Author Topic: Vanguard 401k/ROTH IRA Split (help!)  (Read 2845 times)

maki

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Vanguard 401k/ROTH IRA Split (help!)
« on: December 08, 2014, 02:45:45 PM »
Perhaps this would be better off in the reader case study forum. moderators, please let me know.

First off, happy holidays everyone! Then, sorry to be selfish, but I am in need of some ideas. I'm currently self-employed in the US, and have about $1,500 I can invest on a monthly basis. I do not have a 401k or a ROTH IRA set up, but I want to start 2015 off with something in Vanguard. I have several real estate rental properties, as well as some websites that generate monthly cash flow, but not much in the stock arena.

I net about $60,000/year, have zero debt, am single, and am 33 years old.

I'm thinking of doing a standard split of:

70% VTSAX   Total Stock Market Index Fund
30% VTIAX   Total International Stock Index Fund

I don't, however, know how this should be allocated. Should I just have a ROTH? or a ROTH/401k mix with $5,500 every year going into the ROTH, and the rest into a 401k?

Help, please!
« Last Edit: December 08, 2014, 05:39:02 PM by maki »

Imastoner

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #1 on: December 18, 2014, 12:29:22 PM »
I am not expert and can only offer my advice but here are my thoughts on what I would do in your shoes. Actually its also what I am doing.  The truth is Roth IRA and 401k accounts are both good options so you really can't go very wrong if you stick with smart index funds for the long haul.

401k accounts are business or employment related accounts. Its not uncommon for an employer to match some portion of your contributions.  My employer matches up to 4% of my pre-tax salary on my 401k.  Most would agree I would be a fool not to invest at least 4% of my salary to qualify for the free 4% from my employer.  Check with your employer and see if they have any similar incentives then take full advantage of those before anything else.  One downside to most 401k accounts is that you usually only have a small set of items to invest invest in.  I am lucky as I do have Vanguard Investor class S&P 500 index (VFINX) and a Vanguard bond index fund available. The other main knock on a 401k is that you do still pay taxes on the money but only when you start taking out the money in retirement. I feel that since the typical retirement age is mid 60s and we are in our 30s (i'm 38) that is 30 years away.  For me the extra weight of the free money over 3 decades and focus on smart vanguard index funds will far outweigh the tax burden I will have in my mid 60s when I start to withdraw the money.

Roth IRA is a really good place as well.  The benefit is you put it in after taxes so you are protected no matter what tax bracket you are in later in life. The other main benefit is you have more options to invest in since you have the entire market.  For those that qualify you can put up to $5500 in each year.  For me after I match my 4% from my employer in my 401k I put all extra into my Roth IRA until I hit the annual limit. My Roth IRA is with Vanguard and I invest in Total stock market and Total Bond market index funds (admiral now but started in investor class). Once I hit the limit on my Roth IRA I start putting the leftover back into my 401k since I can go up to $17,500 annually there based on my tax bracket. I have never hit that annual 401k max yet but I am within a few thousand.

Only invest in Roth IRA and 401k what you can set aside for the long haul since you will be penalized if you ever try to withdraw early. Here is a great article to read about how important it is to invest for the long term: http://awealthofcommonsense.com/worlds-worst-market-timer/

In addition I have a personal investment account at Vanguard.  I mainly focus on retirement but I try to put a little in here and there into that account.  I want to be able to get to some of my net worth without the early withdraw penalties in case of a major emergency which I hope never happens. I know those withdraws will be taxed but that is ok with me at this point.  Along with all that  investing I have about 6 months expenses (not salary) in cash at the bank. Many will mock me for having the cash but I found out that having that cash cushion allows me to not constantly worry about market ups and downs. It gives me the peace of mind to just invest for the long haul which to me works and feels right.

I don't know your exact scenario and your goals so all my comments are just to consider and may not be to follow. I am happy renting a place close to work but you may want have a goal to buy a home or investment property in the near future.  In that case you might not want to be so aggressive with your retirement accounts and save for a down payment instead. I hope this helps you decide what to do but you are already on the right path by just asking these questions.  Good Luck!

MDM

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #2 on: December 18, 2014, 12:44:55 PM »
A good start might be http://www.bogleheads.org/wiki/Solo_401(k)_plan

Whether you choose Roth or Traditional, some form of tax-advantage will beat all-taxable.

As for that choice, see http://www.bogleheads.org/wiki/Traditional_versus_Roth and http://www.madfientist.com/retire-even-earlier/.

The above should be enough to get you started, but don't hesitate to ask more if needed.  Good luck!

maki

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #3 on: December 18, 2014, 01:32:59 PM »
Hi guys! Thank you so much for the responses, input, and links!

I'm self-employed, so MDM's response was very helpful. That link from Imastoner, though, is a great read!

If I had, say, $30k to invest every year into a Solo 401k and an IRA, which would I fill up first?

I'm actually pretty sure I can semi-retire next year, but will keep up contributions to these plans. I'd like to not have to tap into them until I was 40 or 45-ish. I plan on living off of my real estate investment and website income until then, with the leftovers going back into these plans.

Imastoner

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #4 on: December 18, 2014, 02:37:05 PM »
Sounds like you are in a great spot if you can semi-retire that early and still put in $30k per year.  I am very jealous.  Where was Mr Money in my 20s?  My sad story aside I didn't consider you might be self employed.  I suggest you review the master or mister money mustache article here:
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
He mentions the idea of a SEP-IRA and solo 401k with some links.  I never did the research since I am not self employed. Plus I think he answers several questions no matter the situation.

You mentioned you might want to start withdrawing in your mid 40s instead of mid 60s so you better be sure that is an option and what the penalties could be for early withdraw.

MDM

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #5 on: December 18, 2014, 02:38:36 PM »
If I had, say, $30k to invest every year into a Solo 401k and an IRA, which would I fill up first?
Don't know - but you might check
https://investor.vanguard.com/what-we-offer/small-business/compare-plans,
http://www.obliviousinvestor.com/sep-vs-simple-vs-solo-401k/, and/or
http://www.mydollarplan.com/solo-401k-versus-sep-ira/
to see how things apply to your specific situation.

maki

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Re: Vanguard 401k/ROTH IRA Split (help!)
« Reply #6 on: December 18, 2014, 02:48:29 PM »
You guys are the best.

*rolls up sleeves and gets another cup of coffee to do some more reading*