Author Topic: Just starting off  (Read 1661 times)

chrisiscitrus

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Just starting off
« on: December 27, 2017, 08:37:45 AM »
Hi everyone,

I've been a MMM reader for many years, and following many of his principles has allowed my wife and I to save up a fair amount of money after graduating from college a couple years ago.  The problem is, we've been saving and building a nest egg but not investing beyond 401k matches due to waffling commitments and changing priorities.  In short, we're pretty good at saving (around a 35% rate) but suck at committing to investing, so we've obviously missed a pretty solid bull run.  We have now decided to try to right the ship and invest the bulk of the money we've saved and put it into an S&P 500 index fund.  The problem, as far as we can see, is that the amount that we want to invest exceeds the amount you can put into a 401k in any given year with our work plans (can you take money saved elsewhere and put it into one of those funds anyway?).  Is there a way that I could invest this money myself (hopefully opening a vanguard account) while still receiving deferred tax-benefits of a 401k, or would I have to open an account and not receive the tax-benefits? Any help would be greatly appreciated!

Frankies Girl

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Re: Just starting off
« Reply #1 on: December 27, 2017, 09:22:54 AM »
No you can't move funds from a savings account into your 401k; that's a work based account that is controlled by your employer, and you have a cap of $18K per person per year, and the money usually is deducted from your paycheck (it isn't possible to my knowledge to do otherwise). If you want to max out the contributions, you'll need to double check how much you're allowed to put in, whether your company has a match and if it needs to be done over the course of the year or can you "front load" and use some of that cash you're sitting on to live off of for the first whatever months and max out the 401k contributions. Personally IMO, it's probably easier to just calculate the percentage/dollar amount by however many paychecks you get per year and set it up to come out evenly over the course of the year.

Each of you can fund an IRA (individual retirement account) up to $5,500 a year. There are two types of IRAs: Roth or traditional. Roth is funded with after tax income, traditional is tax deferred money (you would potentially get credit for using a traditional IRA account). You'd need to figure out which one makes the most sense for your income and eventual taxable brackets to know which type of IRA is best for your situation.

So that's a total of $11K for a married couple that can be placed into a tax deferred account type per year.

If you don't have access to an HSA (health savings account, can be used as a tax deferred holding account hybrid), then you are out of tax deferred options at this point.

After that, your only choice is going to be a taxable/brokerage account. This is an after tax account that can be opened anywhere, hold anything - stocks, bonds, mutual funds, etc - but needs to be more aware of any taxable stuff generated by the types of stocks and whatnot held since it can and will be subject to tax/cap gain/dividend rules and as such should be funded with things that will be tax efficient.
https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement



I just posted the following in another thread, and I think it might be helpful for you as well since it sounds like you're still at the very early stages of figuring out how all this stuff works. I knew nothing up until a few years ago, and found this forum and then Jim Collins and Bogleheads and this is my roadmap for how I got up to speed:

I read Jim Collins' stock series and it was like night and day - I literally went from scared and ignorant to excited and confident. Check out his site or get his book (based on the site). It is absolutely one of the best, easy to understand guides I've ever read.
http://jlcollinsnh.com/stock-series/

Check out Bogleheads site, but the following are the steps I took:

1. Wrote up an investment policy statement to figure out my goals and plans. This is my blueprint for what goes where, why I do A or B if this or that happens, where I want to go in the future, and how I'm going to get there.
https://www.bogleheads.org/wiki/Investment_policy_statement

2. Figured out my asset allocation (AA). This is based off of how much risk/volatility I felt comfortable with and set up my portfolio to reflect my AA (which would also include any real estate).
https://www.bogleheads.org/wiki/Asset_allocation

3. I then took a look at what I held where, sold off everything that didn't match up with my goals in my IPS (I decided I was going to be an index investor holding only 2-4 total mutual funds across my entire portfolio, YMMV). I built a lazy portfolio and I am quite pleased with the ease and elegance of it all. https://www.bogleheads.org/wiki/How_to_build_a_lazy_portfolio
« Last Edit: December 28, 2017, 11:18:35 PM by Frankies Girl »

chrisiscitrus

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Re: Just starting off
« Reply #2 on: December 28, 2017, 06:11:41 AM »
Thank you! You gave me a lot of great info.

MustacheAndaHalf

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Re: Just starting off
« Reply #3 on: January 02, 2018, 09:21:23 AM »
Did you only miss the previous bull market, or are you missing the next one as well? 

My two points: the past is done, there are more bull markets, and your bigger mistake would be not investing rather than beating yourself up over it.  But you also need some motivation, so let me start with that.

You've picked the worst investment in the stock market: cash.  If you buy a bad stock fund with high fees and even a sales charge, you will still beat cash over time.  A bad stock investment beats cash over time.  So the big mistake is definitely doing nothing.

"Vanguard 500 Index Fund Admiral Shares (VFIAX)" is the largest mutual fund by assets.  And it's tax efficient, so you can measure the impact and it might be less than you expect.

Let's say you bought $33,300 worth of VFIAX and held it without selling.  Right now the market gives about 2% in dividends, which would be $666 in taxable dividends. :)  And the IRS, for those in the 25% bracket, applies a 15% tax rate to dividends.  So that $666 in dividends gets taxed 15%, and becomes a $100 tax bill.  In other words, in this example, you held $33,300 in the stock market and paid the IRS $100 for the year.  That's not guaranteed, but it gives you the ballpark estimate of what can happen.

As said earlier, 401(k) contributions must come from your paycheck.  You may be limited in what you can do there, but consider investing in taxable after covering all your other options (for example, your income might limit your IRA contributions).