The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: cashstasherat23 on March 06, 2015, 08:33:35 AM
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So I have now been on the MMM forums for a few months now, and am starting to get a much better picture of my financials and my goals for the future. I've been paying down SL's, increasing my 401k, and living very frugally, so a good start. Today I went back and read my first post, a case study I posted, to see what my progress had been since my first foray into MMM, and noticed some information that had gone right over my head when I was first starting.
Many people on my first post had advised taking the ~$4.5K I have invested in various stocks on TDAmeritrade, and moving that over to an IRA. I am interested in doing so, but have a few questions on how to go about doing this. I have played around with a few calculators, and it seems like a traditional IRA is the way to go for me vs the ROTH, but can't quite grasp the nuances of the tax advantages, just know that the calculators indicate that for me, the trad. IRA would earn about $7K more if I retire by 35.
Also, how would I go about actually moving this money from TDA to an IRA. Would I need to cash out the stocks, and then just invest that money in an IRA, or is there a way to roll it over somehow?
The other question I have is if it truly does make sense for me to move this money to an IRA. I have stock in Apple, Ford, Alibaba, Seadrill, and a few biotech companies, and while I know that it is best to invest heavily in tax advantaged accounts, I think I am having a hard time letting go of the idea that they will "take off" and it will be a worthwhile investment. It is such a horrible thing to keep this $4.5K invested in these stocks, and just put all future money towards other tax advantaged accounts?
(Other info that may be relevant: am contributing 12% to my 401K, with an intention of maxing it out next year after paying of $21K in student loans this year)
Totally new to investing, so appreciate any advice or facepunches!
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I have stock in Apple, Ford, Alibaba, Seadrill, and a few biotech companies, and while I know that it is best to invest heavily in tax advantaged accounts, I think I am having a hard time letting go of the idea that they will "take off" and it will be a worthwhile investment. It is such a horrible thing to keep this $4.5K invested in these stocks, and just put all future money towards other tax advantaged accounts?
No, it is not such a horrible thing to have $4.5k in individual stocks. It's an unnecessary risk, but losing money on $4.5k is unlikely to have a significant effect on your lifetime goals.
What IS a horrible thing to have, however, is an emotional attachment to these stocks, and the mentality that they may "take off" and magically reward you with riches. They are just as likely to do the opposite relative to the market. Hanging onto the idea that you can outsmart the market will likely have a significant effect on your lifetime goals, because it can infect all your investment decisions going forward. In other words, those stocks aren't a problem, but they're a symptom of a problem.
So it's best to convince yourself that, as smart as you are, you aren't smarter than the market. Once you make that mental shift, then you likely won't be interested in keeping your $4.5k in stocks anyway.
In terms of funding an IRA, the money simply comes from your bank account (though you must have had an equivalent amount of earned income for it to be legal). So you would need to liquidate your TDA account first. I don't really know enough to say whether an IRA would be the best place for that money to go (vs. student loans), but it's probably a reasonable choice.
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In terms of your decision between a Roth and Traditional IRA, I think you should put the money in a Roth IRA. This is based on how I am understanding your post which is that you already have the $4,500 and will put exactly that amount into the retirement account regardless of whether it is a Roth or Traditional account.
My reasoning is that $4,500 will grow to be the same amount regardless of the account type. Let's be generous and say it grows to be $100,000. If you put it in the Roth account you can spend the full $100,000 in retirement. If it is a Traditional account then you will pay ordinary income taxes on it when you withdraw the money.
However, if I misunderstood your post and the amount of the contribution is going to be dependent on the tax treatment then I suppose the relevant question becomes whether or not you expect your marginal tax rate upon withdrawal will be higher or lower than your current marginal tax rate.
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Also, how would I go about actually moving this money from TDA to an IRA. Would I need to cash out the stocks, and then just invest that money in an IRA, or is there a way to roll it over somehow?
I'm not a tax attorney, nor do I play one on TV. Contact the IRA administrator you're choosing to use and ask them for a definitive answer.
However, I believe the answer is no. Contributions to IRAs must be done with money. You can only roll in assets if they're coming from another tax-deferred account.
So you have to cash out, pay the capital gains, then buy them again if you want the same holdings in the IRA. Or continue to hold them in the taxable account and get your funds elsewhere.
$4,500 total invested into six companies isn't a very large position in each company. It's less than $1,000 in any one company, right? So let's say they take off. Do you have a big enough position that doubling your money would make any big difference?
Look at their history -- Is Apple, or Ford, or SeaDrill likely to triple their market capitalization at this point? Apple in particular -- it's a great company, everybody knows that. Um, if everybody knows it, then where are the new buyers going to come from to bid it up? The people who don't know it and have decided to buy in? Do you know anybody who hasn't heard of Apple?
Great companies don't make great stocks. If you go back to 1997 and look at Apple then. Apple almost went bankrupt. Microsoft was giving them money so they wouldn't go out of business (Microsoft needed a competitor to avoid being declared a monopoly). Steve Jobs agreed to return to Apple, but wouldn't sign any long-term commitments (he wanted to work for $1/yr). They were a lousy company then, and nobody wanted to touch them. They became a great stock as Jobs turned them back into a great company.
By the way, Apple is the single biggest company in the US by market capitalization. Because I own the US stock market index, I own a big position in Apple (whether I want it or not.)
It's hard to pick individual stock winners. I don't know how to do it. But I can at least get average returns.
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I just checked and you have to make cash contributions to an IRA. The only way you can contribute stock is if it is a rollover from one IRA to another. Once you deposit cash into an IRA you can buy stock with it.
Given the fact that you mention retiring at 35 I think you should keep the AMTD account. With IRA's and 401k you are going to pay penalties if you withdraw funds before 59 1/2. So, you need 24 1/2 years of retirement money in an account you aren't going to pay penalties on.
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With IRA's and 401k you are going to pay penalties if you withdraw funds before 59 1/2. So, you need 24 1/2 years of retirement money in an account you aren't going to pay penalties on.
No.
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
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http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
Thanks for the link. I was going to update about Roth's having penalty free withdrawals of cost basis after 5 years but you beat me to it. For cashstasherat23, if she wants to do this then she definitely needs to use Roth vs standard IRA.
I didn't know about Section 72(t); from article it looks like you could withdraw 2.9% of your 401k annually up to age 59 1/2 using 72(t). My concern would be that you are locking yourself into this withdrawal so you are reducing your flexibility a little.
The simplest method is #1 which is the one MMM is using; use 401k after 59 1/2 and use non tax-advantaged/deferred accounts and other assets before.
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For TD Ameritrade account, they have many commission free ETF's including 32 ETF's from Vanguard. However, it looks like you have to enroll to eliminate the commission; there's no cost to enroll. There is a $19.99 short term trading free if you sell within 30 days but that shouldn't be an issue. You can read more about it here: http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp (http://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp) ETF's and funds will allow you to eliminate the alpha risk of individual stocks (the risk of any one individual stock crashing.) With individual stocks, most people advise owning at least 7 to 10 uncorrelated stocks (i.e. different industries, etc.) to reduce portfolio alpha. I have a TD Ameritrade account for individual stock investments; they are a great broker and are rated very highly.
If you want to invest exclusively in Vanguard funds and ETFs you may as well open a Vanguard account. I have my Roth IRA's there. It looks like the ETF's have similar expense ratios to the Vanguard Admiral class funds which require a $10K minimum investment. Vanguard Investor class funds have a slightly higher expense ratio but a lower $3K minimum investment. So, it looks like ETF's give you the best flexibility, low fees without a $10K minimum investment.
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Thanks for the link. I was going to update about Roth's having penalty free withdrawals of cost basis after 5 years but you beat me to it. For cashstasherat23, if she wants to do this then she definitely needs to use Roth vs standard IRA.
You're getting closer, but you still have some more reading to do.
Roths allow penalty-free withdrawals of contributions after 0 years, and penalty-free withdrawals of conversions after 5 years.
The simplest method is #1 which is the one MMM is using; use 401k after 59 1/2 and use non tax-advantaged/deferred accounts and other assets before.
That may be the simplest, but probably not the best. The vast majority of people on this forum expect to do #2, variously known as the Roth Conversion Pipeline, the Roth Conversion Ladder, etc. Read the following for a more-detailed version of MMM's take: http://www.madfientist.com/traditional-ira-vs-roth-ira/
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You're right, I forgot about that.
With Scenario #2, just hope that the law is the same when you get to 59 1/2. There is already talk of eliminating back door conversions, eliminating tax free withdrawal status on Roths, etc.
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Thanks so much for everyone's advice! It is a lot to take it, but I am reading everyone's information thoroughly.
As for the hope of being smarter than the market, I know that it is impossible, and am convinced that it is not the best course of action for me, hence the wanting to get the money out of TDAm. I have not put another penny in to the stocks since finding MMM, and any resistance I had towards selling them clicked when someone pointed out the small holdings I have in the stocks anyway...they are not going to make me wealthy. Even if they all tripled, it would still be a paltry sum in the scheme of things. RE the stocks, I am fighting heavy resistance from my father, who has drilled into my head for many years that this is the best way to invest, but coming from a man who is heavily in debt, I am realizing that he is not the best person to be taking financial advice from. I am worried that he will be upset if I sell the stocks, but I am living on my own now and fully independent, and just need to be able to tell him in a way that will not upset him.
The one thing that someone mentioned that didn't occur to me (doh!) is to take that $4.5k and use it towards paying down more of my student loans. The loans have a rate of 6.5%, so that is probably as good as any return I could hope to get on an IRA, no?
Eventually I do plan to invest in Vanguard funds, but right now, I think that the priority for me is student loans-->401K-->IRA-->Vanguard.
Thanks again for everyone's input-I have never had strong financial knowledge, so appreciate the help from my fellow mustachians as I figure this all out!
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You can tell your dad that you are taking his advice. By owning index funds, ETFs, etc. you are owning stocks. It's just that you are owning a share of many more companies than you could by buying stock in individual companies. :-)
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You can tell your dad that you are taking his advice. By owning index funds, ETFs, etc. you are owning stocks. It's just that you are owning a share of many more companies than you could by buying stock in individual companies. :-)
Haha that is true!