Author Topic: Case Study: 20s, married, self employed and confused about investing!  (Read 3615 times)

icemodeled

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Hi, first time posting here. I am 27, husband is 26. Bit of background first. We each had average jobs. I worked entry level at a bank and he was a manager of a grocery store. We quit our jobs and went into a business venture that did fairly well and sold it a year later. With the money, we purchased rental properties that sustain us now. My husband also works 2 days a week mowing for a company just for extra cash. We would love to retire early (though semi now, would like to be 100% before normal retirement age, hoping by 40 or so)

I had a 401k which rolled in an IRA after leaving my job. working a bank, the financial advisor did everything and its now at LPL financial. That small amount has continued to decline for 2 years and I am finally ready to do something about it. I do not want a financial advisor anymore, would like to move it to vangaurd and manage it myself.

I have been reading countless blogs and books last few weeks trying to understand investing and what is best for us. Right now, I like vangaurd and index funds. For someone just starting out and learning I want something simple, works for our situation and has good return.

life situation married, no kids - maybe next few years, file joint, late 20s, living in ohio but plan to move in a year or 2 to Florida.

salary $55000 total, after deductions it shows we only made $2000 in 2014. This is mostly rental income and some side jobs

pre tax deductions my IRA $1700, my husband doesnt have any

current expenses monthly
mortgage $641
Cells $70
Rental taxes & insurance $550
Car ins $37
Utilities $150
Grocery $200
Dining out $150
Household $50
Gas $175
Rental repairs $150
Entertainment $25
Misc $50

assets
2008 ford escape $6000
1987 chevy truck $900
6 rental properties (all paid off) $150000
cash - $23000

liabilities
house $65000 left on loan

so to my real questions. I cannot decide what type of account we should have - roth vs traditional IRA.. or are there other options to? Roth has some rules about earned income, I understand rental income is not considered "earned".. so would we even qualify for it?

We also only will have up to $3000 to start with vangaurd (1700 from current IRA plus extra we will add) there are taxable accounts vs tax differed, would one be better then other for us?

For those who retire early, how do you do it before 59 1/2 to avoid penalties? Which account will allow that.

after we open the new account, we are unsure how to invest. We have heard good things about index funds, the VTSAX and S &P 500. I am ok with some risk as I hope for a good return and have awhile until we fully retire. I also like that they seem easy to have, no real maintenance or upkeep.

Any opinions or thoughts? Thanks!
« Last Edit: October 09, 2015, 07:06:21 PM by icemodeled »

ShoulderThingThatGoesUp

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #1 on: October 09, 2015, 07:51:07 PM »
If you showed $2000 in AGI you might hit the saver's tax credit with a traditional.

icemodeled

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #2 on: October 09, 2015, 07:54:33 PM »
It may change next year though. 2014 had a lot of expenses. We fixed up a foreclosure that gave many deductions.

cchrissyy

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #3 on: October 09, 2015, 08:26:16 PM »
Since your taxes are nothing now, and therefore can only be higher in the future, roth is the way to go. That's investing after-tax dollars that grow without being taxed later on, when you might have a higher rate.  Only problem is make sure you understand how much you can each contribute based on your earned income.

traditional makes no sense to you - the point of traditional is you avoid taxes now by paying them later. but you have no taxes to avoid now, and any investments you might make today will pay taxes later anyway. so there's no difference except that your dollars are locked away from you.

icemodeled

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #4 on: October 10, 2015, 08:28:16 AM »
Since your taxes are nothing now, and therefore can only be higher in the future, roth is the way to go. That's investing after-tax dollars that grow without being taxed later on, when you might have a higher rate.  Only problem is make sure you understand how much you can each contribute based on your earned income.

traditional makes no sense to you - the point of traditional is you avoid taxes now by paying them later. but you have no taxes to avoid now, and any investments you might make today will pay taxes later anyway. so there's no difference except that your dollars are locked away from you.

yes I agree, the roth has looked good to me for this reason. After looking at the Roth IRA rules further, it says you can only contribute $5500 max but if your earned income is less then that (ours would be $3-4k, not able to include rental income) we can only contribute that as a max.

in that case, should I rule out the roth? Or have both a roth and traditional so we can contribute more?

is either a roth or traditional IRA our only options? I have seen target retirement funds on vangaurd, only needing $1000 min to open. Is this something to consider?

MDM

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #5 on: October 10, 2015, 11:22:06 AM »
in that case, should I rule out the roth? Or have both a roth and traditional so we can contribute more?
A traditional IRA has the same "earned income" requirement, and the $5500 refers to the total IRA investment, whether Roth, traditional, or a mixture.

Quote
is either a roth or traditional IRA our only options? I have seen target retirement funds on vangaurd, only needing $1000 min to open. Is this something to consider?
There is some nomenclature that needs to be clarified.  Let's take that $1000 as an example.  Let's assume you choose a mutual fund in which to invest it: VTTSX.  So far so good.  Now you need to decide in what type of account you will hold that fund.  Options include
 - traditional IRA
 - Roth IRA
 - "normal" investment account

If you are going to invest at all, you might as well use any tax-advantaged space available to you before putting money into normal, fully taxable, accounts.

cchrissyy

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #6 on: October 10, 2015, 03:16:39 PM »
If your personal maximum contribution to an IRA is $3000 this year, for example, open a Roth IRA and fund it $3000.

Any other funds you want to invest will just be in a normal brokerage account, doesn't matter where

icemodeled

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #7 on: October 10, 2015, 07:20:34 PM »
Ok great, I think I will open a roth IRA with vanguard as it seems to make the most sense for us right now. We will contribute the max were allowed(due to earned income rule)

now for another account to contribute the rest to.. a normal investment account was mentioned. When I looked at accounts on vangaurds website the only ones (beside IRA) were either college or individual/joint accounts. Is the individual account what I would want to pour in the rest of money that I cannot invest into the Roth?

MDM

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #8 on: October 10, 2015, 07:33:20 PM »
When I looked at accounts on vangaurds website the only ones (beside IRA) were either college or individual/joint accounts. Is the individual account what I would want to pour in the rest of money that I cannot invest into the Roth?
For our IRAs we have - as the name implies - individual accounts.  For "the rest of the money" we have a joint brokerage account.  You and DH could have individual brokerage accounts, but that means one more to keep track of.

icemodeled

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #9 on: October 10, 2015, 08:01:02 PM »
When I looked at accounts on vangaurds website the only ones (beside IRA) were either college or individual/joint accounts. Is the individual account what I would want to pour in the rest of money that I cannot invest into the Roth?
For our IRAs we have - as the name implies - individual accounts.  For "the rest of the money" we have a joint brokerage account.  You and DH could have individual brokerage accounts, but that means one more to keep track of.

Thanks, I think we will go with the Roth and a joint account for the "extra" money to invest.

does the brokerage accounts work about the same (other then the tax differences of course). Are you able to invest in stocks, bonds, index funds ect just like you can with IRAs? Also, with the joint brokerage account, are we able to withdrawal at any time without penalty?

MDM

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #10 on: October 10, 2015, 08:47:03 PM »
does the brokerage accounts work about the same (other then the tax differences of course). Are you able to invest in stocks, bonds, index funds ect just like you can with IRAs? Also, with the joint brokerage account, are we able to withdrawal at any time without penalty?
Yes and yes.

You should understand the difference between short- and long-term capital gains - just google those terms.

Some "getting started" reading material:
www.etf.com/docs/IfYouCan.pdf
http://jlcollinsnh.com/stock-series/
http://www.mrmoneymustache.com/the-mmm-reading-list/ - Haven't read them all, but A Random Walk Down Wall Street by Burton Malkiel and The Four Pillars of Investing by William Bernstein were good.
Last but not least: http://www.bogleheads.org/wiki/Category:Getting_started

Good luck, and let us know of any you find particularly helpful!

Jack

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #11 on: October 11, 2015, 09:00:50 AM »
yes I agree, the roth has looked good to me for this reason. After looking at the Roth IRA rules further, it says you can only contribute $5500 max but if your earned income is less then that (ours would be $3-4k, not able to include rental income) we can only contribute that as a max.

In that case, I recommend earning a little bit more W-2 or 1099 money (as long as you don't mind working more to earn more), to get you up to $11000 (i.e., $5500 * 2, since you're married) earned income.

(But are you sure you're figuring all that correctly? I admit, I don't own rental property and don't know much about how the taxes for it works, but it seems implausible that rental income is tax-free. I'd love for you to post the math explaining it!)

icemodeled

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Re: Case Study: 20s, married, self employed and confused about investing!
« Reply #12 on: October 11, 2015, 05:28:03 PM »
Thanks MDM for the links, I will be checking those out!

yes I agree, the roth has looked good to me for this reason. After looking at the Roth IRA rules further, it says you can only contribute $5500 max but if your earned income is less then that (ours would be $3-4k, not able to include rental income) we can only contribute that as a max.

In that case, I recommend earning a little bit more W-2 or 1099 money (as long as you don't mind working more to earn more), to get you up to $11000 (i.e., $5500 * 2, since you're married) earned income.

(But are you sure you're figuring all that correctly? I admit, I don't own rental property and don't know much about how the taxes for it works, but it seems implausible that rental income is tax-free. I'd love for you to post the math explaining it!)

Im not sure what you mean.. we pay taxes (including self employment tax) on every dollar we earn of rental income. After deductions though we show very little profit on our returns but the difference is taxed (income - deductions = taxable income) not sure if this is what you meant.

Our CPA has told us that rental income (for whatever reason) is not earned income though. Earned income is part of the requirements for IRAs and how much or little your able to contribute based on earned income totals for year.

Here is a good article about rental income and earned income regulations..
http://homeguides.sfgate.com/rental-property-qualify-having-income-contribute-taxdeductible-ira-57105.html