Savings: IRA/Individual 401K? Both?

[MountainGal]

Hi there.  As mentioned in my post last month, http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-scared-straight-hair-nearly-gone-help!/, next year I am going to begin saving aggressively for retirement.  Question:  Which do I start first?  An IRA or individual 401K (I am self employed)?  Both?  Currently, at the age of 46, I have neither which is an unsettling feeling to say the least.  I will have at least $8,000 to invest in 2015.  Thank you in advance for your time and expertise.  Also, I should use Vanguard, yes?

[nereo]

Hello MountainGal

Congrats on getting your financial house in order.  46 is a bit late around here, but you can certainly make some headway and you'll quickly have the wind at your back.

To best answer your questions, we need to know if your company has a 401(k) match or not.  If it does, then contribute enough to get the maximum.  Also, there are lots of great posts about whcih is better, a tIRA or a ROTH-IRA - both a very good vehicles for retirement savings, which slightly different tax implications (truth be told either is preferable to saving in non-tax advantaged accounts).

Vanguard is a very popular option here and the one that I use, but I've also heard very good things about Fidelity.  Others prefer to buy ETFs from an online broker like ING once a month - that method is usually only cost-effective if you are buying several $k per transaction though.   What's most important here is that you pay very little (<0.2%) fees for any passive indexing.  I'd recommend Vanguard, and I wouldn't have any reservations about using Fidelity either. 

One last question - can you start contributing towards your IRA before 2015?  You can contribute funds to 2014 up to April 15th of next year.

[MountainGal]

Hello MountainGal

Congrats on getting your financial house in order.  46 is a bit late around here, but you can certainly make some headway and you'll quickly have the wind at your back.

To best answer your questions, we need to know if your company has a 401(k) match or not.  If it does, then contribute enough to get the maximum.  Also, there are lots of great posts about whcih is better, a tIRA or a ROTH-IRA - both a very good vehicles for retirement savings, which slightly different tax implications (truth be told either is preferable to saving in non-tax advantaged accounts).

Vanguard is a very popular option here and the one that I use, but I've also heard very good things about Fidelity.  Others prefer to buy ETFs from an online broker like ING once a month - that method is usually only cost-effective if you are buying several $k per transaction though.   What's most important here is that you pay very little (<0.2%) fees for any passive indexing.  I'd recommend Vanguard, and I wouldn't have any reservations about using Fidelity either. 

One last question - can you start contributing towards your IRA before 2015?  You can contribute funds to 2014 up to April 15th of next year.

Hi nereo, Thank you for your reply.  And, yes, I know, I'm a late MMM bloomer.  :D

My employer does not offer a 401K, because I am self-employed.  ;)

According to my meticulous Excel spreadsheet, I am able to begin contributions January, 2015, barring any unforeseen changes.

Thanks again.

[nereo]

My employer does not offer a 401K, because I am self-employed.  ;)

According to my meticulous Excel spreadsheet, I am able to begin contributions January, 2015, barring any unforeseen changes.

In that case, i'd recommend maxing out your IRA first, since you do not have a match for your 401(k).  The IRA will give you more flexibility with access to that money later in life. 

[MountainGal]

My employer does not offer a 401K, because I am self-employed.  ;)

According to my meticulous Excel spreadsheet, I am able to begin contributions January, 2015, barring any unforeseen changes.

In that case, i'd recommend maxing out your IRA first, since you do not have a match for your 401(k).  The IRA will give you more flexibility with access to that money later in life.

Makes sense.  Thanks again.  :)

[Sid Hoffman]

My employer does not offer a 401K, because I am self-employed.  ;)

Actually owning your own business means you can offer yourself whatever you want to.  In fact you have a lot MORE options as your own business because you can "match" up to 25% of net income up to $51,000/year free from taxation.  Since it reduces the tax burden of your business, it's like a double winner: more tax-free income to yourself while lowering the tax burden of your business.  Here's an IRS guide:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People

[MountainGal]

My employer does not offer a 401K, because I am self-employed.  ;)

Actually owning your own business means you can offer yourself whatever you want to.  In fact you have a lot MORE options as your own business because you can "match" up to 25% of net income up to $51,000/year free from taxation.  Since it reduces the tax burden of your business, it's like a double winner: more tax-free income to yourself while lowering the tax burden of your business.  Here's an IRS guide:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People

Hi Sid.  Right, I get that.  That's why I was asking if I should go for the IRA, individual 401K, or both.  I also understand there is such a thing as a Sep-IRA.

[Mother Fussbudget]

+1 on all the above comments!  Well done, and welcome!
I'd say go with an IRA.  Have you researched starting a Roth IRA? 
http://www.investopedia.com/university/retirementplans/rothira/rothira1.asp

And remember that during the first quarter of any year, you can designate contributions as counting toward the previous year.  In your case, that means you can contribute into your IRA starting January 2015, and designate those contributions as 2014 contributions (up to the $5,500 annual maximum).  You can do that until April 15th when all contributions are automatically designated in the current calendar year.  Since you're playing catch-up, I'd recommend putting ALL your early contributions against your 2014 total until 4/15 - allowing you to potentially 'max out' your 2014 contributions... then proceeding to max out your 2015 contributions.

[MountainGal]

+1 on all the above comments!  Well done, and welcome!
I'd say go with an IRA.  Have you researched starting a Roth IRA? 
http://www.investopedia.com/university/retirementplans/rothira/rothira1.asp

And remember that during the first quarter of any year, you can designate contributions as counting toward the previous year.  In your case, that means you can contribute into your IRA starting January 2015, and designate those contributions as 2014 contributions (up to the $5,500 annual maximum).  You can do that until April 15th when all contributions are automatically designated in the current calendar year.  Since you're playing catch-up, I'd recommend putting ALL your early contributions against your 2014 total until 4/15 - allowing you to potentially 'max out' your 2014 contributions... then proceeding to max out your 2015 contributions.

Thanks, Mother!  And, yes, I've been researching the Roth, among others.  I receive a bonus in April, which I have ear-marked for retirement savings (in addition to the monthly contributions).  I'll toss it in to the IRA.  Thank you so much for your input and recommendations.  :)

[dandarc]

Really depends on how much you want to save.

If you're looking to put in $5500 or less (as an individual), then an IRA makes the most sense - very easy to set-up, not too many gotcha's.

If you want to put in no more than $5500 + 25% (20% for sole-proprieters), then a regular IRA and a SEP-IRA make sense.

If you want to put in more than that, then a traditional IRA + Individual 401K gives you the most tax-advantaged space (unless you make so much that your SEP-IRA contribution could be 52K).  Here, where a lot people are striving for 75%+ savings rates on fairly high incomes, this is often is the best choice.

Then of course, you can add a taxable account to whatever plan you decide on, and may have to if you want to save more than you legally can put into tax-sheltered vehicles.  Taxable accounts aren't too bad of a deal either, particularly when you get to the withdrawal stage if you're still living a frugal lifestyle.

[dandarc]

Just processed the part about 8K to invest for 2015 - if you're going traditional, then IRA + SEP-IRA is probably the easiest route.  If your income is low enough that Roth is a better deal, you might want to go Roth IRA + Individual 401K with Roth Option.  Or you could go for tax-diversification - Roth IRA + SEP-IRA could be reasonable.

Do you know your marginal tax-rate?  That helps with the Traditional vs. Roth decision.

[Mother Fussbudget]

I receive a bonus in April, which I have ear-marked for retirement savings (in addition to the monthly contributions).  I'll toss it in to the IRA.  Thank you so much for your input and recommendations.  :)

I also receive a bonus in March or April - it's called a Tax Refund check!  And it usually goes to my retirement account(s) as I'm in the same savings / FI situation as you - started late, became debt free, now aggressively saving for FI.

[MountainGal]

Just processed the part about 8K to invest for 2015 - if you're going traditional, then IRA + SEP-IRA is probably the easiest route.  If your income is low enough that Roth is a better deal, you might want to go Roth IRA + Individual 401K with Roth Option.  Or you could go for tax-diversification - Roth IRA + SEP-IRA could be reasonable.

Do you know your marginal tax-rate?  That helps with the Traditional vs. Roth decision.

Thank you, dandarc.  According to this http://www.consumerismcommentary.com/2014-federal-income-tax-brackets-and-marginal-rates/, it is 25%.  DH and I file jointly, and I use Schedule C for my business, and he writes off tools, work boots, etc., for his job (he's a field mechanic).

[MountainGal]

I receive a bonus in April, which I have ear-marked for retirement savings (in addition to the monthly contributions).  I'll toss it in to the IRA.  Thank you so much for your input and recommendations.  :)

I also receive a bonus in March or April - it's called a Tax Refund check!  And it usually goes to my retirement account(s) as I'm in the same savings / FI situation as you - started late, became debt free, now aggressively saving for FI.

LOL!  Right on, Mother!  <<high fives>>  DH and I also receive a sizable tax refund, which goes into our EF. 

[dandarc]

Just processed the part about 8K to invest for 2015 - if you're going traditional, then IRA + SEP-IRA is probably the easiest route.  If your income is low enough that Roth is a better deal, you might want to go Roth IRA + Individual 401K with Roth Option.  Or you could go for tax-diversification - Roth IRA + SEP-IRA could be reasonable.

Do you know your marginal tax-rate?  That helps with the Traditional vs. Roth decision.

Thank you, dandarc.  According to this http://www.consumerismcommentary.com/2014-federal-income-tax-brackets-and-marginal-rates/, it is 25%.  DH and I file jointly, and I use Schedule C for my business, and he writes off tools, work boots, etc., for his job (he's a field mechanic).

So most (especially here) would go the traditional route in the 25% bracket - bird in the hand and if you're really committed to the keeping costs down, your taxes will likely be much lower than 25% in retirement.

Be sure you're figuring this right - if you're both self-employed, you figure your taxes on the net income from your Schedule C's.  Sounds like you know this already, but figured I'd mention it just in case.

[Bbqmustache]

Because my wife works for a broker dealer, we can no longer have accounts at Schwab, but I love them and their commission free, super low fee ETFs.
Here's an overview I pasted from the Schwab website:

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