Author Topic: Total Newb - Investment Help and Explanation please  (Read 3839 times)

LadyM

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Total Newb - Investment Help and Explanation please
« on: October 08, 2012, 09:44:52 AM »
Investment help!!

We have several options available, and Iíd like to get some input/advice on what might be the best way to go in terms of socking away cash.

Right now, we donít have much, but we do have $3500 in savings, soon to be growing quickly (will be able to put away between $1K and $2K every month).  Basically over the course of the next four years I want to put away enough money to get us to about $80-90K for a down-payment on a house, and at the same time, this account would also serve as an emergency fund.  I was thinking of putting this money into an individual investment account (subject to capital gains taxes, I know), so that I would have quick access to it in case of a disaster, WITHOUT PENALTIES.  Current savings is only earning 1% with ING, but Iíve just thrown a couple hundred bucks into a Betterment.com investment account to accomplish this goal.

Additionally, we have WAY TOO MANY options for retirement accounts through both my job and my husbandís, and itís kind of making my head hurtÖ.

SIMPLE IRA Ė Offered by my job, includes 100% employer-matching up to 3%.  $11,500 annual limit

Traditional 403(b) Ė Offered by my husbandís jobÖ.no matching, BUT this plan would allow you to take a low-interest (prime+1%) loan from your plan, should it be needed for some reason.  $16,500 annual limit

457(b) Ė Offered by my husbandís work (heís a schoolteacher) again, no matching, but it allows you to take distributions penalty-free prior to age 59.5 provided you terminate your employment.  $16,500 annual limit


I also opened a ROTH IRA through Sharebuilder, but Iím still fuzzy on the whole use-it-like-a-savings-account thing that has been lauded by many in the forum.  People claim that you can withdraw your contributions, but not the gains, tax-free, and this is how it acts as an emergency fund.  At least, thatís my interpretation of what people have been sayingÖperhaps Iím understanding it wrong.  I think I am, because this is what the IRS website says:

Withdrawals of contributions by due date.   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

It sounds as if you can withdraw contributions within the same year without a problem, but not anytime for any amount of contributed cash.  If Iím wrong, someone please explain it to me.  I opened my Sharebuilder ROTH account with $200, but Iíve invested it in nothing because I donít know what to do.  Heck, I donít even know if I want to KEEP it as an ďemergency fundĒ.  Please enlighten me.

Iím a total newb, so bear with my questions:  Is one account better than the other?  Is it beneficial to open and contribute to ALL of the above?  Or is it better to put everything in one big account and watch the compounding go gangbusters?  Do you think the liquidity of the individual investment account is a good idea?  Will the returns out-pace the taxes I will have to pay on it?

JustÖ.help.  Iím 34, so is my husband, and right now at current projections, we could possibly retire as early as late 40s, early 50sÖ..or at least scale back from full-time to part-time work.  So having money completely tied up in an account thatís not accessible without penalty before age 59.5 probably isnít the way to go, at least not 100%. 

COguy

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Re: Total Newb - Investment Help and Explanation please
« Reply #1 on: October 08, 2012, 10:31:51 AM »
You have a ton of questions and seem to have a spinning head about all of this.  I was once that way.  I ended up opening too many accounts and always felt the need to "do something." 

If I could do it over here is what I would do:

1) contribute to tax-deferred accounts to get the match.  Pick a target date fund or something for now and you should be fine.  Get this on autopilot and forget about it.  Contribute a bit more if you can.  Don't look at the balances, just keep contributing.  This is your old man/woman money.  But, you need to at least put something in here.

2) If you really want a house down payment, I would make that the next priority.  So, open an account at some online bank and put money in here.  Don't worry that you are only getting 1% for the money until then.  If it is only 4 years it is not the biggest deal.  Once you have learned more, you can change your strategy or at least come back and ask the board again with more specific questions.

In the meantime, read some investing books.  I like The Bogleheads Guide to Investing, The Four Pillars of Investing, and A Random Walk Down Wall Street.  You should be able to get all of them at the local library. 

The reading is key.  I think it is best if one understands the basics of investing before they put their money up.  If you rush to get into these accounts you don't understand, you can do more harm than good.  6 months of compounding at 1% is not bad at all.  Heck the stock market could crash in the meantime and you could walk into a fire sale on stocks and end up better off.

I hope that helps





LadyM

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Re: Total Newb - Investment Help and Explanation please
« Reply #2 on: October 08, 2012, 11:35:53 AM »
You have a ton of questions and seem to have a spinning head about all of this.  I was once that way.  I ended up opening too many accounts and always felt the need to "do something." 

YES, EXACTLY!!  I feel like I'm a bit of a bump on a log, but it's good to hear that one can over-do it....most likely because I haven't done any reading on the subject.


If I could do it over here is what I would do:

1) contribute to tax-deferred accounts to get the match.  Pick a target date fund or something for now and you should be fine.  Get this on autopilot and forget about it.  Contribute a bit more if you can.  Don't look at the balances, just keep contributing.  This is your old man/woman money.  But, you need to at least put something in here.

Will do, and that's what I suspected.  I'll open the account with my employer to get the match, but what about my husband's employer?  I don't believe there's a match invovled, but should we start socking some pre-tax cash away in his accounts as well?  Or just in my account for the moment?

2) If you really want a house down payment, I would make that the next priority.  So, open an account at some online bank and put money in here.  Don't worry that you are only getting 1% for the money until then.  If it is only 4 years it is not the biggest deal.  Once you have learned more, you can change your strategy or at least come back and ask the board again with more specific questions.

Also helpful....thank you.  This simplifies things for my brain.

In the meantime, read some investing books.  I like The Bogleheads Guide to Investing, The Four Pillars of Investing, and A Random Walk Down Wall Street.  You should be able to get all of them at the local library. 

The reading is key.  I think it is best if one understands the basics of investing before they put their money up.  If you rush to get into these accounts you don't understand, you can do more harm than good.  6 months of compounding at 1% is not bad at all.  Heck the stock market could crash in the meantime and you could walk into a fire sale on stocks and end up better off.

I hope that helps

Awesome, this does help.  Then I will focus my clueless-need-to-invest energies towards learning-to-invest reading.  I'll definitely look into the titles you mentioned. Thanks so much, especially for the "if I could do it over again" sentiment...that really means a lot.

arebelspy

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Re: Total Newb - Investment Help and Explanation please
« Reply #3 on: October 08, 2012, 12:14:34 PM »
IMO: Contribute the minimum you have to to get the max matching benefit.  Max out as much of the Roth as is allowed based on other factors (can only contribute 5k total to normal IRAs, and have to split that between Traditional IRA and Roth if you do both, not sure how that applies to simple).  Max out 457.  The 457, letting you take money out penalty free after terminating employment makes it much better than the 403.

Yes, the Roth you can withdraw any principal tax and penalty free.
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arebelspy

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Re: Total Newb - Investment Help and Explanation please
« Reply #4 on: October 08, 2012, 12:15:51 PM »
Also as far as basic investing goes, this is the best beginners guide, IMO: http://jlcollinsnh.wordpress.com/
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
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COguy

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Re: Total Newb - Investment Help and Explanation please
« Reply #5 on: October 08, 2012, 04:29:43 PM »
Oh yeah, I forgot about Jim Collins.  Yes, his introduction to investing is the best I have seen as well.  So definitely read that before you read the books I listed.  You can then move to some books to learn a little more if you feel like you need it.

LadyM

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Re: Total Newb - Investment Help and Explanation please
« Reply #6 on: October 09, 2012, 07:01:59 AM »

Yes, the Roth you can withdraw any principal tax and penalty free.

RebelSpy,

Can you please explain to me more in depth how a ROTH works.  I understand that since I'm putting post-tax $$ into it, that pulling out the principle (should I need to), in theory shouldn't be taxed at all, seeing as I've already paid taxes on it.  I get that and it computes in my brain.  I also understand why one isn't allowed to withdraw the gains without penalty prior to age 59.5, seeing as they are growing tax-free, etc.  I get all of this.

Where the confusion sets in:  I went to withdraw a few bucks from my Roth (in ING Sharebuilder) just to see what the process would be, and I was asked all kinds of questions like what type of distribution it was (normal, early distribution without exception, early distribution with exception, death etc.)  I was curious why I had to provide this information to withdraw even a portion of what I contributed. 

It caused me concern at the time.  I just need to know more about the product, and the IRS website does nothing to clear it up for me.


LadyM

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Re: Total Newb - Investment Help and Explanation please
« Reply #7 on: October 09, 2012, 07:02:37 AM »
Also as far as basic investing goes, this is the best beginners guide, IMO: http://jlcollinsnh.wordpress.com/

Oh, and I started to read this guy last night.  What might you say is the best post to start with on beginner investing?

arebelspy

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Re: Total Newb - Investment Help and Explanation please
« Reply #8 on: October 09, 2012, 08:18:17 AM »
That would (most likely) be an early withdrawal without exception.

The IRS just wants to know what you're doing, it's nothing to stress about.

As far as JLCollins' blog, I'd recommend the whole thing.  It's only been around a little over a year, and his total posts wouldn't even equal half a book.  Start at post one, read a few, read a few more a day or two later, etc.  You'll finish in a week or two at most.

If I had to pick one, this isn't a bad place to start: jlcollinsnh.wordpress.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/

But it misses some other good ones (what we invest in and why post, for example).
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.