Author Topic: Starting out lots of questions  (Read 4050 times)

oilhunter

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Starting out lots of questions
« on: June 26, 2014, 09:08:06 AM »
Morning, I'm new to the MMM community and the more I read the more questions I start to have. My questions are regarding IRA's and Roth IRA. Here are my stats.

24M single no kids
103K salary- take home 5,200 ( after 401k, taxes and health insurance)
401k- Vanguard target date fund 2055- $17,500- company matches 117% up to 6% currently contributing 15%
e-trade acct- individual stocks mostly blue chip- $2,500

Mortgage - 170,000 @ 4.65% ( 10% down, I know I know)
SL-34,000 @ 4.875 %
Private SL -25,000 6% ( $0) paid off  in Feb. took my 7 months to tackle this.

Monthly Expenses
Mortgage- 1500 ( principal, interest, taxes, insurance and utilities)
SL-1900
Food-300
Entertainment-100
car insurance -50
gas-84 ( 6 miles from work 12 miles round trip) looking to find a good route to bike to work

Sum ~4,000

That leaves me with 1200 a month to invest in and should increase once I'm done with my SL which I anticipate will be summer (2015). As I've been reading I saw that due to my high income level that I'm unable to open an IRA and if I do the contributions will not be deductible. Which leaves me with opening a Roth IRA with Vanguard ( will save 3K for the VTSMX minimum before opening). Should I go ahead an open a roth and once that's maxed out invest into my Etrade acct? I've made it this far and would like your help to reach FI. Any tips and advice are greatly appreciated.
 

matchewed

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Re: Starting out lots of questions
« Reply #1 on: June 26, 2014, 09:21:57 AM »
So couple different things here.

For a traditional IRA your deductions are reduced based on your MAGI (source).

For a Roth IRA your contributions can be limited based on your MAGI (source).

If you can reduce your MAGI or check what it was the previous year you'll have a good idea whether these two things apply to you.

In short you can contribute to a traditional IRA all you want. You just might not be able to use a deduction on your taxes. You can't do a Roth IRA based on MAGI but there are ways around it.

Cwadda

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Re: Starting out lots of questions
« Reply #2 on: June 26, 2014, 09:27:34 AM »
Quote
That leaves me with 1200 a month to invest in and should increase once I'm done with my SL which I anticipate will be summer (2015). As I've been reading I saw that due to my high income level that I'm unable to open an IRA and if I do the contributions will not be deductible. Which leaves me with opening a Roth IRA with Vanguard ( will save 3K for the VTSMX minimum before opening). Should I go ahead an open a roth and once that's maxed out invest into my Etrade acct? I've made it this far and would like your help to reach FI. Any tips and advice are greatly appreciated.

A Roth IRA is when you pay zero taxes on gains, dividends, interest, etc if you withdrawal after the age of 59.5. If you withdrawal before age 59.5, you are subject to a penalty fee. A Roth IRA is never tax-deductible. You can choose to never withdrawal if you wish, even past age 70.5.

A Traditional IRA is when you are taxed on gains, dividends, interest, etc when you withdrawal. This tax is based on your tax bracket (like a 401(k)). You must be age 59.5 to withdrawal without penalty. You MUST start withdrawing at age 70.5. Traditional IRAs can be either tax-deductible or not. If you are single and your Modified Adjusted Gross Income is $70,000 or more, your contribution will NOT be tax-deductible according to this link. http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

If your Modified Adjusted Growth Income is less than $114,000 then you are eligible to contribute to a Roth IRA according to this link. http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2014

That's terrific that you're maxing out your 401(k). Your next best move would be to contribute to a Roth IRA. Contributing to a Traditional IRA would not give you the tax benefit of being able to deduct it. You won't get to deduct your Roth IRA; however, you will be paying zero taxes on it when you withdrawal at age 59.5 or later.

Please someone check this for errors because I'm still a beginner learning about all this.

Cwadda

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Re: Starting out lots of questions
« Reply #3 on: June 26, 2014, 09:29:22 AM »
Like matchewed also mentioned, if you're ineligible to contribute to a Roth IRA and your Traditional IRA is non-deductible, then there are ways around it - called a "Backdoor Roth IRA".

Frankies Girl

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Re: Starting out lots of questions
« Reply #4 on: June 26, 2014, 09:39:56 AM »
I think there might be a few more categories missing like cell, internet, household items... maybe?

Your 401k match is awesome, so good for you on maxing it out at your age as well. I would possibly look into moving out of the target date funds and 100% into VTSAX if it was possible since you are young enough to ride out the volatility of the market - but that's just knowing what I know now; nothing really wrong with a target date fund and it is Vanguard, so super.

In any case, I would probably be looking into paying down that mortgage to the point that you can refinance to get a better rate. I would also question whether the house was worth the cost (totally get wanting to live in a nice house, but it is just you, so have to wonder if it's as good a deal to have a larger/more expensive living arrangement).

I would also be hitting that student loan pretty hard, which it looks like you are doing. You should have that paid off in just under 2 years at the current rate of payment, so once that's gone, you're going to really have a great chunk of money each month to invest.

Yes to a Roth IRA, again I would be 100% VTSMX until it flips to VTSAX. I personally don't do the day trading, so for me, once the Roth was funded for the year, I'd be doing a taxable account and investing, again, in 100% VTSAX (especially since it's a more tax efficient fund to have in a taxable account). I think if you're really interested in the day trading through the etrade account, I'd keep it as a separate account and just fund it with a small portion of "play" money that isn't the bulk of your assets, but that's just my comfort level (passive investing in index funds all the way for me).

I think the biggest challenge for you is going to be avoiding lifestyle inflation. You're earning a super amount, but you're also saving a great amount and really you could be FI in well under 10 years if you keep this up. The way it broke out to me is that you're living on under $2500/month (once you remove the student loan payment, and adding in some fat since you might be forgetting a few things), so keep up the great progress!


Cheddar Stacker

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Re: Starting out lots of questions
« Reply #5 on: June 26, 2014, 10:01:14 AM »
Welcome to the forum oilhunter!

It looks like you're doing some great things. I would make two small tweaks to your plan and to the previous suggestions, although it's really nitpicky as they are all good suggestions.

1) You make $103K and contribute 15% to the 401K, which totals $15,450. You are leaving a $2K tax deduction on the table. Switch that 15% up to 17% and you'll land right on the $17,500. Then do everything else.

2) If you're paying PMI on the mortgage due to the 10% down, that 4.65% rate is really more like 6% or more, so I would get to 80% LTV to eliminate PMI before paying down the lower interest SL of $34K. In addition to a potentially lower interest rate, the SL interest can help your taxes even more than the mortgage interest. This is because it's a pre-AGI deduction, and it might lower your MAGI which matchewed referred to already. This can help you in a lot of ways.

A Roth IRA is when you pay zero taxes on gains, dividends, interest, etc if you withdrawal after the age of 59.5. If you withdrawal before age 59.5, you are subject to a penalty fee. A Roth IRA is never tax-deductible. You can choose to never withdrawal if you wish, even past age 70.5.

Please someone check this for errors because I'm still a beginner learning about all this.

Bolded part is only partly true. You can withdraw the principal at any point without penalty (maybe that's what you were trying to say??). If you withdraw earnings you are subject to penalty. If you do the backdoor Roth you have to wait 5 years for the principal to "mature/season" before you can take it out without penalty.

Good post though Cwadda, a lot of good data there.

anisotropy

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Re: Starting out lots of questions
« Reply #6 on: June 26, 2014, 10:21:17 AM »
just saying hi to my oil hunting buddy :)

oilhunter

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Re: Starting out lots of questions
« Reply #7 on: June 26, 2014, 10:31:06 AM »
Thanks for your replies. I will increase my contributions from 15 to 17% it was at 17% but I reduced it will I saved for a home but now I can go back to 17 %. I'll reduce the amount I put into my SL and increase my mortgage payments. I've found a roommate and he wont move until Aug. that should  accelerate PMI removal.  Seems like I'll be under the MAGI of 114,000 which means I can open a Roth IRA for the time being unless I get a bonus and that sets me over that limit. If both IRA and Roth IRA are of the question then that only leaves me to invest in taxable accts. With that being said  I will  start a 1k minimum (any index fund with that limit)  within a taxable vanguard acct and then move it to VTSMX and then VTSAX.

Company pays my cellphone bill, almost never home so cable and internet are nonexistent.

My savings have been depleted due to the recent purchase of the home. I bought the home with the intent of making it a income property after 5 years since its a few blocks from my alma mater. 

Cheddar Stacker

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Re: Starting out lots of questions
« Reply #8 on: June 26, 2014, 10:42:40 AM »
It would have to be a pretty big bonus to put you over that MAGI.

 $103,000.00    Income
 $(17,500.00)   401k
    $(1,500.00)   SL interest
   $84,000.00    MAGI
  $30,000.00    Bonus
 $114,000.00    New MAGI

So you have a $30K bonus cushion. If you get more than that, count your blessings and don't worry about the Roth. You'll be fine either way.

PloddingInsight

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Re: Starting out lots of questions
« Reply #9 on: June 26, 2014, 10:54:34 AM »
If you are 24, I'm surprised to see a $1,900 student loan payment for a $34,000 balance.  Are you making higher payments on purpose?  How long is the term on that loan?

oilhunter

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Re: Starting out lots of questions
« Reply #10 on: June 26, 2014, 12:35:54 PM »
If you are 24, I'm surprised to see a $1,900 student loan payment for a $34,000 balance.  Are you making higher payments on purpose?  How long is the term on that loan?

I had lots of small loans and consolidated back in Jan. 2014 for a 30yr term with a minimum of 200. I'm making that higher payment to get out of debt. But it has been brought to my attention that the PMI is worth removing vs being more aggressive on my SL.

Cheddar Stacker: thanks for that depiction, typically my bonuses are from 10-15% of salary which still would put me well within MAGI limits. I never expect a bonus so I don't factor that into my budget.

Thanks again for all the feedback, always trying to optimize as much as I can.