Author Topic: Explain it to me like I'm a child  (Read 2037 times)

52cents

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Explain it to me like I'm a child
« on: November 06, 2019, 10:20:11 AM »
I presume this has been asked before, if so, could somebody direct me to the blog post or topic? I'm ready to open a Vanguard account, VTI and what not, but I'm a bit green on all things non real estate related. It might seem routine for most of you but I'm unsure of what I'm doing.

Thanks!

terran

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Re: Explain it to me like I'm a child
« Reply #1 on: November 06, 2019, 10:26:35 AM »
Do you already have any retirement accounts (401(k), etc through work or an IRA)? How much is your income (as it effects accounts you can open, and tax considerations).

52cents

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Re: Explain it to me like I'm a child
« Reply #2 on: November 06, 2019, 10:37:49 AM »
Do you already have any retirement accounts (401(k), etc through work or an IRA)? How much is your income (as it effects accounts you can open, and tax considerations).

Aha, just as I expected, not straight forward at all!
Wife has retirement accounts if that makes any difference. I'm self employed and income fluctuates rather dramatically. I have a couple of small investment accounts, one is an IRA, I was a moron and bought stocks like you're not supposed to over 10 years ago. Luckily they were NVDA and APPL. I took the advice of another moron and lost a whole lot on the day the market did that dip thing and everything automatically sold. Anyway, I'm left with a negligible $6k or so split between a regular investment account and an IRA with e-trade. Should I sell those off and reinvest in VTI?

Frankies Girl

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Re: Explain it to me like I'm a child
« Reply #3 on: November 06, 2019, 11:00:55 AM »
https://jlcollinsnh.com/stock-series/
^worked for me. Can get his book that is more recent than the blog posts (unless he went and updated them) but book is an easy read.


BlueHouse

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Re: Explain it to me like I'm a child
« Reply #4 on: November 06, 2019, 11:07:32 AM »
First, I think you want a tax-advantaged account. 
Pick up the phone, call Vanguard, and tell them you want to open a solo 401k (or SEP IRA if they have one).  They'll walk you through all the steps. 

Then, make a plan to put money into this account on a regular basis.  (monthly, quarterly, or yearly). 

terran

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Re: Explain it to me like I'm a child
« Reply #5 on: November 06, 2019, 11:10:57 AM »
In that case, before you start investing in a taxable brokerage account, I would start maxing out your and your wife's retirement accounts in the order suggested here: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153. Also follow the "traditional vs Roth" links to help figure out what type of account.

Here's a post I wrote the other day, much of which applies to you too: https://forum.mrmoneymustache.com/investor-alley/finally-left-edward-jones-now-what-is-the-correct-account/msg2491577/#msg2491577. In particular:

If [don't] have an employer sponsored retirement plan then your only option [for a tax advantaged account, except that you're self employed] is an IRA. Between a Roth IRA and traditional IRA you can contribute a total of $6000 in [each 2019 and] 2020, but only up to your total earned income for the year [...]. Traditional is tax deferred meaning you get a tax deduction now and pay tax when you withdraw. Roth is not, so you pay tax now but not when you withdraw. Depending on your income and whether or not you and/or a spouse are covered by a retirement plan at work you may or may not be able to contribute to these types of accounts, so share those details if you're concerned or see https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019 and https://www.irs.gov/retirement-plans/ira-deduction-limits

Since you're self employed there are some more retirement plans available to you. Do you have any employees?

On the question of investing

On investing beyond retirement accounts and the question "should I invest in VTI?", from that same post:

If you want to invest more than the space you have available in retirement accounts you can open a taxable brokerage account, and invest in whatever you want there. Unlike the retirement accounts you've used to date, you will pay taxes on interest (from bonds) and dividends (from stocks) you hold in the taxable account, and you'll also pay tax on any gains when you sell investments held in a taxable account. The amount of tax varies depending your income and how long you've held the investment. It tends to be better to hold bond investments in retirement accounts and stock investments in taxable accounts since stock investments aren't taxed as much. You can learn more at https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

As far as what to invest in, VTSAX [VTI is the ETF version] is a popular choice. It's a stock investment fund which means it's "risky"/volatile (meaning it moves around a lot), but it invests in stocks from the whole US market so it's well diversified. Some people would also want to invest in some bonds (like VBTLX) which are likely to grow much less, but be a lot less volatile (meaning the price won't go up and down as much). Some people might also want to invest in an international stock investment (like VTIAX [VXUS is the ETF version]) to diversify further into international markets. There are lots more options to invest in, but those will cover the basics and it's all I invest in. You can learn more at https://www.bogleheads.org/wiki/Asset_allocation

While you're figuring things out (or forever) investing in a target date fund wouldn't be a bad idea. These invest in all of the three investment types I mentioned above (plus international bonds) and automatically set and adjust the asset allocation, so you don't have to worry about it. The downsides are that you're "stuck" with what Vanguard has decided is the right asset allocation, you pay Vanguard a little more to manage it, and they're somewhat less tax efficient when held in a taxable account since they contain bonds. All in all not a bad deal, especially if held in retirement accounts where you don't have to worry about tax efficiency. More here: https://investor.vanguard.com/mutual-funds/target-retirement/#/

All of these Vanguard investments (including the target date funds) should be available at Etrade without a commission if you want to stick with them. I have my self employed 401(k) there.

terran

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Re: Explain it to me like I'm a child
« Reply #6 on: November 06, 2019, 11:13:35 AM »
Pick up the phone, call Vanguard, and tell them you want to open a solo 401k (or SEP IRA if they have one).  They'll walk you through all the steps. 

This is good advice, but only if you don't have employees. If you have or plan to have employees you need to proceed with more caution.

I would also go with Etrade since you already have an IRA there, they have pretty much all the same investments without fees, and their solo 401(k) has a few helpful features that others don't.

robartsd

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Re: Explain it to me like I'm a child
« Reply #7 on: November 06, 2019, 12:21:28 PM »
Anyway, I'm left with a negligible $6k or so split between a regular investment account and an IRA with e-trade. Should I sell those off and reinvest in VTI?
Go ahead and sell off and reinvest in your chosen index fund within the IRA - this is not a taxable event. In the regular investment account you might think about how it will impact your taxes first (though it a small enough amount that it won't be a big impact either way).

Bernard

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Re: Explain it to me like I'm a child
« Reply #8 on: November 06, 2019, 04:32:50 PM »
The market is at a historic high (the DOW today closed at 28,492.56 -- only 0.54 % under the all-time record), so sell your individual stocks and buy Vanguard ETFs. I'm with E-Trade myself and I have VTI, VOO, and VGT. So far, VGT did best, followed by VOO, and then VTI. You can buy these at eTrade commission-free at the same super low rates as Vanguard offers. Keep them in a traditional IRA, 'cause if you now restart your retirement savings, you'll unlikely will have an enormous amount for RMDs when you retire, so your tax burden in retirement will be low.

52cents

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Re: Explain it to me like I'm a child
« Reply #9 on: November 07, 2019, 05:27:13 AM »
Pick up the phone, call Vanguard, and tell them you want to open a solo 401k (or SEP IRA if they have one).  They'll walk you through all the steps. 

This is good advice, but only if you don't have employees. If you have or plan to have employees you need to proceed with more caution.

I would also go with Etrade since you already have an IRA there, they have pretty much all the same investments without fees, and their solo 401(k) has a few helpful features that others don't.

I do have 2 employees, what difference do employees make?

terran

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Re: Explain it to me like I'm a child
« Reply #10 on: November 07, 2019, 07:35:43 AM »
Pick up the phone, call Vanguard, and tell them you want to open a solo 401k (or SEP IRA if they have one).  They'll walk you through all the steps. 

This is good advice, but only if you don't have employees. If you have or plan to have employees you need to proceed with more caution.

I would also go with Etrade since you already have an IRA there, they have pretty much all the same investments without fees, and their solo 401(k) has a few helpful features that others don't.

I do have 2 employees, what difference do employees make?

Simple. If you have employees you can't open a solo/individual 401(k) because you're not a solo business.

You can open a 401(k), but it will have to be a more robust plan that you'll have to pay a company to run, and you'll have to make employer contributions for your employees. Could still be worthwhile, but probably only if you think it will help with retention/hiring, or you just think it's the "right" thing to do for your employees as I doubt the tax savings on deferring your income would make up for the extra costs.

Here are a couple of options I've seen mentioned: https://www.employeefiduciary.com/ and https://www.guideline.com/. Whoever does your payroll might also offer something.

Here's a good post that discusses some of the issues you'll want to consider when contemplating a 401(k) for your business: https://www.bogleheads.org/forum/viewtopic.php?t=255992#p4059822 anything by the author of that post ("Spirit Rider") is reliable when it comes to retirement plans.

A SEP IRA or SIMPLE IRA might be better options for you as they cost less to run (should be free), but I think you still have to make contributions for your employees equal to your contributions in proportion to income. You don't have to open it with Vanguard, but here is some good summary information about the different plans: https://investor.vanguard.com/small-business-retirement-plans/options

If you have a CPA you might want to discuss this with them.

BlueHouse

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Re: Explain it to me like I'm a child
« Reply #11 on: November 07, 2019, 02:26:03 PM »
I use Paychex as my payroll provider (even though I'm only one employee, I set everything up for more).  they also offer 401k administration, so my payroll is deducted and automatically sent to the 401k.  The retirement plan costs $240/year for just me.

BicycleB

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Re: Explain it to me like I'm a child
« Reply #12 on: November 13, 2019, 07:08:39 AM »
Find a CPA experienced with small business owners. They should know the rules involving your 401k questions, and the rules determining tax impacts of your different choices. A CPA costs money, but often saves you more than that by the value of their advice. There are are tax/legal consequences involved in your 401k choice that are important because they're not easy to reverse. (Note: I'm not currently a CPA, nor giving professional advice in this post, but was a CPA in the past.)

You can spend a lot of time learning all the rules yourself, partly by studying the responses in this forum, or a smaller amount of time while paying a competent pro to analyze your situation.

As to what you "should" do with your money, that is partly determined by your life situation and goals. Factors determining a wise decision include:

What is your family's:
spending rate?
non-business debt?
income?
savings?
risk tolerance?
how stable is your income?
 
For this, a CPA is less necessary, but your own input is more important. Yes, it's complicated. It takes more time to do this than you want it to. But once you learn this area a little more, it becomes easier the rest of your life. Just get in there!
« Last Edit: November 13, 2019, 07:15:57 AM by BicycleB »