Author Topic: Add to VTSAX or start a Roth IRA?  (Read 6879 times)

lpep

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Add to VTSAX or start a Roth IRA?
« on: June 06, 2014, 09:05:39 PM »
Hello mustachians! I am relatively new to your ranks and looking for some advice. I'm a 25-year-old American, just moved part of my savings ($17,000) from a terrible savings account earning approximately .02% interest (what a waste!) to a taxable account with Vanguard, invested entirely in VTSAX. My parents are also wonderful lovely people and bought me a few stocks years ago that have done really well, so my net worth is around $67k (I have no debt). I've also learned to be frugal from them and so naturally have many mustachian tendencies - that's how I saved the 17k to begin with. I've been lucky!

Here's my question: I'm obviously aiming for FI, and I think I can get there within 15 years (I live in Vietnam for now, and while the cost of living is insanely low and my salary is good for here, I'm not exactly making tons of USD). I have about another $2k coming to me that I can invest, and I hope to add to my savings monthly after that. Does it make sense for me to open a Roth IRA with Vanguard and invest that in VTSAX, if I'm going to retire by 40? Or should I buy into a different Vanguard fund (bonds, dividends... I don't understand the options too well) with my taxable account? I'm also thinking of trying Lending Club, since the type A part of me is really enjoying checking numbers daily, and I think it could be a fun experiment (with about $500 or so).

Any advice?

ch12

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Re: Add to VTSAX or start a Roth IRA?
« Reply #1 on: June 07, 2014, 10:46:03 AM »
I'm not exactly making tons of USD). I have about another $2k coming to me that I can invest, and I hope to add to my savings monthly after that. Does it make sense for me to open a Roth IRA with Vanguard and invest that in VTSAX, if I'm going to retire by 40? Or should I buy into a different Vanguard fund (bonds, dividends... I don't understand the options too well) with my taxable account? I'm also thinking of trying Lending Club, since the type A part of me is really enjoying checking numbers daily, and I think it could be a fun experiment (with about $500 or so).

Read the MadFIentist on how to allocate your savings for the best return for an early retiree: http://www.madfientist.com/retire-even-earlier/

Out of curiosity, what's the COL like in Vietnam? Is it hard to live there/get a visa, and do you find that the language barrier is difficult?

FireYourJob

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Re: Add to VTSAX or start a Roth IRA?
« Reply #2 on: June 07, 2014, 02:40:36 PM »
I'd do everything you could to make sure you fund a Roth each year.  The only reason the government "allows" it is so few people that do it.  The long term tax advantages are tremendous.

lpep

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Re: Add to VTSAX or start a Roth IRA?
« Reply #3 on: June 07, 2014, 08:10:52 PM »
I'm not exactly making tons of USD). I have about another $2k coming to me that I can invest, and I hope to add to my savings monthly after that. Does it make sense for me to open a Roth IRA with Vanguard and invest that in VTSAX, if I'm going to retire by 40? Or should I buy into a different Vanguard fund (bonds, dividends... I don't understand the options too well) with my taxable account? I'm also thinking of trying Lending Club, since the type A part of me is really enjoying checking numbers daily, and I think it could be a fun experiment (with about $500 or so).

Read the MadFIentist on how to allocate your savings for the best return for an early retiree: http://www.madfientist.com/retire-even-earlier/

Out of curiosity, what's the COL like in Vietnam? Is it hard to live there/get a visa, and do you find that the language barrier is difficult?

I've read the whole Mad Fientist series of Roth vs. traditional IRA, and mostly... I'm just confused. I don't understand how if you have taxes withheld, do you claim the part of your income that you put into a t-IRA and get them refunded? Cuz his whole "never pay taxes on your IRA!" thing sounds fantastic, but kind of complicated in practice - not that I mind complicated, but I just want to know what I'm doing before I sign up for anything :)

Vietnam is super cheap! I just went to the morning market and bought three bell peppers, 5 onions, two pineapples ready to eat, 2 kohlrabi, some peeled garlic, a cauliflower, 4 zucchinis, some basil, about 2 kg of tomatoes, 4 potatoes, and two blocks of fresh tofu for about $8! They were sold out of bread or I could have gotten mini baguettes for about 10 cents each.

My rent is $175/mo for half of a 1br apartment, eating street food is about $1.50 per meal... I ride a bicycle or take the bus (30 cents/ride!), so no transportation costs to speak of. It's a very mustachian way to live! I make about $20/hr teaching English and working part time with some side work for a publication is more than enough.

Visas are very easy to get (for a price, of course - 3 months single entry is $120), just kind of a pain with the whole sending off your passport to the embassy, then renewing every 3 months or going on a visa run.

Long answer :) I love it here, but yes, the language barrier is difficult. You can get by on charades, knowing the numbers, and a few other words here and there, but getting by and actually communicating with people are two very different things.

ch12

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Re: Add to VTSAX or start a Roth IRA?
« Reply #4 on: June 07, 2014, 08:50:49 PM »

Read the MadFIentist on how to allocate your savings for the best return for an early retiree: http://www.madfientist.com/retire-even-earlier/

Out of curiosity, what's the COL like in Vietnam? Is it hard to live there/get a visa, and do you find that the language barrier is difficult?

I've read the whole Mad Fientist series of Roth vs. traditional IRA, and mostly... I'm just confused. I don't understand how if you have taxes withheld, do you claim the part of your income that you put into a t-IRA and get them refunded? Cuz his whole "never pay taxes on your IRA!" thing sounds fantastic, but kind of complicated in practice - not that I mind complicated, but I just want to know what I'm doing before I sign up for anything :)

Vietnam is super cheap! I just went to the morning market and bought three bell peppers, 5 onions, two pineapples ready to eat, 2 kohlrabi, some peeled garlic, a cauliflower, 4 zucchinis, some basil, about 2 kg of tomatoes, 4 potatoes, and two blocks of fresh tofu for about $8! They were sold out of bread or I could have gotten mini baguettes for about 10 cents each.

My rent is $175/mo for half of a 1br apartment, eating street food is about $1.50 per meal... I ride a bicycle or take the bus (30 cents/ride!), so no transportation costs to speak of. It's a very mustachian way to live! I make about $20/hr teaching English and working part time with some side work for a publication is more than enough.

Visas are very easy to get (for a price, of course - 3 months single entry is $120), just kind of a pain with the whole sending off your passport to the embassy, then renewing every 3 months or going on a visa run.

Long answer :) I love it here, but yes, the language barrier is difficult. You can get by on charades, knowing the numbers, and a few other words here and there, but getting by and actually communicating with people are two very different things.

If you're living in Vietnam and making $20/hour+extra side work, you probably are safely under the foreign income exclusion at $97,600.

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

If all of your income is federal tax free, then I'd go for a Roth.

Vietnam sounds like a cool place to live! Fresh food that is so cheap is nothing to be sneezed at. Charades to communicate probably add a fresh layer of challenge to daily life. I'm actually Vietnamese by heritage, but I can't speak it, so I'd probably be in the same boat. :)

butchmonkey

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Re: Add to VTSAX or start a Roth IRA?
« Reply #5 on: June 07, 2014, 11:00:05 PM »
The mad fientist angle essentially involves two parts.

While working you contribute to a traditional IRA and take the deduction on your income, freeing you from having to pay taxes on the amount you contribute.

Then in retirement, because you have no earned income, you can convert a chunk of your traditional IRA money to a Roth IRA each year without paying any tax on it. (It counts as earned income but as long as you're combined taxes on earned income remain below the standard deduction, you don't have to pay taxes.)

I think the best writing on this subject is actually this post:

http://www.gocurrycracker.com/never-pay-taxes-again/

Enjoy, and please eat done nem nuong for me.




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lpep

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Re: Add to VTSAX or start a Roth IRA?
« Reply #6 on: June 08, 2014, 12:03:15 AM »
The mad fientist angle essentially involves two parts.

While working you contribute to a traditional IRA and take the deduction on your income, freeing you from having to pay taxes on the amount you contribute.

Then in retirement, because you have no earned income, you can convert a chunk of your traditional IRA money to a Roth IRA each year without paying any tax on it. (It counts as earned income but as long as you're combined taxes on earned income remain below the standard deduction, you don't have to pay taxes.)

I think the best writing on this subject is actually this post:

http://www.gocurrycracker.com/never-pay-taxes-again/

Enjoy, and please eat done nem nuong for me.


Thank you for that link! I get it now! That is a smart, smart thing to do then.

Ch12 pointed out that I won't pay US taxes anyway on what I'm earning here, so I might as well put it straight into a Roth IRA and keep that going. Then, when I move home, start with a traditional IRA. If I max out my Roth this year, which I hopefully will, I can put whatever else I can save into my taxable account.

Doing taxes next year should be interesting!

I'm actually a pescatarian, so sadly no nem for me... but I will eat all the bun ca for you that you want!

lpep

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Re: Add to VTSAX or start a Roth IRA?
« Reply #7 on: June 08, 2014, 12:09:28 AM »

Read the MadFIentist on how to allocate your savings for the best return for an early retiree: http://www.madfientist.com/retire-even-earlier/

Out of curiosity, what's the COL like in Vietnam? Is it hard to live there/get a visa, and do you find that the language barrier is difficult?

I've read the whole Mad Fientist series of Roth vs. traditional IRA, and mostly... I'm just confused. I don't understand how if you have taxes withheld, do you claim the part of your income that you put into a t-IRA and get them refunded? Cuz his whole "never pay taxes on your IRA!" thing sounds fantastic, but kind of complicated in practice - not that I mind complicated, but I just want to know what I'm doing before I sign up for anything :)

Vietnam is super cheap! I just went to the morning market and bought three bell peppers, 5 onions, two pineapples ready to eat, 2 kohlrabi, some peeled garlic, a cauliflower, 4 zucchinis, some basil, about 2 kg of tomatoes, 4 potatoes, and two blocks of fresh tofu for about $8! They were sold out of bread or I could have gotten mini baguettes for about 10 cents each.

My rent is $175/mo for half of a 1br apartment, eating street food is about $1.50 per meal... I ride a bicycle or take the bus (30 cents/ride!), so no transportation costs to speak of. It's a very mustachian way to live! I make about $20/hr teaching English and working part time with some side work for a publication is more than enough.

Visas are very easy to get (for a price, of course - 3 months single entry is $120), just kind of a pain with the whole sending off your passport to the embassy, then renewing every 3 months or going on a visa run.

Long answer :) I love it here, but yes, the language barrier is difficult. You can get by on charades, knowing the numbers, and a few other words here and there, but getting by and actually communicating with people are two very different things.

If you're living in Vietnam and making $20/hour+extra side work, you probably are safely under the foreign income exclusion at $97,600.

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

If all of your income is federal tax free, then I'd go for a Roth.

Vietnam sounds like a cool place to live! Fresh food that is so cheap is nothing to be sneezed at. Charades to communicate probably add a fresh layer of challenge to daily life. I'm actually Vietnamese by heritage, but I can't speak it, so I'd probably be in the same boat. :)

Aha! I knew there was a reason I kept reading your username as "Chi 2." I have two girls named Chi in one of my classes :)

"Fresh food" is actually questionable - there are no limits of pesticide use here, so some veggies/fruit have 10x the US limit. That's the real price. Tastes great though!

Thanks for the advice! That makes a TON of sense. Looks like I should open a Roth, max it out, then add more to my taxable account. When I move back home, whenever that is, I'll open a regular IRA and do the whole Mad Fientist Roth conversion trick.

Myself even one month ago would have no idea what I just said. Love this site. Cảm Ơn for the help!

TomTX

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Re: Add to VTSAX or start a Roth IRA?
« Reply #8 on: June 08, 2014, 06:50:59 AM »

Thanks for the advice! That makes a TON of sense. Looks like I should open a Roth, max it out, then add more to my taxable account. When I move back home, whenever that is, I'll open a regular IRA and do the whole Mad Fientist Roth conversion trick.

Myself even one month ago would have no idea what I just said. Love this site. Cảm Ơn for the help!

You have so much after tax money saved, I would just directly stash the Roth max every year -unless the tIRA gets you out of the 25% bracket or something.

expatartist

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Re: Add to VTSAX or start a Roth IRA?
« Reply #9 on: June 17, 2014, 08:43:54 AM »
A very useful thread, thanks! I've been looking for the best way to start with Vanguard on a small scale while working overseas, and this looks to be it.

beltim

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Re: Add to VTSAX or start a Roth IRA?
« Reply #10 on: June 17, 2014, 10:04:22 AM »
If you use the foreign income exclusion to avoid us taxes you're not allowed to contribute to Roth IRAs.

lpep

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Re: Add to VTSAX or start a Roth IRA?
« Reply #11 on: June 18, 2014, 12:14:50 AM »
If you use the foreign income exclusion to avoid us taxes you're not allowed to contribute to Roth IRAs.

Someone has brought this up in another thread, and DARN! But I actually do have income coming in from American companies (side hustles). It's not much, but it would be nice to put into a Roth. Any idea if I can do this? Or is all my income either excluded or not?

I'm going to have confusing taxes this year...

beltim

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Re: Add to VTSAX or start a Roth IRA?
« Reply #12 on: June 18, 2014, 10:54:16 AM »
If you use the foreign income exclusion to avoid us taxes you're not allowed to contribute to Roth IRAs.

Someone has brought this up in another thread, and DARN! But I actually do have income coming in from American companies (side hustles). It's not much, but it would be nice to put into a Roth. Any idea if I can do this? Or is all my income either excluded or not?

I'm going to have confusing taxes this year...

Yes, you can put in income that you do not exclude into a Roth.  You may also look into the foreign  tax credit - it's possible that you may be eligible for a Roth if you file that way, instead of using the foreign income exclusion.