investing in a traditional IRA

[Stache In Training]

I had a 401K from an old job, and a Roth.  So I rolled over the 401K to an IRA when I left that job.  I am planning on investing that money into a REIT index (vanguard's).  My Roth, which has the bulk of my retirement money is in a target date fund.

My issue is that the 401k was not much, about 2300.  Which is below the minimum for the investor shares fund.  So I was simply going to invest in the REIT ETF.  However, since ETF's have to buy full shares, I will have a few dollars left over that will just be sitting in a money market account. (I'd like to get that money working.)   My other issue is that my next job doesn't have a 401k fund to invest into. (The owner unfortunately thinks it's a waste to invest, since people were complaining that the money was just "disappearing" when they invested. So he just wants to pay people more, and let them make the decision.  So as long as that is true, I'm ok.) So that means I'm going to have to invest in my traditional myself.

So I've got investing into a Roth by myself down, I just send in after tax money, stay under the max, and I'm good.  So for investing into a traditional by myself, I don't know the process.  But I believe the process is: that I invest money, and then Vanguard will send some tax form stating how much I invested into a tIRA, that I file, and then I get tax back on that money? Since IRA's are supposed to be pre-tax money?  Please let me know if this wrong, or what the process is.

Also, I am able to invest in both a roth and traditional in the same year, right?  I know a roth is 5,500 a year, but what's the max for a traditional? Do the maxes change when you are investing in both?

Once that is known, I figure I can invest more money, so then I can get those extra dollars left over in the MM working.

Thanks in advance!

[madage]

Others here will have much better ideas than I for tax efficiency, but I wanted to quickly chime in to say the $5,500 annual contribution is the total between both the traditional and Roth IRA's. Stated again, you can't invest more than $5,500 in 2013 between the two accounts.

You miss out on a lot of tax-advantaged savings without a 401(k).

[sherr]

So I've got investing into a Roth by myself down, I just send in after tax money, stay under the max, and I'm good.  So for investing into a traditional by myself, I don't know the process.  But I believe the process is: that I invest money, and then Vanguard will send some tax form stating how much I invested into a tIRA, that I file, and then I get tax back on that money? Since IRA's are supposed to be pre-tax money?  Please let me know if this wrong, or what the process is.

Yes, that's pretty much exactly how it works. Money you contribute to a traditional IRA / 401k is subtracted from your total income when you do your taxes, so you will end up getting a bigger refund or paying less due taxes than you would have otherwise.

Also, I am able to invest in both a roth and traditional in the same year, right?  I know a roth is 5,500 a year, but what's the max for a traditional? Do the maxes change when you are investing in both?

Yes, but as madage says $5,500 is the maximum for both combined. Whether you want to use a Roth or a Traditional IRA depends on whether you think your tax rate is going to be higher now (while you're working) or when you retire. If it's going to be higher now (which is true for most people) then it's better to use a Traditional IRA. If it's going to be higher in retirement (either because you are spending *a lot* of money in retirement or because tax rates have gone up significantly) then it's better to use a Roth. Roths also have a couple of minor perks, like the ability to withdraw contributions at any time without paying a penalty.

I had a 401K from an old job, and a Roth.  So I rolled over the 401K to an IRA when I left that job.  I am planning on investing that money into a REIT index (vanguard's).  My Roth, which has the bulk of my retirement money is in a target date fund.

My issue is that the 401k was not much, about 2300.  Which is below the minimum for the investor shares fund.  So I was simply going to invest in the REIT ETF.  However, since ETF's have to buy full shares, I will have a few dollars left over that will just be sitting in a money market account. (I'd like to get that money working.)   My other issue is that my next job doesn't have a 401k fund to invest into. (The owner unfortunately thinks it's a waste to invest, since people were complaining that the money was just "disappearing" when they invested. So he just wants to pay people more, and let them make the decision.  So as long as that is true, I'm ok.) So that means I'm going to have to invest in my traditional myself.

It sounds to me like what you really want then is a solo-401k: http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans
They're designed for small businesses. My wife has one because as an Independent Contractor she's technically a Sole Proprietorship business. Solo-401ks allow you to contribute the much larger amount of up to ($17,500 + 25% of your salary "as the company") *in addition* to the $5,500 that you can contribute to your IRAs. However you're only eligible if you're self-employed, and it doesn't sound like you will be. :(

Not having a 401k is a major setback in my opinion, and it's not something you can easily replace yourself. Of course you can always just contribute your extra money to regular taxable accounts, but you'll end up paying a lot more taxes on it that way.

[Stache In Training]

Yes, it is a major set back.  Though I think we'll still be far enough away from going up to the next tax bracket, but still not close to dropping down to the lower one, so at least I don't have to worry about getting taxed at a higher rate without the 401k.

My wife is only contributing to her 401k to the point of company matching.  So maybe I'll just make sure she starts contributing more there.

As for the solo 401K, I'll be selling cars at a toyota dealership (that's right, profiting off of the anti-mustachians), and so while it's like starting my own business, I am technically not self employed.  I'll have to read that make sure certain professions aren't eligible.  Although my wife does have an etsy shop... maybe I can get it via that, or start my own etsy, so it's in my name. 

Thanks for confirming the process.