Author Topic: How should I be investing my $$  (Read 6946 times)

davef

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How should I be investing my $$
« on: July 15, 2014, 02:24:29 PM »
lets hear it. I am 32 no debt have one property plus a rental property. I have a 401k which currently has 43k and a Individual brokerage acount that has 23k I have about $1k per month after all the bills are paid to invest as I see fit. I am employed full time and self employed. I plan to loose the full time job at some point in the next 5 years and spend the rest of my life self employed. I have no desire to retire. I'll just work less and hire a manager when I dont want to run the company day to day. 

I have 15k in liquid funds including emergency funds.

In the brokerage account as ETFs?
Roth IRA?
Another income property?

What are your thoughts?

Joel

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Re: How should I be investing my $$
« Reply #1 on: July 15, 2014, 02:36:48 PM »
Are your 401k contributions maxed?

davef

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Re: How should I be investing my $$
« Reply #2 on: July 15, 2014, 04:15:13 PM »
No, I'm putting in 8% my company matches up to 5% but allows me to put in up to 75%

Joel

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Re: How should I be investing my $$
« Reply #3 on: July 15, 2014, 04:25:57 PM »
Then max your 17,500 annual limit to your 401k

milesdividendmd

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Re: How should I be investing my $$
« Reply #4 on: July 15, 2014, 04:28:36 PM »
Assuming you still have taxable income and low cost investment options through your 401k, my preferred order of investments is...

Max out 401K, then max out HSA, then max out Roth (or backdoor Roth depending on your income) then invest in taxable accounts.

Your goal with this method is to lower your current tax bill as much as possible, then do Roth conversions when your income is lower in retirement/self employment.)

Hope that helps.

davef

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Re: How should I be investing my $$
« Reply #5 on: July 15, 2014, 09:44:12 PM »
Can you explain why. Considering I am paying the lowest rate now that I will ever be paying it seems it would make sense to pay taxes now and get it over with.

Joel

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Re: How should I be investing my $$
« Reply #6 on: July 15, 2014, 09:51:04 PM »
How so? What is your marginal rate now? What is your expected marginal rate upon retirement?

milesdividendmd

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Re: How should I be investing my $$
« Reply #7 on: July 15, 2014, 10:19:51 PM »
Can you explain why. Considering I am paying the lowest rate now that I will ever be paying it seems it would make sense to pay taxes now and get it over with.

This is a difficult question to answer because I do not know the particulars of your financial situation. I don't know what your tax rate is now. I have no idea what your tax rate will be in retirement.

But assuming you are still paying some income tax now, and you will be living a Mustachian lifestyle in retirement, then maxing out your 401(k) will certainly reduce your taxes due now but whatever your marginal tax rate is times the total contribution to your 401(k).

If then in early semi-retirement you use a Roth ladder to convert your 401(k) to an IRA and then convert your IRA to a Roth IRA tax-free, you will still pay no taxes upon pulling your money out of your Roth.

It is hard to do much better than zero taxes on your contributions, zero taxes on your growth, and zero taxes on your distributions. 

If you are already not paying income taxes, then I agree, contribute as much as possible to a Roth after meeting the match with your 401(k) (assuming you do not have access to a health care savings account.)

beltim

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Re: How should I be investing my $$
« Reply #8 on: July 15, 2014, 10:47:05 PM »
Can you explain why. Considering I am paying the lowest rate now that I will ever be paying it seems it would make sense to pay taxes now and get it over with.

This is a difficult question to answer because I do not know the particulars of your financial situation. I don't know what your tax rate is now. I have no idea what your tax rate will be in retirement.

But assuming you are still paying some income tax now, and you will be living a Mustachian lifestyle in retirement, then maxing out your 401(k) will certainly reduce your taxes due now but whatever your marginal tax rate is times the total contribution to your 401(k).

If then in early semi-retirement you use a Roth ladder to convert your 401(k) to an IRA and then convert your IRA to a Roth IRA tax-free, you will still pay no taxes upon pulling your money out of your Roth.

It is hard to do much better than zero taxes on your contributions, zero taxes on your growth, and zero taxes on your distributions. 

If you are already not paying income taxes, then I agree, contribute as much as possible to a Roth after meeting the match with your 401(k) (assuming you do not have access to a health care savings account.)

I don't understand why this keeps getting repeated as the end-all solution. A Roth IRA ladder is only tax-free if you can live on less than your standard deductions and exemptions - in 2014, that's $10,150.  Even among MMM readers and forum posters, that's rare - 20% according to http://forum.mrmoneymustache.com/ask-a-mustachian/poll-what-are-your-annual-expenses-(per-adult-housing-excluded)/

milesdividendmd

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How should I be investing my $$
« Reply #9 on: July 15, 2014, 11:04:44 PM »
Can you explain why. Considering I am paying the lowest rate now that I will ever be paying it seems it would make sense to pay taxes now and get it over with.

This is a difficult question to answer because I do not know the particulars of your financial situation. I don't know what your tax rate is now. I have no idea what your tax rate will be in retirement.

But assuming you are still paying some income tax now, and you will be living a Mustachian lifestyle in retirement, then maxing out your 401(k) will certainly reduce your taxes due now but whatever your marginal tax rate is times the total contribution to your 401(k).

If then in early semi-retirement you use a Roth ladder to convert your 401(k) to an IRA and then convert your IRA to a Roth IRA tax-free, you will still pay no taxes upon pulling your money out of your Roth.

It is hard to do much better than zero taxes on your contributions, zero taxes on your growth, and zero taxes on your distributions. 

If you are already not paying income taxes, then I agree, contribute as much as possible to a Roth after meeting the match with your 401(k) (assuming you do not have access to a health care savings account.)

I don't understand why this keeps getting repeated as the end-all solution. A Roth IRA ladder is only tax-free if you can live on less than your standard deductions and exemptions - in 2014, that's $10,150.  Even among MMM readers and forum posters, that's rare - 20% according to http://forum.mrmoneymustache.com/ask-a-mustachian/poll-what-are-your-annual-expenses-(per-adult-housing-excluded)/

Saying that you must live on less than $10,150 in order to participate in a Roth IRA ladder is absolutely incorrect.

You can live on 70k plus in investment income tax free, as long as your top marginal tax rate  is below 15%.

And you can participate in a Roth  ladder as long as your EARNED income plus your Roth conversion amount adds up to less than your standard deduction plus personal exemptions.

For a married couple in 2014 this amount is $20,300.

This concept was best explained here:

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

And

http://www.madfientist.com/traditional-ira-vs-roth-ira/
« Last Edit: July 15, 2014, 11:06:39 PM by milesdividendmd »

beltim

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Re: How should I be investing my $$
« Reply #10 on: July 15, 2014, 11:15:44 PM »
Can you explain why. Considering I am paying the lowest rate now that I will ever be paying it seems it would make sense to pay taxes now and get it over with.

This is a difficult question to answer because I do not know the particulars of your financial situation. I don't know what your tax rate is now. I have no idea what your tax rate will be in retirement.

But assuming you are still paying some income tax now, and you will be living a Mustachian lifestyle in retirement, then maxing out your 401(k) will certainly reduce your taxes due now but whatever your marginal tax rate is times the total contribution to your 401(k).

If then in early semi-retirement you use a Roth ladder to convert your 401(k) to an IRA and then convert your IRA to a Roth IRA tax-free, you will still pay no taxes upon pulling your money out of your Roth.

It is hard to do much better than zero taxes on your contributions, zero taxes on your growth, and zero taxes on your distributions. 

If you are already not paying income taxes, then I agree, contribute as much as possible to a Roth after meeting the match with your 401(k) (assuming you do not have access to a health care savings account.)

I don't understand why this keeps getting repeated as the end-all solution. A Roth IRA ladder is only tax-free if you can live on less than your standard deductions and exemptions - in 2014, that's $10,150.  Even among MMM readers and forum posters, that's rare - 20% according to http://forum.mrmoneymustache.com/ask-a-mustachian/poll-what-are-your-annual-expenses-(per-adult-housing-excluded)/

Saying that you must live on less than $10,150 in order to participate in a Roth IRA ladder is absolutely incorrect.

You can live on 70k plus in investment income tax free, as long as your top marginal tax rate  is below 15%.

And you can participate in a Roth  ladder as long as your EARNED income plus your Roth conversion amount adds up to less than your standard deduction plus personal exemptions.

For a married couple in 2014 this amount is $20,300.

This concept was best explained here:

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

And

http://www.madfientist.com/traditional-ira-vs-roth-ira/

I didn't say that. What I said was correct.  Please read my post before saying I'm incorrect - it was only 3 sentences.

milesdividendmd

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How should I be investing my $$
« Reply #11 on: July 15, 2014, 11:40:45 PM »
I read your post. And you'll have to trust me that I'm not trying to twist your words.

What did you mean when you said this?

"A Roth IRA ladder is only tax-free if you can live on less than your standard deductions and exemptions - in 2014, that's $10,150."

I've reread it 5 times now and it still seems to explicitly state that you must live on less than $10,150/year in 2014 in order to avoid paying taxes on Roth ladder conversions during early retirement.

The point is that you must be able to live on less than $10,150 in earned income plus >70K in investment income, in order to avoid paying taxes on Roth conversions, which I'm pretty sure most Mustachians can handle.
« Last Edit: July 15, 2014, 11:42:25 PM by milesdividendmd »

beltim

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Re: How should I be investing my $$
« Reply #12 on: July 15, 2014, 11:50:11 PM »
I read your post. And you'll have to trust me that I'm not trying to twist your words.

What did you mean when you said this?

"A Roth IRA ladder is only tax-free if you can live on less than your standard deductions and exemptions - in 2014, that's $10,150."

I've reread it 5 times now and it still seems to explicitly state that you must live on less than $10,150/year in 2014 in order to avoid paying taxes on Roth ladder conversions during early retirement.

The point is that you must be able to live on less than $10,150 in earned income plus >70K in investment income, in order to avoid paying taxes on Roth conversions, which I'm pretty sure most Mustachians can handle.

Perhaps it would be clearer if it were re-worded: "A Roth IRA ladder is only tax-free only if you convert less than your deductions and exemptions - in 2014, that's $10,150."

Yes, you can have a great deal of proceeds from taxable investments and still not pay tax - but that requires having that money in taxable accounts, which the people saying max out the 401k and traditional IRA never seem to mention. 

I'm not saying that investing in a traditional IRA or 401k isn't the correct choice - but it's exceedingly unlikely that one would be able to pay no taxes on your investments as so many claim when they invoke the Roth IRA ladder.

milesdividendmd

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Re: How should I be investing my $$
« Reply #13 on: July 15, 2014, 11:58:18 PM »
Fair enough.

The point you're making is that every early retiree needs money in a taxable account prior to retiring. I agree with that sentiment wholeheartedly.

Even if an early retiree is planning on living on nothing but his Roth ladder, he still must fund his first five years of retirement from a taxable account (or prior Five year old Roth  contributions)

My point is that you can live a pretty extravagant lifestyle in retirement and still pay no taxes using a Roth ladder as demonstrated in the go Curry cracker post.



milesdividendmd

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Re: How should I be investing my $$
« Reply #14 on: July 16, 2014, 12:00:32 AM »
The other point I would make is that if you cannot afford to contribute to both taxable and tax-sheltered accounts at the same time, you should preferentially dump money into your tax-sheltered accounts early in your career and save your saving for your taxable accounts for the few years prior to your early retirement. In this way you will shelter more of your money from capital gains and get more benefit from compound interest over time.



beltim

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Re: How should I be investing my $$
« Reply #15 on: July 16, 2014, 05:10:33 AM »
Fair enough.

The point you're making is that every early retiree needs money in a taxable account prior to retiring. I agree with that sentiment wholeheartedly.

Even if an early retiree is planning on living on nothing but his Roth ladder, he still must fund his first five years of retirement from a taxable account (or prior Five year old Roth  contributions)

My point is that you can live a pretty extravagant lifestyle in retirement and still pay no taxes using a Roth ladder as demonstrated in the go Curry cracker post.

Sure, but it's only no taxes *in retirement* - there were still those pesky income taxes on the money you put into taxable accounts.

davef

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Re: How should I be investing my $$
« Reply #16 on: July 16, 2014, 08:59:26 AM »
I do pay taxes now but they are fairly low. Between my writeoffs for my business, my rental property and my mortgage I paid only about 7k taxes on 115k gross income. In retirement I will be a business owner likely collecting 100k+ in dividends each year. Realistically (by 2040 about when I expect to retire) likely 200k plus.

milesdividendmd

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Re: How should I be investing my $$
« Reply #17 on: July 16, 2014, 09:36:05 AM »

Fair enough.

The point you're making is that every early retiree needs money in a taxable account prior to retiring. I agree with that sentiment wholeheartedly.

Even if an early retiree is planning on living on nothing but his Roth ladder, he still must fund his first five years of retirement from a taxable account (or prior Five year old Roth  contributions)

My point is that you can live a pretty extravagant lifestyle in retirement and still pay no taxes using a Roth ladder as demonstrated in the go Curry cracker post.

Sure, but it's only no taxes *in retirement* - there were still those pesky income taxes on the money you put into taxable accounts.

All the more reason to max out a 401k preferentially.

I honestly don't understand the point you're making here. What strategy are you advocating for where you avoid taxes in pre-retirement?



beltim

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Re: How should I be investing my $$
« Reply #18 on: July 16, 2014, 11:13:24 AM »

Fair enough.

The point you're making is that every early retiree needs money in a taxable account prior to retiring. I agree with that sentiment wholeheartedly.

Even if an early retiree is planning on living on nothing but his Roth ladder, he still must fund his first five years of retirement from a taxable account (or prior Five year old Roth  contributions)

My point is that you can live a pretty extravagant lifestyle in retirement and still pay no taxes using a Roth ladder as demonstrated in the go Curry cracker post.

Sure, but it's only no taxes *in retirement* - there were still those pesky income taxes on the money you put into taxable accounts.

All the more reason to max out a 401k preferentially.

I honestly don't understand the point you're making here. What strategy are you advocating for where you avoid taxes in pre-retirement?

My point is only that you can only access $10k or so per person via a Roth ladder tax-free. I'm not advocating any strategy - I'm just pointing out a limitation.

Jags4186

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How should I be investing my $$
« Reply #19 on: July 16, 2014, 11:31:45 AM »
So based on the above information a hypothetical couple looking for 40k in retirement tax free income you would need 500k in an TIRA/401k and 500k in a taxable account.



Jags4186

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How should I be investing my $$
« Reply #20 on: July 16, 2014, 11:31:49 AM »
Duplicate

AssetGrinder

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Re: How should I be investing my $$
« Reply #21 on: July 18, 2014, 10:51:17 AM »
What I would do?
Max out  tax sheltered accounts
or pay off any outstanding mortgages if I had any first.
Mix up  asset mix and dont be so over weighted in property.
Invest 50-50 in property/ equities give or take 10%

Cheddar Stacker

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Re: How should I be investing my $$
« Reply #22 on: July 18, 2014, 01:16:19 PM »
I do pay taxes now but they are fairly low. Between my writeoffs for my business, my rental property and my mortgage I paid only about 7k taxes on 115k gross income. In retirement I will be a business owner likely collecting 100k+ in dividends each year. Realistically (by 2040 about when I expect to retire) likely 200k plus.

If you are right in your predictions about future income, you are correct to use the Roth. Max that out at $5,500, continue with 401K contributions however you see fit, and put everything else in your taxable brokerage account and invest in stock indexes.

davef

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Re: How should I be investing my $$
« Reply #23 on: July 18, 2014, 03:15:39 PM »
Thank you!