Author Topic: Not fully understanding IRA's-Please help!  (Read 4170 times)

photomom324

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Not fully understanding IRA's-Please help!
« on: February 01, 2015, 09:58:09 AM »
My husband and I are savers and since recently discovery MMM we want to get into investing. I've been reading through all of the blog posts, recommended books and the forum and am hoping to understand some things that still aren't quite clicking.

My husband makes 300,000/year. We max out the 401k through his work and we recently paid off our mortgage. We want to get the rest of our savings into investing, but the taxable/tax sheltered thing still has me a bit confused. From what I have read we do not qualify for a Roth IRA but could have one with the backdoor thing. So we can open a traditional IRA, correct? And then transfer it to a Roth IRA? From what I understand we can only contribute 5,500 per year into an IRA. Is that correct? We have about 11,000 extra each month that we would like to start working for us instead of sitting in a savings account and I'm just not 100% sure what our options are.

I appreciate any insight and advice! Thank you!

Zaga

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Re: Not fully understanding IRA's-Please help!
« Reply #1 on: February 01, 2015, 11:04:50 AM »
You have it essentially right, you can put $5,500 each into a traditional IRA, then roll that to a Roth IRA the next day. 

That will tax shelter 1 month of your surplus.

He's also maxing out his 401-K.  Did you check through his work to see if he has the option of putting even more than the max in?  Some workplaces you can put in more after tax.  It will be like a non-deductible IRA.  The good thing about this is once a year (for some employers) you can roll that money over into a Roth.  That will shelter some more of your money.

Do you have access to an HSA?  Some money can be sheltered there.

Do you have access to a 401-K or something similar?  If so put as much as you can in there.

After you've done all of that then you'll just be left with investing without the tax shelter in a taxable account.  Pile it in there, you're in a great place to do that!

photomom324

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Re: Not fully understanding IRA's-Please help!
« Reply #2 on: February 01, 2015, 11:38:51 AM »
You have it essentially right, you can put $5,500 each into a traditional IRA, then roll that to a Roth IRA the next day. 

That will tax shelter 1 month of your surplus.

He's also maxing out his 401-K.  Did you check through his work to see if he has the option of putting even more than the max in?  Some workplaces you can put in more after tax.  It will be like a non-deductible IRA.  The good thing about this is once a year (for some employers) you can roll that money over into a Roth.  That will shelter some more of your money.

Do you have access to an HSA?  Some money can be sheltered there.

Do you have access to a 401-K or something similar?  If so put as much as you can in there.

After you've done all of that then you'll just be left with investing without the tax shelter in a taxable account.  Pile it in there, you're in a great place to do that!

Thank you!

No I do not have a 401k..I stay at home with our kids so I'm unemployed. I thought I read something you can't contribute more than your income so since I do not have my own income can 5500 still be contributed for me and can they be in the same IRA?

I'll have him check about the option of contributing more than the max. I know each year we get a check from the 401k because the amount we contribute is higher than the average of all contributing employees or something? I'm not sure on the details..up until just recently we've just been blindly following along. His employer uses John Hancock for 401k which it seems like their fees are a lot higher than Vanguard..does that make sense to contribute extra if we have that option?

Also is it smart or even possible to move the money in his 401k to a vanguard account? I keep seeing on Vanguard's website about rolling over your 401k and I didn't know if that was possible if you are still with your employer.

I do think we have the option of a HSA so I'll have him ask about that as well. Does an HSA earn interest at all?

Thanks again! I really appreciate it!

Psychstache

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Re: Not fully understanding IRA's-Please help!
« Reply #3 on: February 01, 2015, 11:43:45 AM »
You have it essentially right, you can put $5,500 each into a traditional IRA, then roll that to a Roth IRA the next day. 

That will tax shelter 1 month of your surplus.

He's also maxing out his 401-K.  Did you check through his work to see if he has the option of putting even more than the max in?  Some workplaces you can put in more after tax.  It will be like a non-deductible IRA.  The good thing about this is once a year (for some employers) you can roll that money over into a Roth.  That will shelter some more of your money.

Do you have access to an HSA?  Some money can be sheltered there.

Do you have access to a 401-K or something similar?  If so put as much as you can in there.

After you've done all of that then you'll just be left with investing without the tax shelter in a taxable account.  Pile it in there, you're in a great place to do that!

Thank you!

No I do not have a 401k..I stay at home with our kids so I'm unemployed. I thought I read something you can't contribute more than your income so since I do not have my own income can 5500 still be contributed for me and can they be in the same IRA?

I'll have him check about the option of contributing more than the max. I know each year we get a check from the 401k because the amount we contribute is higher than the average of all contributing employees or something? I'm not sure on the details..up until just recently we've just been blindly following along. His employer uses John Hancock for 401k which it seems like their fees are a lot higher than Vanguard..does that make sense to contribute extra if we have that option?

Also is it smart or even possible to move the money in his 401k to a vanguard account? I keep seeing on Vanguard's website about rolling over your 401k and I didn't know if that was possible if you are still with your employer.

I do think we have the option of a HSA so I'll have him ask about that as well. Does an HSA earn interest at all?

Thanks again! I really appreciate it!

First off, contrats on killing it income wise and not inflating lifestyle. Investing 5 figures a month is badass.

Second, assuming you are married filing jointly, his income is your income, therefore y'all can max out an IRA for you.

On getting money back from the 401k, there is some rule about highly compensated employees and having contributions limited if not enough lower compensated employees contribute. I don't have this problem, so hopefully someone else who knows more can speak to it.

No, you can't roll over a 401k until you sever employment.

HSAs can be in savings accounts or investment accounts, it depends on the custodian. My wife and I use HSA bank and HSA administrators and invest most of our HSA money in Vanguard funds.

Zaga

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Re: Not fully understanding IRA's-Please help!
« Reply #4 on: February 01, 2015, 12:50:56 PM »
You have it essentially right, you can put $5,500 each into a traditional IRA, then roll that to a Roth IRA the next day. 

That will tax shelter 1 month of your surplus.

He's also maxing out his 401-K.  Did you check through his work to see if he has the option of putting even more than the max in?  Some workplaces you can put in more after tax.  It will be like a non-deductible IRA.  The good thing about this is once a year (for some employers) you can roll that money over into a Roth.  That will shelter some more of your money.

Do you have access to an HSA?  Some money can be sheltered there.

Do you have access to a 401-K or something similar?  If so put as much as you can in there.

After you've done all of that then you'll just be left with investing without the tax shelter in a taxable account.  Pile it in there, you're in a great place to do that!

Thank you!

No I do not have a 401k..I stay at home with our kids so I'm unemployed. I thought I read something you can't contribute more than your income so since I do not have my own income can 5500 still be contributed for me and can they be in the same IRA?

I'll have him check about the option of contributing more than the max. I know each year we get a check from the 401k because the amount we contribute is higher than the average of all contributing employees or something? I'm not sure on the details..up until just recently we've just been blindly following along. His employer uses John Hancock for 401k which it seems like their fees are a lot higher than Vanguard..does that make sense to contribute extra if we have that option?

Also is it smart or even possible to move the money in his 401k to a vanguard account? I keep seeing on Vanguard's website about rolling over your 401k and I didn't know if that was possible if you are still with your employer.

I do think we have the option of a HSA so I'll have him ask about that as well. Does an HSA earn interest at all?

Thanks again! I really appreciate it!
To elaborate further, if one spouse has income, both can contribute to an IRA.  The I in IRA stands for Individual, so you would each have a separate one.  If you haven't been putting money in for both of you, you can still contribute for 2014 anytime before April 15th, so get on that asap!

Your DH is a highly compensated employee (HCE), which means that he is limited by some formula based on what all of the lower paid employees contribute to the 401-K. 

Sorry to hear about the high fees in his 401-K.  My DH's 401-K is also a high fee plan, but we contribute anyways because eventually when he switches jobs we'll be able to roll it over to a low fee IRA.

Since they've been sending his excess contributions back, then they probably don't have the after tax option.  You'll just have to do the best you can with taxable investing.  (Of course you should ask HR anyways, and while you're at it you should ask them to improve the plan to one with lower fees!)

An HSA is generally an interest bearing account.  However all of the ones I have seen also have the option of investing the money.  I did not because the money was there for medical expenses, but with your income I'd do my best to invest all of the HSA money in as low a fee fund as possible and pay for medical expenses out of pocket.  **Bonus - keep all of your receipts and in future years you can withdraw money from the HSA tax free for all of your medical expenses.  For example, say in 2015 you have a kid with a broken leg and it costs you $500 out of pocket and you pay from your checking account.  You are allowed to take that $500 out of the HSA at *any* time in the future, tax free!  So you retire in 2030, as long as you have the receipt, you can take out that $500 then.

MDM

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Re: Not fully understanding IRA's-Please help!
« Reply #5 on: February 01, 2015, 01:01:32 PM »
We have about 11,000 extra each month that we would like to start working for us instead of sitting in a savings account

Do you have any money (outside the 401k) invested in stocks, real estate, bonds, ...?

photomom324

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Re: Not fully understanding IRA's-Please help!
« Reply #6 on: February 02, 2015, 06:40:45 AM »
We have about 11,000 extra each month that we would like to start working for us instead of sitting in a savings account

Do you have any money (outside the 401k) invested in stocks, real estate, bonds, ...?

No we do not yet..we have just been putting everything into a savings account. :/ We opened an account with Vanguard but I haven't done anything with it yet. We are already taxed a lot and on top of my husband's salary we also get an average of 10,000 each year in 1099's that haven't had any taxes withheld so I have been nervous about screwing us even more in the tax department.

photomom324

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Re: Not fully understanding IRA's-Please help!
« Reply #7 on: February 02, 2015, 06:42:38 AM »
You have it essentially right, you can put $5,500 each into a traditional IRA, then roll that to a Roth IRA the next day. 

That will tax shelter 1 month of your surplus.

He's also maxing out his 401-K.  Did you check through his work to see if he has the option of putting even more than the max in?  Some workplaces you can put in more after tax.  It will be like a non-deductible IRA.  The good thing about this is once a year (for some employers) you can roll that money over into a Roth.  That will shelter some more of your money.

Do you have access to an HSA?  Some money can be sheltered there.

Do you have access to a 401-K or something similar?  If so put as much as you can in there.

After you've done all of that then you'll just be left with investing without the tax shelter in a taxable account.  Pile it in there, you're in a great place to do that!

Thank you!

No I do not have a 401k..I stay at home with our kids so I'm unemployed. I thought I read something you can't contribute more than your income so since I do not have my own income can 5500 still be contributed for me and can they be in the same IRA?

I'll have him check about the option of contributing more than the max. I know each year we get a check from the 401k because the amount we contribute is higher than the average of all contributing employees or something? I'm not sure on the details..up until just recently we've just been blindly following along. His employer uses John Hancock for 401k which it seems like their fees are a lot higher than Vanguard..does that make sense to contribute extra if we have that option?

Also is it smart or even possible to move the money in his 401k to a vanguard account? I keep seeing on Vanguard's website about rolling over your 401k and I didn't know if that was possible if you are still with your employer.

I do think we have the option of a HSA so I'll have him ask about that as well. Does an HSA earn interest at all?

Thanks again! I really appreciate it!

First off, contrats on killing it income wise and not inflating lifestyle. Investing 5 figures a month is badass.

Second, assuming you are married filing jointly, his income is your income, therefore y'all can max out an IRA for you.

On getting money back from the 401k, there is some rule about highly compensated employees and having contributions limited if not enough lower compensated employees contribute. I don't have this problem, so hopefully someone else who knows more can speak to it.

No, you can't roll over a 401k until you sever employment.

HSAs can be in savings accounts or investment accounts, it depends on the custodian. My wife and I use HSA bank and HSA administrators and invest most of our HSA money in Vanguard funds.

Thank you! Do HSA's need to be opened through his employer or is this something that can be done on our own?

triumph07

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Re: Not fully understanding IRA's-Please help!
« Reply #8 on: February 02, 2015, 07:32:29 AM »
First time poster, but long time lurker.  We were looking into opening an IRA this year for both my wife and I, but realized we were over the 118,000 income limit.  You won't be able to open one either with that high of an income.  If an HSA is available because of your high deduct-able health plan then for sure take advantage of that.

Nothlit

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Re: Not fully understanding IRA's-Please help!
« Reply #9 on: February 02, 2015, 07:36:19 AM »
To contribute to an HSA, you must be covered by a high-deductible health plan (HDHP). Most employers that offer an HDHP also provide an HSA (and some employers even make contributions to the HSA). However, you are not limited to using your employer's HSA. You are free to open one up with any custodian, as long as you are covered by an HDHP. Most people who do this still make their original contributions to their employer's HSA via payroll deduction, as this allows them to bypass Social Security and Medicare taxes on those amounts. Then once a year or so, it's easy enough to do a rollover (requires some tax paperwork) or trustee-to-trustee transfer (no tax paperwork) from the employer's HSA to whatever other one is preferred.

photomom324

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Re: Not fully understanding IRA's-Please help!
« Reply #10 on: February 02, 2015, 08:15:25 AM »
First time poster, but long time lurker.  We were looking into opening an IRA this year for both my wife and I, but realized we were over the 118,000 income limit.  You won't be able to open one either with that high of an income.  If an HSA is available because of your high deduct-able health plan then for sure take advantage of that.

From what I have read on Vanguard's site, I am pretty sure there is no income limit to a traditional IRA just the Roth IRA. But then there is the backdoor thing so the next day you can move your contribution to a Roth IRA. I have been trying to find what the income limit is for being able to claim Traditional IRA on taxes but from what I think I'm understanding because we have my husband's 401k and our income that we wouldn't benefit from a Traditional IRA anyway? So the backdoor to Roth IRA would be our best option.

Wow guys I think it is finally starting to make sense! Whew! Thank you so much!

Ok so I had transferred money to Vanguard but I haven't done anything with it. Does anyone know if I can use those funds towards an IRA? From what I can tell it seems my only option is transferring more from a bank account?

And with HSA you can only take money out of it if you have a medical expense receipt; is this correct? So we wouldn't want to keep too much in there, would we?

Zaga

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Re: Not fully understanding IRA's-Please help!
« Reply #11 on: February 02, 2015, 08:31:35 AM »
First time poster, but long time lurker.  We were looking into opening an IRA this year for both my wife and I, but realized we were over the 118,000 income limit.  You won't be able to open one either with that high of an income.  If an HSA is available because of your high deduct-able health plan then for sure take advantage of that.
Not true, you can contribute at any income level.  You just can't take the deduction at higher incomes.  However, as mentioned previously, you can still roll the contribution over to a Roth IRA and so get a Roth contribution in at any income level.

Nothlit

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Re: Not fully understanding IRA's-Please help!
« Reply #12 on: February 02, 2015, 08:33:18 AM »
For withdrawals from an HSA, it basically works like this:
  • Under age 65:
    • Qualified medical expense: no tax, no penalty
    • Not a qualified medical expense: income tax + 20% penalty
  • Over age 65:
    • Qualified medical expense: no tax, no penalty
    • Not a qualified medical expense: income tax only (no penalty)

So if you wait until age 65 it basically becomes like a Traditional IRA. With as much income (and little spending) as you have, it might make sense to fully fund the HSA even if you don't plan to make any withdrawals from it until old age. That's great tax-deferred growth!

As for the funds you've already transferred to Vanguard, I presume those are in a taxable account? I know it is possible to sell from a taxable account and use the funds to buy in an IRA. You may just need to start walking through the steps to open the IRA and it will ask you where the money to fund the IRA should come from -- at that point I suspect you will be able to specify either your bank account or liquidation of funds in your taxable account. You can always just call Vanguard and ask -- this is the sort of question I'm sure they're happy to answer for their customers.
« Last Edit: February 02, 2015, 08:36:11 AM by Nothlit »

Zaga

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Re: Not fully understanding IRA's-Please help!
« Reply #13 on: February 02, 2015, 08:39:09 AM »
First time poster, but long time lurker.  We were looking into opening an IRA this year for both my wife and I, but realized we were over the 118,000 income limit.  You won't be able to open one either with that high of an income.  If an HSA is available because of your high deduct-able health plan then for sure take advantage of that.

From what I have read on Vanguard's site, I am pretty sure there is no income limit to a traditional IRA just the Roth IRA. But then there is the backdoor thing so the next day you can move your contribution to a Roth IRA. I have been trying to find what the income limit is for being able to claim Traditional IRA on taxes but from what I think I'm understanding because we have my husband's 401k and our income that we wouldn't benefit from a Traditional IRA anyway? So the backdoor to Roth IRA would be our best option.

Wow guys I think it is finally starting to make sense! Whew! Thank you so much!

Ok so I had transferred money to Vanguard but I haven't done anything with it. Does anyone know if I can use those funds towards an IRA? From what I can tell it seems my only option is transferring more from a bank account?

And with HSA you can only take money out of it if you have a medical expense receipt; is this correct? So we wouldn't want to keep too much in there, would we?
1)  Call Vanguard, they can answer any basic questions about how to contribute to and invest various accounts.  Don't forget to invest your funds, you're losing to inflation!

2)  An HSA is only good for medical expenses, but there is an exception.  After you are aged 65 you can treat any remaining money in the HSA as an IRA and use it for anything after paying regular income taxes on withdrawals, just like a traditional IRA or a 401-K.  Here are a few articles with more specific and clearly written rules about this and how to take advantage of the rules. 

http://www.bankrate.com/finance/insurance/health-savings-account-rules-and-regulations.aspx

http://www.madfientist.com/hsa/

snshijuptr

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Re: Not fully understanding IRA's-Please help!
« Reply #14 on: February 02, 2015, 08:49:13 AM »
At $300,000 your biggest hurdle is taxes, not investment return. Step 1 for your situation is reduce tax burden and invest in index funds. Find a target date fund and mimic their asset allocation (don't buy one of those funds, just buy the funds it holds). Step 2 etc might be learning to invest and increase gain or be ultra frugal, but that can wait.

I highly recommend the MadFIentist for his breakdown on tax reduction:
http://www.madfientist.com/retire-even-earlier/
He has a lot of other great articles and is a big proponent/expert of tax reduction.

There is also this classic article from Root of Good:
http://rootofgood.com/make-six-figure-income-pay-no-tax/

Warning on HSA's: They only work wonders if you have 1) A high deductible health plan, which may not make sense if you have small children, and 2) you can invest your HSA. Otherwise, an FSA that covers your annual medical expenses should be used to at least reduce your burden by a little.

triumph07

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Re: Not fully understanding IRA's-Please help!
« Reply #15 on: February 02, 2015, 08:51:54 AM »
First time poster, but long time lurker.  We were looking into opening an IRA this year for both my wife and I, but realized we were over the 118,000 income limit.  You won't be able to open one either with that high of an income.  If an HSA is available because of your high deduct-able health plan then for sure take advantage of that.
Not true, you can contribute at any income level.  You just can't take the deduction at higher incomes.  However, as mentioned previously, you can still roll the contribution over to a Roth IRA and so get a Roth contribution in at any income level.

Yeah, sorry, you are correct.  I was thinking about the deductibility of the IRA, not whether you could have one or not.  We were looking to open one this year to get some tax relief and then I found the limits... kinda frustrating.

photomom324

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Re: Not fully understanding IRA's-Please help!
« Reply #16 on: February 02, 2015, 09:30:54 AM »
At $300,000 your biggest hurdle is taxes, not investment return. Step 1 for your situation is reduce tax burden and invest in index funds. Find a target date fund and mimic their asset allocation (don't buy one of those funds, just buy the funds it holds). Step 2 etc might be learning to invest and increase gain or be ultra frugal, but that can wait.

I highly recommend the MadFIentist for his breakdown on tax reduction:
http://www.madfientist.com/retire-even-earlier/
He has a lot of other great articles and is a big proponent/expert of tax reduction.

There is also this classic article from Root of Good:
http://rootofgood.com/make-six-figure-income-pay-no-tax/

Warning on HSA's: They only work wonders if you have 1) A high deductible health plan, which may not make sense if you have small children, and 2) you can invest your HSA. Otherwise, an FSA that covers your annual medical expenses should be used to at least reduce your burden by a little.

Thank you so much! You have helped so much!  Our main goal is for my husband to quit his job and we move to a different state. Along with that would be a major pay cut. He's not a high level executive or anything..just really good at sales. We want to be able to do all of this without feeling financially strapped. Right now we are saying our goal is 3 years but will be more than thrilled if it is able to happen sooner.

Yes, the money in the Vanguard account is in a taxable account. From what I understand, in our taxable account we should invest in VTSAX and VTIAX? The Vanguard target date funds also show bonds included in them. I am confused about where our bonds should be...Bogleheads says in a taxable account they could help with taxes if you are in a high tax bracket but then what about when we aren't in a high taxed bracket? Maybe I should just worry about that when the time comes? Do we have the same asset allocation in both the taxable and IRA accounts?


Zaga

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Re: Not fully understanding IRA's-Please help!
« Reply #17 on: February 02, 2015, 10:26:34 AM »
Your asset allocation is across all accounts, it doesn't have to be the same in each place.

So you can put all stock funds like the ones you listed in taxable, then fill your tax advantaged accounts with all or mostly bonds to round out your asset allocation.

Have you picked an asset allocation that works for you?  Do some reading on the subject if you haven't already.  I like the Boglehead books personally.

seattlecyclone

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Re: Not fully understanding IRA's-Please help!
« Reply #18 on: February 02, 2015, 12:32:14 PM »
We have about 11,000 extra each month that we would like to start working for us instead of sitting in a savings account

Do you have any money (outside the 401k) invested in stocks, real estate, bonds, ...?

No we do not yet..we have just been putting everything into a savings account. :/ We opened an account with Vanguard but I haven't done anything with it yet. We are already taxed a lot and on top of my husband's salary we also get an average of 10,000 each year in 1099's that haven't had any taxes withheld so I have been nervous about screwing us even more in the tax department.

This is common logic, but wrong. Do not keep your money in a terrible place for long-term growth just so that you don't have to pay more taxes. Yes, your tax bill will go up when you have taxable dividends and capital gains, but your net worth will go up even more!

I applaud you for looking into all available tax-advantaged investment vehicles, but after you've maxed those all out the best thing to do is invest through a taxable brokerage account.