Author Topic: Probably the most basic 401k and IRA questions. =/  (Read 4182 times)

Logichronox

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Probably the most basic 401k and IRA questions. =/
« on: March 01, 2016, 02:22:04 PM »
Hello, new to the forum, saving and investing, so I'm having some trouble answering my questions online--it's not basic *enough* for me, apparently.

For the last some amount of years, I've been putting 5% into my 401k, because that's what my company match is.  I decided after reading the blog to up that to 10% to see how it felt (since I should apparently be trying to get as close to cap as I can) and it hasn't taken effect yet.  I got my taxes done yesterday, and this is the first year I made it into the 25% tax bracket.  Ouch.  So I thought it would be a good idea to lower my tax rate by getting more money invested pre-tax...but I have no idea what I'm doing.

My income is incredibly variable, due to the completely unpredictable nature of mandatory overtime at my job.  Apparently my AGI was $76,650 last year?  No idea if I'll make that much, less or more this year.  I've changed my 401k deduction to 24%, because that should get me to cap or close based on last year's income (which is really all I have to go off of).  I'm concerned about not putting in enough, or alternatively, hitting the cap too soon and missing the employer match for the rest of the year.  How do those of you with variable income resolve this?

Second question:  I was also thinking about opening an IRA with Vanguard, because I thought that traditional IRA deductions were also pre-tax income?  But some of the articles I've read online suggest that it is, and others seem to say that it's a post-tax contribution that you then write off as a tax deduction at the end of the year?  Can't seem to figure out how this works...and where does the $5,500 limit come in?  If it's post-tax anyway, why does it matter how much you put in?

Lastly, I currently have my 401k through Charles Schwab, just changed my allocations (?) to 50% VINIX, 25% VTSNX, 25% VBTIX, with $44,000 in the 401k.  I'm looking to retire in 15ish years (or sooner!) if possible.  I know I'm just starting out, but is this...how bad was this decision?

Any help or advice on any or all of these topics would be extremely welcome.  I'm doing as much research as I can on my own, but I'm feeling a little out of my depth.

Thanks!

katsiki

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #1 on: March 01, 2016, 02:45:32 PM »
Others can probably provide more advanced info, but here are a couple of answers.

1) Check with your HR or Payroll dept.  Most companies stop 401k contributions when you hit the max.  You should also be able to monitor this through your paystubs or online.
2) Can you easily change the percentage?  ie just change on a web page.  If so, that makes this a lot easier.  Start getting close and you can dial it down (to be safe).
3) Traditional IRA is post-tax but you deduct on your taxes.  Check the income limits before doing this.
4) 5500 is the limit for IRAs (Trad or Roth).

Good luck!

GGNoob

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #2 on: March 01, 2016, 02:49:53 PM »
Glad to hear you upped your contributions. At 5%, you'd be working forever.

Here's some thoughts on question #1. Some employers will "true up" their match at the end of the year if you max it too soon. You may want to ask your HR department. Also, do you have the option of doing a dollar amount instead of a percentage? My wife and I both contribute a dollar amount to our 401k accounts.

For question #2, it sounds like you are single from your post. You cannot deduct the entire $5,500 Traditional IRA contribution unless your MAGI is less than $61,000. See this page and click on IRA Deduction Limits. For 2015, you can still contribute $5,500 to a Roth IRA until April 18, 2016. Then for your 2016 contributions, keep the MAGI limit of $61k in mind when deciding if you can deduct the Traditional IRA contributions or if you should do a Roth IRA for 2016 as well. You can always "re-characterize" your 2016 contribution from a Roth to a Traditional if your MAGI is lower than you thought at the end of the year.

You don't mention your age, but your 401k allocation seems fine.
« Last Edit: March 01, 2016, 02:52:01 PM by GGNoob »

Jack

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #3 on: March 01, 2016, 02:51:04 PM »
I'm concerned about not putting in enough, or alternatively, hitting the cap too soon and missing the employer match for the rest of the year.  How do those of you with variable income resolve this?

First, see if your company's 401k has a "true up" provision where they'll give you the match as if you contributed each pay period, even though you maxed it out earlier.

Second, find out if you can designate a particular dollar amount instead of a percentage (if that's the case, then you just do $18K / # of pay periods)

Third, find out what the maximum percentage contribution actually is. If it's 100%, then you can just guess low and catch up in December or whatever.

Second question:  I was also thinking about opening an IRA with Vanguard, because I thought that traditional IRA deductions were also pre-tax income?  But some of the articles I've read online suggest that it is, and others seem to say that it's a post-tax contribution that you then write off as a tax deduction at the end of the year?  Can't seem to figure out how this works...and where does the $5,500 limit come in?  If it's post-tax anyway, why does it matter how much you put in?

You contribute to an IRA using money that's part of your take-home pay, which means taxes have already been withheld from it. If you contribute to a Traditional IRA then you deduct the contribution when you file and get the taxes back; if you contribute to a Roth IRA then you don't (but you don't have to declare it as income in 30 years or whenever, when you withdraw it again).

Lastly, I currently have my 401k through Charles Schwab, just changed my allocations (?) to 50% VINIX, 25% VTSNX, 25% VBTIX, with $44,000 in the 401k.  I'm looking to retire in 15ish years (or sooner!) if possible.  I know I'm just starting out, but is this...how bad was this decision?

Not bad at all! A little bond-heavy and US-tilted for my taste, but a perfectly reasonable allocation.

Interest Compound

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #4 on: March 01, 2016, 02:54:25 PM »
1. Just use a pre-defined number instead of a percentage. If you want to max out the $18,000 for the year, contribute $750 per paycheck (if you're paid twice a month) and you're done.

2. You can either get the money back when you do your taxes, or change our withholding. Considering your variable income, I'd just do it come tax time personally. The $5,500 limit comes in, when the broker (Vanguard) stops you from adding more, because they know you'll get hit with a big penalty come tax time if you go over.

3. List the full fund names, along with their expense ratios, and we can tell you if it was a bad idea. You can look up this information on morningstar.com

Logichronox

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #5 on: March 02, 2016, 01:30:08 AM »
Thanks, everyone, for the suggestions!  I will absolutely check with my employer to confirm whether they true-up the contributions, as well as looking into deducting a dollar amount into my 401k, I didn't even realize that might be an option.  Also, thank you for explaining the IRA information, it was really useful--I feel like I might have an idea of what I want to do with that now. 
I'm thinking a traditional IRA, since I fully intend to be in the 15% tax bracket in retirement (whether or not I can bring it down enough to get back in while I'm working).  Looking at going with Vanguard Retirement 2035?  It has:
Vanguard Total Stock Market Index Fund Investor Shares 49%
Vanguard Total International Stock Index Fund Investor Shares 32.7%
Vanguard Total Bond Market II Index Fund Investor Shares 12.7%
Vanguard Total International Bond Index Fund Investor Shares 5.6%
Would this be good?  I was interested in the Vanguard Total Stock Market Index Admiral Shares (VTSAX) which I've seen suggested elsewhere, just going all in, but the minimum is $10,000.  I...get the impression that you can't do that with an IRA because of the maximum amount per year?  Or am I again misunderstanding this?

MDM

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #6 on: March 02, 2016, 05:19:16 AM »
I got my taxes done yesterday, and this is the first year I made it into the 25% tax bracket.  Ouch.  So I thought it would be a good idea to lower my tax rate by getting more money invested pre-tax...but I have no idea what I'm doing.

My income is incredibly variable, due to the completely unpredictable nature of mandatory overtime at my job.  Apparently my AGI was $76,650 last year?
Incredibly variable indeed, as your AGI would have to have been <$45K in 2014 to keep you out of the 25% tax bracket.

When you say "got my taxes done," does that mean "finished doing my own taxes" or "got my taxes done by someone else"?  I highly recommend the former, as that could help you understand how 401ks, HSAs, IRAs, etc. affect you.

Quote
Second question:  I was also thinking about opening an IRA with Vanguard, because I thought that traditional IRA deductions were also pre-tax income?  But some of the articles I've read online suggest that it is, and others seem to say that it's a post-tax contribution that you then write off as a tax deduction at the end of the year?  Can't seem to figure out how this works...and where does the $5,500 limit come in?  If it's post-tax anyway, why does it matter how much you put in?
One thing I didn't see mentioned in other replies was that the more you contribute to your 401k, the lower your MAGI.  Maximizing your 401k could make the difference between being eligible or ineligible for a deductible tIRA (this gets back to that familiarity with Form 1040 mentioned above).

Good luck!

MickeyMoustache

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #7 on: March 02, 2016, 07:29:21 AM »
Thanks, everyone, for the suggestions!  I will absolutely check with my employer to confirm whether they true-up the contributions, as well as looking into deducting a dollar amount into my 401k, I didn't even realize that might be an option.  Also, thank you for explaining the IRA information, it was really useful--I feel like I might have an idea of what I want to do with that now. 
I'm thinking a traditional IRA, since I fully intend to be in the 15% tax bracket in retirement (whether or not I can bring it down enough to get back in while I'm working).  Looking at going with Vanguard Retirement 2035?  It has:
Vanguard Total Stock Market Index Fund Investor Shares 49%
Vanguard Total International Stock Index Fund Investor Shares 32.7%
Vanguard Total Bond Market II Index Fund Investor Shares 12.7%
Vanguard Total International Bond Index Fund Investor Shares 5.6%
Would this be good?  I was interested in the Vanguard Total Stock Market Index Admiral Shares (VTSAX) which I've seen suggested elsewhere, just going all in, but the minimum is $10,000.  I...get the impression that you can't do that with an IRA because of the maximum amount per year?  Or am I again misunderstanding this?
Can you share the expense ratios for each fund as well?  The expense ratio is the single most important deciding factor when looking at fund options (lower is better!). 

Jack

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #8 on: March 02, 2016, 08:16:21 AM »
Looking at going with Vanguard Retirement 2035?  It has:
Vanguard Total Stock Market Index Fund Investor Shares 49%
Vanguard Total International Stock Index Fund Investor Shares 32.7%
Vanguard Total Bond Market II Index Fund Investor Shares 12.7%
Vanguard Total International Bond Index Fund Investor Shares 5.6%
Would this be good?

How old are you? Unless you're already over 45, I think that fund shortly become too conservative for you (even if it isn't necessarily right now).

As an early retiree, or especially a very early retiree like most of us here, you'll want a more aggressive asset allocation than normal even in retirement because your time horizon is so much longer than it is for somebody who retires at 65. There are plenty of us here who are planning to be 100% stocks, or close to it, our entire lives. 80% stocks/20% bonds is also reasonable, but 60% stocks/40% bonds starts to get risky (where "risk" has less to do with portfolio volatility, and more about the value eroding due to inflation). Target Retirement 2035 is already at the inflection point where it's about to start ramping up its bonds beyond 20%. (See the portfolio allocation vs. time chart on this page.)

If you want to use a target-date fund, pick one whose date matches the year you turn 65, or maybe even the year you turn 70 or 75.

I was interested in the Vanguard Total Stock Market Index Admiral Shares (VTSAX) which I've seen suggested elsewhere, just going all in, but the minimum is $10,000.  I...get the impression that you can't do that with an IRA because of the maximum amount per year?  Or am I again misunderstanding this?

That's correct. In the first year, you'd have to start out with Investor Shares (VTSMX), which has a $3,000 minimum. Then in year 2, once your balance hits $10,000, you can tell Vanguard to exchange the VTSMX for VTSAX. (Even if you don't, they'll eventually do it for you.)

Logichronox

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #9 on: March 02, 2016, 05:10:07 PM »
Thanks again for the great replies! 
I get my taxes done by someone else, but I can certainly look into that for next year.  Yes, we were incredibly short-staffed at my job last year, so I made about $20,000 more than the previous year.  Lots of overtime.  But it looks like it's continuing into at least part of this year as well.  So I'm trying to maximize my 401k this year to make up for it.
The expense ratio on the Target Retirement Plan is 0.15%, the expense ratio on the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) is 0.17% (but per another comment, I could turn that into an Admiral Shares mutual fund at 0.05% next year).  Is that a better plan?
I'm 34 years old, and like everyone else, would like to reach FI as soon as possible.  ;p

Jack

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #10 on: March 02, 2016, 05:26:49 PM »
The expense ratio on the Target Retirement Plan is 0.15%, the expense ratio on the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) is 0.17% (but per another comment, I could turn that into an Admiral Shares mutual fund at 0.05% next year).  Is that a better plan?
I'm 34 years old, and like everyone else, would like to reach FI as soon as possible.  ;p

The 0.02% difference in expense ratio between VTSMX and VFFVX* is negligible. The question is whether you want bonds and international stocks to be part of your asset allocation or not. Do you?

Also note that you don't have to get VTSMX now just because you want VTSAX later: the third choice would be to get the VFFVX now and then exchange it for VTSAX  in a year when your balance is high enough. But again, if you do that then you need to have a good answer to the question "why are you changing your asset allocation?" since you'd also be going from 54/36/10 (US/int'l/bonds) to 100/0/0.

(*VFFVX is the symbol for Vanguard Total Retirement 2055, which is probably the one I would pick if I were your age.)

Uturn

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #11 on: March 02, 2016, 05:56:32 PM »
I didn't see this mentioned, and it sounds like you haven't done this before.  Pay attention when making allocation changes.  My 401k will only apply my changes to future allotments, not what is already there.  I really had to dig around for the change for all holdings option. 

Logichronox

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Re: Probably the most basic 401k and IRA questions. =/
« Reply #12 on: March 02, 2016, 06:10:25 PM »
I picked that domestic stock/international stock/bond mix with my 401k, because I mostly have no idea what I'm doing, so more diversification seemed like a good idea.  ;p
But from what I've seen here, it would not be a bad thing to open and max an IRA with just the VTSMX (or VTSAX) index fund, since it's already so diverse.  But I appreciate the recommendation for VFFVX as well, I'm going to keep reading and looking into my options there.

Regarding the allocation changes, I'll absolutely check back at what I selected to make sure that I've altered the current allotments, not just future ones.  Thanks!