similar contribution limits and rules from an employee's perspective. Contributions to these employer sponsored plans in no way impacts an individual's eligibility to contribute to IRAs that the individual opens. You may maximize contributions to a SIMPLE IRA ($18,000 deducted from your pay + employer match) and still contribute $5,500 to both your IRA and your spouse's IRA (and maximize contributions to any employer sponsored plan your spouse may have access to).

The 2016 employee contribution limit for a SIMPLE IRA is $12,500, not $18,000.

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #5 on: October 25, 2016, 12:02:56 PM »
So, basically, I would do both: get into your company's plan at least up to the 1% match but probably maxing it out if it is in fact a Simple IRA, AND ALSO open an IRA at Vanguard - two, actually: a Roth because you might not be able to take a full Traditional IRA deduction at your income level, and a Traditional that you will roll your Simple IRA over to in a couple of years.

mskyle,

Thank you for your reply. I'm not sure I fully understand not being able to take a full Traditional IRA deduction due to my income. Can you provide some more information on this? 

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #6 on: October 25, 2016, 12:04:06 PM »
2. I’m concerned about investing so much money into something that has risk. I can’t seem to shake the idea of “what if the market crashes and I lose $XYZ amount for good”. Any advice?

Only individual company stocks can drop to $0 value "for good." In order for a mutual fund or ETF to do so, every company held in the fund would have to go bankrupt. The more different companies that are held, the less likely that becomes. For any reasonable index fund, that's exceedingly unlikely and in the cases where it could happen (e.g. catastrophic nuclear war or something), your portfolio value will probably be the least of your concerns. This is the principle of diversification.

The more realistic worse-case scenario is merely poor returns. (For an extreme example, consider Japan.) You avoid that problem using diversification too.


Jack,

That is an extremely good point. Thank you for putting this into perspective.

« Last Edit: October 25, 2016, 12:16:21 PM by Mr. Millennial Mustache »

Jack

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #7 on: October 25, 2016, 12:06:39 PM »
I'm not sure I fully understand not being able to take a full Traditional IRA deduction due to my income. Can you provide some more information on this?

https://www.irs.gov/retirement-plans/ira-deduction-limits

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #8 on: October 25, 2016, 12:14:54 PM »
I'm not sure I fully understand not being able to take a full Traditional IRA deduction due to my income. Can you provide some more information on this?

https://www.irs.gov/retirement-plans/ira-deduction-limits

Jack,

Thanks for the link. Is this applicable if I don't partake in my companies Simple IRA even though it's offered?


Jack

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #9 on: October 25, 2016, 12:30:55 PM »
Thanks for the link. Is this applicable if I don't partake in my companies Simple IRA even though it's offered?

That page has a link explaining what "covered by a retirement plan" means. I clicked it and got this:

You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:
  • IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or
Box 13 on the Form W-2 you receive from your employer should contain a check in the “Retirement plan” box if you are covered. If you are still not certain, check with your (or your spouse’s) employer.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #10 on: October 25, 2016, 12:46:10 PM »
Thanks for the link. Is this applicable if I don't partake in my companies Simple IRA even though it's offered?
I believe the IRS considers you covered by a retirement plan if you are eligible even if you elect not to participate. The income limits for IRA deductions are based on Modified AGI - contributions to the Simple IRA reduced your Modified AGI, so even if electing not to contribute would eliminate the income limits for IRA contribution deductions; it would not be a means of optimizing your taxes. Income limits on Traditional IRA deductions might be a reason to prioritize Simple IRA contributions before Traditional IRA contributions.

biglawinvestor

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #11 on: October 25, 2016, 03:23:03 PM »
Thanks for the link. Is this applicable if I don't partake in my companies Simple IRA even though it's offered?

If your company offers a retirement plan at work, the income limits on the Traditional IRA apply to you (regardless of whether you participate in the retirement plan at work). If your company does not offer a retirement plan, the income limits vanish and anyone can contribute to a Traditional IRA.

It sounds like your income is going to be too high to contribute to a Traditional IRA. Have you checked to confirm?

Assuming your company is offering a Simple IRA, the 1% match is free money, so you might as well take it. Have they provided you with the investment options inside the Simple IRA?

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #12 on: October 25, 2016, 04:54:01 PM »
Thanks for the link. Is this applicable if I don't partake in my companies Simple IRA even though it's offered?

If your company offers a retirement plan at work, the income limits on the Traditional IRA apply to you (regardless of whether you participate in the retirement plan at work). If your company does not offer a retirement plan, the income limits vanish and anyone can contribute to a Traditional IRA.

It sounds like your income is going to be too high to contribute to a Traditional IRA. Have you checked to confirm?

Assuming your company is offering a Simple IRA, the 1% match is free money, so you might as well take it. Have they provided you with the investment options inside the Simple IRA?

Hi biglawinvestor,

Yes, after doing more research it appears that my AGI is too high to be able to contribute to a Traditional IRA being that my place of work offers the Simple IRA.

I've found the following links that show the two investment options (One Choice & Build Your Own):

1. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/mutual-fund-details/summary/one-choice-2050-portfolio.html#ARFWX
2. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/performance.html



JAYSLOL

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #13 on: October 25, 2016, 05:03:44 PM »
Maybe read or re-read MMMs post "what to do about that scary stock market".  You don't need to worry about loosing your money because, you will be a diligent saver for a bunch of years, and your fund purchases will dollar cost average over a couple of decades depending on your savings rate.  You will then withdraw those funds in retirement over an even longer period of time, which means the market can go up and down and it won't hardly affect you at all provided you don't panic and sell everything during a crash and stick to a safe withdrawal rate (4%).  The people who buy high all at once and sell low all at once, lose.  People who have low MERs on good funds and dollar cost average in and out over long time periods tend to win.  And tend to win big.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #14 on: October 25, 2016, 05:11:46 PM »
Yes, after doing more research it appears that my AGI is too high to be able to contribute to a Traditional IRA being that my place of work offers the Simple IRA.

I've found the following links that show the two investment options (One Choice & Build Your Own):

1. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/mutual-fund-details/summary/one-choice-2050-portfolio.html#ARFWX
2. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/performance.html
Not great options there. If you can contribute directly to a Roth IRA, then you should rollover from the Simple IRA to a Traditional IRA for better investment options as soon as you are eligible. The hiccup here is that any Traditional IRA funds interfere with the path to a backdoor Roth.

MoseyingAlong

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #15 on: October 25, 2016, 05:45:31 PM »
Hi, Mr Millenial Mustache,

There is some use of "contribute" goong on that is not technically correct. They probably are more thinking "deduct."

To be clear, you can CONTRIBUTE to a traditional IRA whether or not you are covered by a employer-provided retirement plan as long as you ve earned income equal to the contribution limit.

The work retirement plan and upper income limits affect whether you can DEDUCT your contributions, i.e. get an immediate tax benefit.

Sometimes it's a great strategy to contribute to a traditional IRA even if you can't deduct it, i.e. it's a "non-deductible" contribution. This is because you may be able to turn around and convert the traditional IRA to a Roth IRA without paying any tax.

I'm bring this up because you might make too much to contribute directly to a Roth IRA and this is the backdoor method to get there. If possible, I almost always recommend contributing the annual max to IRAs because it.gives you options and once April 15th is past, you can't contribute for the past year but you can recharacterize or withdraw or convert.

Hope this helps and didn't just muddy the water.

NoStacheOhio

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #16 on: October 26, 2016, 06:29:43 AM »
In your case, I would probably contribute as much as possible to the Simple IRA at work, and ONLY contribute to the Prime Money Market Fund, then roll the account over to your preferred brokerage (tIRA) as soon as you're eligible, and invest in a low cost index. Because it's a qualified rollover, the income limits don't apply.

Those funds all have expense ratios over 1%, there aren't any good choices at all.

Jack

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #17 on: October 26, 2016, 08:28:10 AM »
Those funds all have expense ratios over 1%, there aren't any good choices at all.

That goes beyond "not good choices;" that's goddamned highway robbery! Many of them aren't even near 1% (there's one over 4%!), and the ones that are tend to be conservative funds that should be expected to return less than the expense ratio!

Once the fiduciary rule becomes applicable (April 10, 2017?) those expense ratios should be literally criminal!

I hate to say it, but I almost concur with the suggestion to contribute only to the money market fund and then roll it over ASAP. But at a ridiculous 0.58% even that fund is bad, and "ASAP" being two years away is way too long to accept that drag on returns. (If the OP maxes it for 2 years for a total contribution of $25,000, he can expect to have something like $24,800 left by the time he can becomes eligible to roll it over, give or take contribution timing and the compounding period.) If the OP picked that fund, the best strategy would be to contribute $1 immediately to start the rollover clock, then make the other $12,499 and $12,500 contributions as close to the end of each year as possible in order to minimize compounded losses. (The whole thought of intentionally back-loading investment account contributions instead of front loading them is perverse and I feel disgusted just for suggesting it!)

Otherwise, you're almost forced to pick from the shitty ~1.5% actively-managed stock funds just to have a shred of hope that you won't lose money simply due to the expense ratios!

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #18 on: October 26, 2016, 08:40:02 AM »
ask for a 0.5% raise instead of the match those all blow.

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #19 on: October 26, 2016, 08:41:04 AM »
Those funds all have expense ratios over 1%, there aren't any good choices at all.

That goes beyond "not good choices;" that's goddamned highway robbery! Many of them aren't even near 1% (there's one over 4%!), and the ones that are tend to be conservative funds that should be expected to return less than the expense ratio!

Once the fiduciary rule becomes applicable (April 10, 2017?) those expense ratios should be literally criminal!

I hate to say it, but I almost concur with the suggestion to contribute only to the money market fund and then roll it over ASAP. But at a ridiculous 0.58% even that fund is bad, and "ASAP" being two years away is way too long to accept that drag on returns. (If the OP maxes it for 2 years for a total contribution of $25,000, he can expect to have something like $24,800 left by the time he can becomes eligible to roll it over, give or take contribution timing and the compounding period.) If the OP picked that fund, the best strategy would be to contribute $1 immediately to start the rollover clock, then make the other $12,499 and $12,500 contributions as close to the end of each year as possible in order to minimize compounded losses. (The whole thought of intentionally back-loading investment account contributions instead of front loading them is perverse and I feel disgusted just for suggesting it!)

Otherwise, you're almost forced to pick from the shitty ~1.5% actively-managed stock funds just to have a shred of hope that you won't lose money simply due to the expense ratios!

Be careful with how you contribute.  Many companies will match 1% like yours, but they will limit the amount PER PAY PERIOD.  If that is the case, the company match would be much less than the 1% they state unless your contributions per pay period are low enough to get the full benefit.  Your HR department should be able to tell you if they have this limitation.

NoStacheOhio

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #20 on: October 26, 2016, 08:44:24 AM »
Those funds all have expense ratios over 1%, there aren't any good choices at all.

That goes beyond "not good choices;" that's goddamned highway robbery! Many of them aren't even near 1% (there's one over 4%!), and the ones that are tend to be conservative funds that should be expected to return less than the expense ratio!

Once the fiduciary rule becomes applicable (April 10, 2017?) those expense ratios should be literally criminal!

I hate to say it, but I almost concur with the suggestion to contribute only to the money market fund and then roll it over ASAP. But at a ridiculous 0.58% even that fund is bad, and "ASAP" being two years away is way too long to accept that drag on returns. (If the OP maxes it for 2 years for a total contribution of $25,000, he can expect to have something like $24,800 left by the time he can becomes eligible to roll it over, give or take contribution timing and the compounding period.) If the OP picked that fund, the best strategy would be to contribute $1 immediately to start the rollover clock, then make the other $12,499 and $12,500 contributions as close to the end of each year as possible in order to minimize compounded losses. (The whole thought of intentionally back-loading investment account contributions instead of front loading them is perverse and I feel disgusted just for suggesting it!)

Otherwise, you're almost forced to pick from the shitty ~1.5% actively-managed stock funds just to have a shred of hope that you won't lose money simply due to the expense ratios!

Yeah, I was trying not to get too worked up about how bad those choices are, but you're right.

The only consolation on the Money Market is that you're still paying less than the match in fees (assuming there isn't an annual account fee). Your suggestion about backloading makes a lot of sense.

I think if I were going for one of the other options, I'd probably just use one of the bond funds at 0.9x%. It'll at least pay interest above the ER while you're waiting out the rollover clock.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #21 on: October 26, 2016, 09:07:42 AM »
Be careful with how you contribute.  Many companies will match 1% like yours, but they will limit the amount PER PAY PERIOD.  If that is the case, the company match would be much less than the 1% they state unless your contributions per pay period are low enough to get the full benefit.  Your HR department should be able to tell you if they have this limitation.
In a SimpleIRA, they are not allowed to limit the match by pay period (but they can delay contributing the match until their tax due date). Also they have to match 3% of salary dollar for dollar in 3 out of every 5 years (or give 2% of salary across the board regardless of employee contributions). You can read these rules on the IRS page for SIMPLE IRA contribution limits.

You have to wait 2 years from the first deposit into your SIMPLE IRA before any rollover into an IRA; however, after that you can rollover the funds as soon as they are deposited. You should talk to your employer about how unsatisfactory the expense ratios on the available funds are and recommend they consider moving the SIMPLE IRA to another provider (such as Vangaurd).

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #22 on: October 26, 2016, 10:43:15 AM »
Hi Everyone,

First, I want to thank everyone for providing all of this extremely insightful information. This is my first post on the forum and am very happy to see the amount of replies.

To recap, I've learned the following :

1. I'm not eligible for a Traditional IRA at this time. Both due to my employer offering + income level.
2. The options within the Simple IRA that are offered are simply terrible and may not be worth my investment at all.

That said, even though I'm in a high tax bracket, should I consider a Roth IRA with Vanguard in lieu of my current options?

Thank you,
Mr. Millennial Mustache

Jack

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #23 on: October 26, 2016, 12:14:13 PM »
2. The options within the Simple IRA that are offered are simply terrible and may not be worth my investment at all.

"Terrible" and "not worth your investment" are two different things. Even with investment choices as bad as these, the tax savings may still make it worth it (especially since you can GTFO to better options after two years).

Concretely, if "investing" in the money market fund costs you 7.5% (0.5% expense ratio + 7% opportunity cost for not investing in the stock market) but the alternative is to pay 21% (28% in taxes - 7% for investing returns from a taxable account), then you still come out ahead.

(Of course, that's just the first year. The tax benefit in subsequent years is much lower while the expense ratio and opportunity cost remains constant, so the decision becomes worse and worse over time. That's why moving your money after two years is so important. On the bright side, it could be worse: if this were a horrible 401k instead of SIMPLE IRA, moving the money might have required changing jobs.)
« Last Edit: October 26, 2016, 12:22:02 PM by Jack »

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #24 on: October 26, 2016, 12:36:15 PM »
1. I'm not eligible for a Traditional IRA at this time. Both due to my employer offering + income level.
You're not eligible to deduct contributions to a Traditional IRA at this time. You could still open one, contribute the max to it, and enjoy the returns growing tax free until withdraw.

That said, even though I'm in a high tax bracket, should I consider a Roth IRA with Vanguard in lieu of my current options?
If you qualify for Roth IRA contributions and are able to max tax advantaged accounts, then I'd max the SIMPLE IRA and open a Roth IRA and max it. In 2 years you can open a traditional IRA and rollover funds from the SIMPLE IRA to the traditional IRA. You'd continue contributing to the SIMPLE IRA, but rollover regularly to avoid the high fees. Meanwhile try to get your employer/SIMPLE IRA to provide better investing options. The key option you need is a low-fee index fund (preferably total stock market, but S&P 500 is close enough - fee should be less than 0.5%).

If you already exceed the income limits for direct Roth IRA contributions, you can execute a backdoor Roth strategy until you start rollover of funds from the SIMPLE IRA to a traditional IRA. After a rollover (or other pre-tax contribution) to a traditional IRA, these funds will interfere with executing the Roth backdoor. You may want to consult a tax CPA prior to a rollover if the backdoor Roth strategy might be applicable in your future.

For the two years that your money must stay in the SIMPLE IRA, I'd invest in one of the funds that primarily holds equities rather than the the money market fund. Although the fees will be a drag on performance, these funds should still exceed inflation over the long term. I'd probably pick an all equity fund with the lowest expense ratio (AICRX or AEYRX) or the One Choice fund that currently matches my desired asset allocation. The only way you win with a money market fund that has fees >0.5% is if the market happens to be down when you execute your rollover. Once you start rollovers into your traditional IRA, you can assign future contributions to the money market fund since they won't stay in the SIMPLE IRA for much time at all.

biglawinvestor

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #25 on: October 26, 2016, 03:29:41 PM »
You're not eligible to deduct contributions to a Traditional IRA at this time. You could still open one, contribute the max to it, and enjoy the returns growing tax free until withdraw.

Just a note on this point. While you could do this, I couldn't think of any reason why it's better to make a non-deductible traditional IRA contribution and then leave it there, when you could convert that non-deductible IRA contribution to a Roth IRA (I think this is what you're suggesting, just pausing a sec to mention that point in particular).

biglawinvestor

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #26 on: October 26, 2016, 03:34:34 PM »
I've found the following links that show the two investment options (One Choice & Build Your Own):

1. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/mutual-fund-details/summary/one-choice-2050-portfolio.html#ARFWX
2. https://www.americancentury.com/content/americancentury/direct/en/investment-products/workplace/performance.html

Those options in the second link are definitely not great (as everyone else has mentioned). But what about those One Choice Target Date Portfolios? The One Choice 2060 is a blend of 85% stocks / 15% bonds with an expense ratio of 0.99%. While not great, that's not awful given your ability to invest with tax-deferred dollars. Once you leave this job you can roll the money into a better account with less fees.

This is where I see the One Choice 2060:
https://www.americancentury.com/content/dam/americancentury/ipro/pdfs/factsheet/OneChoiceTargetDate_multi.pdf

biglawinvestor

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #27 on: October 26, 2016, 03:41:32 PM »
OP, you may also want to carefully read this thread which involves an American Century SIMPLE IRA and what sounds like a plan to roll the money from the American Century SIMPLE IRA to a Vanguard SIMPLE IRA.

https://www.bogleheads.org/forum/viewtopic.php?t=197216

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #28 on: October 26, 2016, 03:47:32 PM »
biglawinvestor,

Thank you for your latest replies, they are a huge help. I'm going to review "The One Choice 2060" and the link you provided.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #29 on: October 26, 2016, 04:50:02 PM »
OP, you may also want to carefully read this thread which involves an American Century SIMPLE IRA and what sounds like a plan to roll the money from the American Century SIMPLE IRA to a Vanguard SIMPLE IRA.

https://www.bogleheads.org/forum/viewtopic.php?t=197216
Good info there. Employers can set up SIMPLE IRA plans with a Designated Financial Institution (DFI) in which case there can be no fee for transferring out or the employer can set up SIMPLE IRA plans in which employees can select the financial institution on their own. If your employer uses a DFI, the DFI is required to allow you to transfer your balance to an institution of your choice on a regular basis. It sounds like you can open a Vanguard SIMPLE IRA and set it up so that either 1) your employer deposits your contribution to your Vangaurd SIMPLE IRA or 2) the DFI transfers the balance to your Vangaurd SIMPLE IRA regularly. The DFI may charge an account maintenance fee and may designate which investment(s) your investments your funds may be in while they await transfer (likely their money market fund). Since you can set up a SIMPLE IRA for yourself at Vangaurd, no need to rollover to a traditional IRA interferring with backdoor IRA strategies.

Travis

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #30 on: October 26, 2016, 05:02:43 PM »
2. I’m concerned about investing so much money into something that has risk. I can’t seem to shake the idea of “what if the market crashes and I lose $XYZ amount for good”. Any advice?

Only individual company stocks can drop to $0 value "for good." In order for a mutual fund or ETF to do so, every company held in the fund would have to go bankrupt. The more different companies that are held, the less likely that becomes. For any reasonable index fund, that's exceedingly unlikely and in the cases where it could happen (e.g. catastrophic nuclear war or something), your portfolio value will probably be the least of your concerns. This is the principle of diversification.

The more realistic worse-case scenario is merely poor returns. (For an extreme example, consider Japan.) You avoid that problem using diversification too.


Jack,

That is an extremely good point. Thank you for putting this into perspective.

Something else to consider with your age - it doesn't really matter what happens with the market until you're ready to start pulling the money out.  During the wealth accumulation phase, you don't really have "money" in your portfolio, rather you have shares of stock that have a value.  The difference is it doesn't become cash you can use until you sell.  At that point whatever the value was of the shares the day you sold becomes "for good."  If your portfolio (consisting of low cost index funds for example) loses a massive amount of value tomorrow, then that's just numbers on a website.  If after that crash you do nothing to those shares and spend the next several years adding to them and the market recovers (it has a funny habit of doing that consistently) you might not even remember that there was a crash way back when. 

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #31 on: October 27, 2016, 08:56:07 AM »
OP, you may also want to carefully read this thread which involves an American Century SIMPLE IRA and what sounds like a plan to roll the money from the American Century SIMPLE IRA to a Vanguard SIMPLE IRA.

https://www.bogleheads.org/forum/viewtopic.php?t=197216
Good info there. Employers can set up SIMPLE IRA plans with a Designated Financial Institution (DFI) in which case there can be no fee for transferring out or the employer can set up SIMPLE IRA plans in which employees can select the financial institution on their own. If your employer uses a DFI, the DFI is required to allow you to transfer your balance to an institution of your choice on a regular basis. It sounds like you can open a Vanguard SIMPLE IRA and set it up so that either 1) your employer deposits your contribution to your Vangaurd SIMPLE IRA or 2) the DFI transfers the balance to your Vangaurd SIMPLE IRA regularly. The DFI may charge an account maintenance fee and may designate which investment(s) your investments your funds may be in while they await transfer (likely their money market fund). Since you can set up a SIMPLE IRA for yourself at Vangaurd, no need to rollover to a traditional IRA interferring with backdoor IRA strategies.

Hi Robartsd,

Thanks for your advice. I was all set to do exactly that when I received the following email from American Century :

"American Century does not allow for the DFI (designated financial institution) feature which would allow you to transfer your contributions from them to another financial institution of your choice."

I also found in the link Boglehead link that the 2 year holding only applies to 401K/Roth IRA/Traditional IRA. This was also confirmed by my contact at American Century. Seems like I don't have any other options while under this employer.

Thank you,
Mr. Millennial Mustache
 
« Last Edit: October 27, 2016, 10:45:50 AM by Mr. Millennial Mustache »

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #32 on: October 27, 2016, 04:49:18 PM »
Hi Robartsd,

Thanks for your advice. I was all set to do exactly that when I received the following email from American Century :

"American Century does not allow for the DFI (designated financial institution) feature which would allow you to transfer your contributions from them to another financial institution of your choice."

I also found in the link Boglehead link that the 2 year holding only applies to 401K/Roth IRA/Traditional IRA. This was also confirmed by my contact at American Century. Seems like I don't have any other options while under this employer.

Thank you,
Mr. Millennial Mustache
If American Century is not a DFI (5305 SIMPLE IRA), you have a 5304 SIMPLE IRA and your employer must deposit your contributions in the financial institution that you select (they can limit your selection to an open enrollment period).

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #33 on: October 27, 2016, 04:56:14 PM »
Hi Robartsd,

Thanks for your advice. I was all set to do exactly that when I received the following email from American Century :

"American Century does not allow for the DFI (designated financial institution) feature which would allow you to transfer your contributions from them to another financial institution of your choice."

I also found in the link Boglehead link that the 2 year holding only applies to 401K/Roth IRA/Traditional IRA. This was also confirmed by my contact at American Century. Seems like I don't have any other options while under this employer.

Thank you,
Mr. Millennial Mustache
If American Century is not a DFI (5305 SIMPLE IRA), you have a 5304 SIMPLE IRA and your employer must deposit your contributions in the financial institution that you select (they can limit your selection to an open enrollment period).

I've confirmed that American Century is a 5305. Yet, they're saying they do not offer than feature. I'm extremely lost now :)

NoStacheOhio

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #34 on: October 27, 2016, 05:11:01 PM »
Hi Robartsd,

Thanks for your advice. I was all set to do exactly that when I received the following email from American Century :

"American Century does not allow for the DFI (designated financial institution) feature which would allow you to transfer your contributions from them to another financial institution of your choice."

I also found in the link Boglehead link that the 2 year holding only applies to 401K/Roth IRA/Traditional IRA. This was also confirmed by my contact at American Century. Seems like I don't have any other options while under this employer.

Thank you,
Mr. Millennial Mustache
If American Century is not a DFI (5305 SIMPLE IRA), you have a 5304 SIMPLE IRA and your employer must deposit your contributions in the financial institution that you select (they can limit your selection to an open enrollment period).

I've confirmed that American Century is a 5305. Yet, they're saying they do not offer than feature. I'm extremely lost now :)

It sounds like they may just be misusing the term "DFI." As in "we don't let you DESIGNATE your own FINANCIAL INSTITUTION."

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #35 on: October 27, 2016, 05:24:18 PM »
I've confirmed that American Century is a 5305. Yet, they're saying they do not offer than feature. I'm extremely lost now :)
Carefully read the plan documents from your employer. While a SIMPLE IRA can be set up with custom documents, most use Form 5304 or 5305.

Form 5305 SIMPLE contains the language (bottom of page 2): "The undersigned agrees to serve as designated financial institution, receiving all contributions made pursuant to this SIMPLE IRA plan and depositing those contributions to the SIMPLE IRA of each eligible employee as soon as practicable. Upon the request of any participant, the undersigned also agrees to transfer the participant’s balance in a SIMPLE IRA established under this SIMPLE IRA plan to another IRA without cost or penalty to the participant."

If your plan documents require you to use American Century and do not require American Century to transfer without cost or penalty to the participant, I would take the documents to a CPA for review, they may be violating the tax code.

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #36 on: October 27, 2016, 05:35:10 PM »
Robartsd,

You've been a huge help. I'm taking this document to our CPA now.

Mr. Millennial Mustache
« Last Edit: October 27, 2016, 05:44:53 PM by Mr. Millennial Mustache »

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #37 on: October 28, 2016, 09:03:43 AM »
Well, after sending that document and pointing out the 5305 form, they changed their answer greatly. Last question for this topic: 

Now that I will be maxing my companies SIMPLE IRA and transferring to a new account under Vanguard, any suggestions there? Specific SIMPLE IRA investments?
« Last Edit: October 28, 2016, 09:49:44 AM by Mr. Millennial Mustache »

NoStacheOhio

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #38 on: October 28, 2016, 09:22:09 AM »
Well, after sending that document and pointing out the 5305 form, they changed their answer greatly. Last question for this topic: 

Now that I will be maxing my companies SIMPLE IRA and transferring to a new account under Vanguard, any suggestions there? Specific SIMPLE IRA investments?

Jeremy

VTSMX/VTSAX

Have you read through the JLCollins stock series? Do you have a plan for what asset allocation you want, generally?

Mr. Millennial Mustache

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #39 on: October 28, 2016, 09:49:30 AM »
Hi NoStacheOhio,

I have but it's been months, I'll re-read this today as I am really not sure at this time. Welcome any suggestions as I start diving back into the stock series.


NoStacheOhio

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #40 on: October 28, 2016, 11:13:02 AM »
Hi NoStacheOhio,

I have but it's been months, I'll re-read this today as I am really not sure at this time. Welcome any suggestions as I start diving back into the stock series.

It's pretty easy to spout off what I would do, but that's not going to be the right fit for everyone.

Generally speaking, broad-based index funds are a smart investment. From there, you just need to decide if you want international exposure, and if so how much? If you want bond exposure, and if so, how much? Any other asset classes you might consider, same deal.

The important things are low expense ratios, low/no transaction fees and diversification.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #41 on: October 28, 2016, 03:44:44 PM »
VTSMX/VTSAX
This is Vanguard's total stock market fund. As Vangaurd Simple IRA accounts are subject to a $25 fee per fund, I'd start out with just this fund and diversify in a few years when you reach $50,000 invested and the fee is waived. You could also use a target retirement fund or life strategy fund if you are uncomfortable with 100% stocks. You can hold the exact same thing in your Roth IRA.

TomTX

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #42 on: October 28, 2016, 04:47:51 PM »
VTSMX/VTSAX
This is Vanguard's total stock market fund. As Vangaurd Simple IRA accounts are subject to a $25 fee per fund, I'd start out with just this fund and diversify in a few years when you reach $50,000 invested and the fee is waived. You could also use a target retirement fund or life strategy fund if you are uncomfortable with 100% stocks. You can hold the exact same thing in your Roth IRA.

$50k is probably a good time to start thinking about diversifying past VTSAX. But there is no big hurry. It's not a big deal to stay 100% VTSAX to $250k.

robartsd

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Re: A Confused Millennial (Retirement Account Questions)
« Reply #43 on: October 31, 2016, 04:06:35 PM »
$50k is probably a good time to start thinking about diversifying past VTSAX. But there is no big hurry. It's not a big deal to stay 100% VTSAX to $250k.
I'd say it's not a big deal to stay 100% VTSAX until you hit 60-80% of your FIRE target - if options to diversify are more costly now than they would be if you were closer to FIRE, it's probably better to wait.