Author Topic: Starting my Roth IRA, or finishing my student loans + tax advice? - UPDATE!  (Read 7371 times)

Apocalyptica602

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Hey everyone, looking for some advice and I hope you can help me out.

Here's my deal:

Age:24, been working full time for about 18 months now.
Income: 70k/year after salary and bonuses
Assets: 401k currently worth 19k, "Cash Value Pension" with about 2.5-3k thrown in by my company, total cash on hand usually hovers around 3k for emergencies. Reliable used car worth about 2-3k (super low mileage for its 1999 model year but has a ~$2500 dollar 'cosmetic' dent in the passenger side that doesnt affect function)
Debt: 9.5k student debt remaining @ 5.5% from a federal loan
Currently I'm maxing out my 401k through my employer (17k/year + .75 cents on the dollar for 6%), and I want to open a Roth IRA (likely with Vanguard)

I love 'paying myself first' and by taking massive pre-tax deductions from my paycheck + imposing myself with a very aggressive $1,500/month loan repayment (my minimum was like ~220/mo) I've learned to live very below my means while investing and rapidly paying down debt.

I know I'm in a good spot but I'm looking for what's the BEST way to go about the following:

In January I'm looking at a 3,000 dollar bonus, once I do my taxes I should also get a large return since I just claimed 0 and didn't optimize my witholding (It's on my to-do list) last year I got roughly 5,000.

Although I'm not sure which is the correct way to look at this situation:

Originally I had wanted to just throw my entire bonus at my loans, and file my taxes as early as possible so once I got the return I throw that at my loans and BOOM, debt free.

Although I know the last possible date to contribute to a Roth IRA for the year is April 15th... if I file my taxes first in January for example, and then open a Roth IRA before the April 15th deadline, is that allowed? And/Or will that complicate anything with next year's taxes or will I have to file an amended return or something?

In other words, should I pay off my debt ASAP for the guaranteed 5.5% return and peace of mind of being debt free (which is important to me) and possibly not get the full 5k contribution invested to the Roth this year in time? Or should I make it a point to invest the full 5k this year no matter what and always keep it maxed, even if it means extending my loans another couple months?

Hope that explanation wasn't too confusing, sorry for being verbose.

Looking forward to hearing your thoughts!
« Last Edit: April 06, 2013, 05:13:21 PM by Apocalyptica602 »

Another Reader

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #1 on: December 17, 2012, 09:38:57 PM »
Throwing $1,500 a month at $9,500 in debt will have it paid off in just over 6 months anyway.  Once the opportunity to contribute to a Roth is gone, you can't get it back.  In your shoes, I would fully fund the Roth.  That would leave you with an extra $3,000 after the tax refund, and you can then knock out the student loan two months faster.

For 18 months in the workforce, you have accomplished a great deal.  All I can add is keep up the good work!

dragoncar

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #2 on: December 18, 2012, 12:27:48 AM »
At that interest rate, I'd personally hit the student debt first.  But given your stats, it seems that either choice is reasonable and won't really make or break you.

Edit:  Nevermind, I missed the part where you are already paying off the loan quickly.  If you are in a situation where you can contribute to a 2012 roth, 2013 roth, and pay off your loans by 2014, I'd say the order doesn't matter so make sure you don't lose the 2012 roth.
« Last Edit: December 18, 2012, 12:32:08 AM by dragoncar »

matt_g

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #3 on: December 18, 2012, 09:44:30 AM »
Pfffft.... Congratulations on being 24 and thinking about retirement.  You are going to win the game of life.  You are 24 and have 9.5k in student loans.  That's a joke, pay off that shit right now.

Step 1. Pay off your 9.5k Loan.  Throw every extra cent at it until its paid off... You'll figure out how to find a few extra grand once it's almost paid off...
Step 2. Max out retirement accounts
Step 3. Put aside a little cash to replace your ride in case it explodes
Step 4. Are you going to buy a house or have a wedding in the next few years?  Save up for it.
Step 5. Max out taxable investment accounts

70k-17k=53k .... Where is the rest of it going?  Taxes... Cable TV, Cellphone plans?

Apocalyptica602

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #4 on: December 18, 2012, 10:57:33 AM »
Pfffft.... Congratulations on being 24 and thinking about retirement.  You are going to win the game of life.  You are 24 and have 9.5k in student loans.  That's a joke, pay off that shit right now.

Step 1. Pay off your 9.5k Loan.  Throw every extra cent at it until its paid off... You'll figure out how to find a few extra grand once it's almost paid off...
Step 2. Max out retirement accounts
Step 3. Put aside a little cash to replace your ride in case it explodes
Step 4. Are you going to buy a house or have a wedding in the next few years?  Save up for it.
Step 5. Max out taxable investment accounts

70k-17k=53k .... Where is the rest of it going?  Taxes... Cable TV, Cellphone plans?

Taxes, rent (985/month from June 2011-June 2012 and 400/month from June 2012-June 2013). I moved back home with the parents to a) reduce my rent b) reduce my food budget to essentially zero c) accelerate debt repayment. It also conveniently works out since the program I'm in at work requires me to move around the country once a year (for 3 years in total), and one location was close to their house.

I'm not living rent-free with them because I'd feel like a mooch + they could use some extra cash (not the most mustachian people)

I've been paying my loans off aggressively for a while now. When I graduated in May 2011 I had $100 in a savings account, no credit card and roughly 35k in school debt. But a nice shiny new Mechanical Engineering degree.

So at the start of this year my loans were 25k. As of this year I've paid just over 15k into them, 17k pre-tax into 401k, one huge "worth it" expense was I had LASIK to correct my "Can't see the big E on the eyechart without my glasses" for 5k.

So thats 37k + (6 x 985) + (6 x 400) = 45.3k

I count debt repayment as savings so out of my gross of ~70k I have a 45% savings rate? Might be missing something.

(Excuse my rough math, I use Mint for general net worth and budget tracking but don't look at the individual expenses as much as I used to)

Admittedly I'm playing it a little fast and loose with the numbers here, but you get the idea.

Thanks for your insight about saving up for a new(used) car and wedding / real estate. I figure once that loan is paid off I'm gonna take the 1500 a month I was paying into the loan and continue to automatically deposit it into a savings account once a month, where from there it'll go to whichever retirement vehicle / taxable account / savings goal.

Anyone have any idea if there's any correlation between the Roth IRA and the date I file my taxes? Like if I file my taxes ASAP, use the return to max the 2012 Roth IRA, then in 2013 I max it again, when I file my taxes in 2013 am I going to have to declare 10k worth of contributions? Or do I amend my 2012 return with extra red tape and paperwork?


dragoncar

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #5 on: December 18, 2012, 01:20:15 PM »
I'm not a tax advisor, but AFAIK, Roth contributions are independent of tax filings.  Because they are not deductible, they do not go on the return.

matt_g

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #6 on: December 18, 2012, 03:12:34 PM »
I wouldn't spend too much time stressing over the ROTH IRA Contributions and pulling some fancy shenanigans to get an extra couple of grand in your IRA.  You get the tax advantage down the road on the earnings if you go with the IRA Option, or you get the savings on interest rate and the satisfaction of being debt free by paying off the loan.  Call me Dave Ramsey but I'd take the debt free option for my money.

Apocalyptica602

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #7 on: December 18, 2012, 04:37:41 PM »
I'm not a tax advisor, but AFAIK, Roth contributions are independent of tax filings.  Because they are not deductible, they do not go on the return.

I did some Googling and yeah you're correct, contributions don't even need to be put anywhere on your taxes. I guess the April 15th deadline threw me off and made me think it was correlated to tax filing.

Thanks very much for your answers so far everyone!

I know I can't really go 'wrong' with either option. Unless I decide to take my bonus and tax return and put a down payment on a 2013 BMW. *punches self in face*

Any other opinions?

NWstubble

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #8 on: December 18, 2012, 05:05:42 PM »
I'm not a tax advisor, but AFAIK, Roth contributions are independent of tax filings.  Because they are not deductible, they do not go on the return.

Yeah, this is what I was thinking too (also not a tax advisor) and the GOOG didn't say otherwise. The institution that holds your Roth will send your contribution info to the IRS, because it is after tax contribution shouldn't affect your tax return.

File your taxes, put your return towards the 2012 Roth contribution. Keep paying off loan debt as fast as possible. Prosper.

michelle

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #9 on: December 18, 2012, 05:55:23 PM »
To confirm, you can open the Roth up until on 4/15 and fund for 2012.  You can still file early and use the refund to help you fund the Roth without stopping the extra payments on student loans.   You will receive a Form 5498 showing your Roth Contribution; however, it's just informational unless the IRS shows that you weren't eligible to contribute to Roth due to income limits.

m8547

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #10 on: December 18, 2012, 08:15:36 PM »
Now I'm confused about my Roth. I set Vanguard to maximize my contributions for the year, and when today's transaction goes through, it will be full. What about the contributions between January and April of next year? Are those going to put me over the limit?

m8547

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #11 on: December 18, 2012, 08:22:55 PM »
It looks like any contributions for 2012 between January and April 15 2013 are retroactive contributions, but the normal period for a year is January-December.  Sorry for hijacking the thread.

NWstubble

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #12 on: December 18, 2012, 08:36:39 PM »
It looks like any contributions for 2012 between January and April 15 2013 are retroactive contributions, but the normal period for a year is January-December.  Sorry for hijacking the thread.

You have the option of electing what tax year the contributions in Jan-Apr go to. If you max your 2012 by December, have the contributions starting in Jan go toward 2013.

Vanguard will do this automatic if you selected the auto-options.
« Last Edit: December 18, 2012, 08:49:36 PM by NWstubble »

Crash87

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Re: Starting my Roth IRA, or finishing my student loans + tax advice?
« Reply #13 on: December 18, 2012, 08:46:21 PM »
A quick run down of IRAs:

2012: $5,000 limit deadline: 4/15/2013
2013: $5,500 limit

You may choose what year to include contributions under between 1/1 and 4/15. Tradition IRA contributions are pre-tax and thus are deducted on the front page of your tax return. Roth IRA contributions are post-tax and thus not deducted on your return.

Apocalyptica602

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Hey all!

Just figured I'd bump my post and share an update:

How my taxes turned out: my return this year was about ~$2200 from the fed, but owed ~800 or so to the states. Reason being was I lost roughly $2500 in student credits since I finished college in May 2011, and also I owed some state taxes due to me living/earning in Maryland for half of 2012, moving to New York and earning in NJ for the other half of 2012, witholding got messed up.

However, excellent news!

As it stands now, by hunkering down hard I've managed to:

Pay off the last of my college loans (!!!)
Open a Vanguard RothIRA 100% in VTSMX, and fully fund $5000 of it just before the April 15th deadline. (!)
Continue my maxing of my 401k @ $17k/year. (!)

I grit my teeth and constantly felt poor, but I couldn't be happier. I even found a few extra bucks to take a cheap 4-day cruise with my girlfriend, and attend my best friend's bachelor party in AC in March.

WOOOOO!

Thanks for all of your help everyone!

icefr

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Pay off the last of my college loans (!!!)
Open a Vanguard RothIRA 100% in VTSMX, and fully fund $5000 of it just before the April 15th deadline. (!)

WOOT!

Continue my maxing of my 401k @ $17k/year. (!)

Pssst you can put in $17,500 this year! :)