Author Topic: Investing outside of a Roth IRA  (Read 5203 times)

MVal

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Investing outside of a Roth IRA
« on: May 29, 2015, 10:49:09 AM »
Newbie investor here.

I have my 401K at work and my Roth IRA, but is it advisable to invest in stocks outside of those retirement vehicles? I mean, if you purchase stocks just outright, are you paying some sort of taxes on your profits/dividends each year? And if you do invest outside of a retirement fund, can you get those funds back at any time without any fees or tax penalties?

For instance, if I am maxing out my Roth IRA and still have a ton of savings that I don't want just collecting dust on a low-interest savings account, what should I do with it to maximize returns but still leave it accessible for future plans such as buying a home, traveling, etc?

Frankies Girl

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Re: Investing outside of a Roth IRA
« Reply #1 on: May 29, 2015, 10:58:59 AM »
You're talking about a taxable brokerage account. Sure, lots of people do that.

If you're above the 15% taxable bracket, then you pay taxes on dividends and short/long term capital gains (cap gains only trigger if you sell off a stock/fund). If you're below that taxable bracket, then no, you don't pay anything on the dividends/cap gains as long as you hold said funds for at least a year*. And yes, you can sell or buy at any time with no restrictions/fees other than what are built into the funds themselves or what your brokerage charges for buying and selling if any (check the funds you're buying - the expense ratios and any short-term redemption fees and the like).

So if you're investing in a taxable brokerage account, over the 15% tax bracket and aren't selling off your funds all the time, the only taxes you'd owe would be on the dividends generated by your funds. As this is a taxable account, you'd want to make sure you hold the most tax efficient funds possible in there.
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

The proper order to invest according to account (buckets) if I am remembering correctly:

work-sponsored tax deferred account (401k/403b/other) - up to match (if any)
HSA if you have access to one - up to maximum ($3,350 for individuals/family coverage $6,650)
traditional IRA/Roth IRA (depends on which one works best for your situation) - up to maximum ($5,500 currently)
work-sponsored accounts - up to maximum ($18,000 currently)
taxable brokerage account


*edited to add the hold for a year part and correct order and maximums on accounts, got them reversed - gah!... thanks for the catch FrugalNacho!)
« Last Edit: May 29, 2015, 12:57:43 PM by Frankies Girl »

MVal

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Re: Investing outside of a Roth IRA
« Reply #2 on: May 29, 2015, 11:14:57 AM »
Thanks, Frankie's Girl!

What do you think are good places to start a taxable brokerage account? Is that something places like Edward Jones specialize in? I wonder if they are a wise choice, or if others are better.

rmendpara

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Re: Investing outside of a Roth IRA
« Reply #3 on: May 29, 2015, 11:23:33 AM »
Almost every major brokerage offers this type of account...

Fidelity
Schwab
Vanguard
E trade
Scottrade
Options house
Merrill/Bank of america
TD

many others...

All are in a simlar price range. Some offer free ETF trading for certain fund companies. Depending on what you want to trade, and how much you generally trade at once, it's a pretty similar cost everywhere.

frugalnacho

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Re: Investing outside of a Roth IRA
« Reply #4 on: May 29, 2015, 11:24:50 AM »
You're talking about a taxable brokerage account. Sure, lots of people do that.

If you're above the 15% taxable bracket, then you pay taxes on dividends and short/long term capital gains (cap gains only trigger if you sell off a stock/fund). If you're below that taxable bracket, then no, you don't pay anything on the dividends/cap gains. And yes, you can sell or buy at any time with no restrictions/fees other than what are built into the funds themselves or what your brokerage charges for buying and selling if any (check the funds you're buying - the expense ratios and any short-term redemption fees and the like).

So if you're investing in a taxable brokerage account, over the 15% tax bracket and aren't selling off your funds all the time, the only taxes you'd owe would be on the dividends generated by your funds. As this is a taxable account, you'd want to make sure you hold the most tax efficient funds possible in there.
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

The proper order to invest according to account (buckets) if I am remembering correctly:

work-sponsored tax deferred account (401k/403b/other) - up to match (if any)
HSA if you have access to one - up to maximum ($3,350 for individuals/family coverage $6,650)
work-sponsored accounts - up to maximum ($5,500 currently)
traditional IRA/Roth IRA (depends on which one works best for your situation) - up to maximum ($18,000)

taxable brokerage account

I think you inverted the work sponsored account and IRAs in this post.  The work sponsored account should have a max of $18k, and the IRA has a max of $5.5k.  You should max an IRA before you max the 401k.  You have a choice in where your IRA is, so you can open one at a low cost provider like vanguard.  You are stuck with your work sponsored plan though and they typically have much higher fees and much poorer selection of funds.  For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Another thing I would add is that what you say about capital gains is true only when you've held the asset for 1 year.  If you sell it before you've had it for a year it counts as short term capital gains and is taxed more harshly (at your regular tax rate).

My opinion on the best place to have a brokerage account: Vanguard.  You will get the lowest fees.  I also wouldn't bother with individual stocks, just purchase a low cost index fund and be done with it.  My preferred fund: VTSAX - this is a total stock market index fund with an ER of 0.05%. 

ingrownstudentloans

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Re: Investing outside of a Roth IRA
« Reply #5 on: May 29, 2015, 11:27:50 AM »
For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Does this hold true if you don't qualify for a traditional IRA?  If you have to go RothIRA, I think the tax advantaged account through the employer is a better route, even if the fees are a bit higher...correct me if I am wrong.

frugalnacho

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Re: Investing outside of a Roth IRA
« Reply #6 on: May 29, 2015, 11:29:38 AM »
For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Does this hold true if you don't qualify for a traditional IRA?  If you have to go RothIRA, I think the tax advantaged account through the employer is a better route, even if the fees are a bit higher...correct me if I am wrong.

No, it was very generalized advice that assumes you are eligible for a tIRA.  I probably should have added that.

ingrownstudentloans

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Re: Investing outside of a Roth IRA
« Reply #7 on: May 29, 2015, 11:32:01 AM »
No, it was very generalized advice that assumes you are eligible for a tIRA.  I probably should have added that.

No worries, we are about to FINALLY get a 401k at work (yay) with no match (boo) and I was just thinking through my own priorities list this morning.  This is probably the only reason the question even jumped out at me.

mizzourah2006

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Re: Investing outside of a Roth IRA
« Reply #8 on: May 29, 2015, 12:33:41 PM »
For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Does this hold true if you don't qualify for a traditional IRA?  If you have to go RothIRA, I think the tax advantaged account through the employer is a better route, even if the fees are a bit higher...correct me if I am wrong.

No, it was very generalized advice that assumes you are eligible for a tIRA.  I probably should have added that.

It's also generalized in fee's and investment options for 401k plans. For example, mine has index funds that track the Russell 1k for .03% expense ratios. Even the best Vanguard options are .05%. Not a huge difference, but not really a reason to go tIRA before 401k for me.

frugalnacho

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Re: Investing outside of a Roth IRA
« Reply #9 on: May 29, 2015, 01:11:19 PM »
For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Does this hold true if you don't qualify for a traditional IRA?  If you have to go RothIRA, I think the tax advantaged account through the employer is a better route, even if the fees are a bit higher...correct me if I am wrong.

No, it was very generalized advice that assumes you are eligible for a tIRA.  I probably should have added that.

It's also generalized in fee's and investment options for 401k plans. For example, mine has index funds that track the Russell 1k for .03% expense ratios. Even the best Vanguard options are .05%. Not a huge difference, but not really a reason to go tIRA before 401k for me.

And no administrative overhead?  If that's the case I would say sure, but I would be willing to bet 401k is the more expensive option for 99% of people.

forummm

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Re: Investing outside of a Roth IRA
« Reply #10 on: May 29, 2015, 01:19:55 PM »
For those reasons, after you contribute enough to the 401k to get the company match you should prioritize maxing the IRA first, and then maxing the 401k after that.

Does this hold true if you don't qualify for a traditional IRA?  If you have to go RothIRA, I think the tax advantaged account through the employer is a better route, even if the fees are a bit higher...correct me if I am wrong.

No, it was very generalized advice that assumes you are eligible for a tIRA.  I probably should have added that.

It's also generalized in fee's and investment options for 401k plans. For example, mine has index funds that track the Russell 1k for .03% expense ratios. Even the best Vanguard options are .05%. Not a huge difference, but not really a reason to go tIRA before 401k for me.

And no administrative overhead?  If that's the case I would say sure, but I would be willing to bet 401k is the more expensive option for 99% of people.

I've only heard of federal employees (TSP rates are 0.029%) and one other forum member (seemed very certain that his was 0.01% and provided documentation that seemed to bear this out) who could beat 0.05%.

mizzourah2006

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Re: Investing outside of a Roth IRA
« Reply #11 on: May 29, 2015, 02:41:48 PM »


I've only heard of federal employees (TSP rates are 0.029%) and one other forum member (seemed very certain that his was 0.01% and provided documentation that seemed to bear this out) who could beat 0.05%.

Thanks for calling me a liar, lol.

Here is a link to the same funds I have available. 

https://www.bogleheads.org/forum/viewtopic.php?t=131064

Quote
Blackrock Russell 1000 Index Trust (ZBGRIT) (.03%)

Would you like me to attach the fund fact sheet?


MVal

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Re: Investing outside of a Roth IRA
« Reply #12 on: May 29, 2015, 08:51:53 PM »
Thanks for posting the link, mizzourah2006. I'm also an '06 grad of Mizzou!