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First, apply common sense in terms of high savings rate and understanding risk vs reward (and liquidity) in investing...and anticipate possible risks of inflation ('70s style) in coming years
Agree, most retail brokers are morons and often dishonest, like salesmen in any industry
Would educate self on basics of investing; people often spend more time planning vacations or watching useless TV/movies than learning basics of investing
Use Amazon to get some great simple investing primers written by guys like Joel Greenblatt, David Swensen (little tougher read but explains why most mutual funds are a wasteful scam vs simple, low-cost S&P500 index funds), and regularly read WSJ and Bloomberg to understand what's happening in economy, business and stock/bond markets
Always remember that solid investing is easy for those with common sense, savings discipline and lack of fear&greed
And if someone is truly an extraordinary investor, they are likely a hedge fund billionaire who doesn't invest for or sell stuff to "normal" folks and doesn't show up on TV or in press for interviews
Given that taxes will have to rise someday to pay off the $14T national debt, putting in after tax dollars NOW and pulling out tax free dollars LATER seems the better choice for someone just starting out.
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Originally Posted by j_k_k
The question then becomes, in that debt-ridden situation, does one actually believe the proceeds will be tax-free as promised. I don't trust the government to keep its word on that in a pinch. In short, I think by then the government will have proven to its satisfaction that no matter what it does, the population will just bend over and accept it; therefore, since it can get away with it, it will do it.
I've thought of both of these implications, which is why I would like to do some of each.
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Originally Posted by LongArm
Sure you can. It's just that you can't contribute more than the maximum ($5k) between the two of them together in the same year. E.g., if you contribute $3k to a traditional, you can't contribute more than $2k to the Roth.
That's how I read it too. So between my husband and I, we could put $5000 in a Roth and $5000 in a Traditional each year, right? Assuming the 401(k) doesn't mess with that, I still need to look into that further. (Oh, and the catchup doesn't apply to us, we are in our 30s, that seems to only be for people 50+).
...So between my husband and I, we could put $5000 in a Roth and $5000 in a Traditional each year, right? Assuming the 401(k) doesn't mess with that...
Right, the two of you can contribute a total of $10k. The 401k won't be an issue because you're not near the income threshhold ($89k-$109k for those married filing jointly).
However, if it were me, I'd put all $10k into Roths. What's hardly ever mentioned when traditional IRA vs. Roth comparisons are done is the fact that you actually have to invest MORE (the savings from your tax deduction) into the traditional IRA to compete with the Roth, all else remaining equal. Most of the online calculators assume this is being done when they spit out results, which does make it a fair comparison, but my guess is that it rarely happens in reality. With EQUAL amounts invested in each, you'll end up with significantly more in the Roth than you would with the traditional because of the fact that gains in a Roth are never taxed. The fact that you and your husband are in a modest tax bracket makes you even better candidates for the Roth, IMO. Could the rules change? Sure, anything "could" happen. But I tend to go with what "is" rather than what "could be," myself.
I generally agree with one of the other posters who suggested ETFs over mutual funds. There are some good mutual funds out there, but unless you know how to find them, it's better to take the low-cost path of least resistance and go with ETFs, IMO. ETFs give you more flexibility too, such as the ability to protect yourself with stop-losses, etc. BTW, when I say "ETFs," I mean your basic, traditional ETFs, NOT the new-fangled leveraged ones.
If this "advisor" you're going to talk to is from a brokerage, watch out for recommendations to buy load funds (as warned previously). Load funds are recommended because they put money in HIS pocket, not because they're best for YOU. If you want UNBIASED guidance, go with a fee-only advisor/planner.
some cfp will try to sell you class c mutual funds where they dont charge front load ,but charge distibution selling fees.they are going to try to get it one way or another
4. Begin to study, read "Smart Money", "Kiplingers" or other popular press magazines on finance and management.
This should actually be Rule #1. And 2 and 3, for that matter. ie RESEARCH, STUDY and LEARN. Knowledge is power. Perhaps go to a book store and browse some of the books there and grab 1 or 2 and read at your leisure.
I would also add, and in this order (probably repeating what some have already said):
1 - Max out IRAs, pref. Roths
2 - Absolutely take advantage of your company 401Ks. There is a tax break there also.
3 - After those, whatever is left IMO invest in mostly mutual funds. A good standard mix would probably look something like these general categories of funds:
30-40% large cap funds
20-30% mid/small cap funds
10-20% international funds
10-20% "specialty" funds
...and a little sprinkling of bonds. Personally I'm not a fan until you get considerably older and have fewer than most, but you'll get varying opinions on that (and as I get older that opinion is changing ).
Last 2 bits of very general advice:
1 - What specific funds you invest in is much less important than what types you invest in (ie as above), as funds of a given type generally tend to perform similarly.
2 - Take with a grain of salt any advice anyone gives on using company XYZ, eg Fidelity vs Schwab vs Janus vs etc etc etc. Again, do the research. No one company has a lock on greatness.
What's hardly ever mentioned when traditional IRA vs. Roth comparisons are done is the fact that you actually have to invest MORE (the savings from your tax deduction) into the traditional IRA to compete with the Roth, all else remaining equal. Most of the online calculators assume this is being done when they spit out results, which does make it a fair comparison, but my guess is that it rarely happens in reality. With EQUAL amounts invested in each, you'll end up with significantly more in the Roth than you would with the traditional because of the fact that gains in a Roth are never taxed.
No offense but this is very misleading IMO. Roths are taxed, but the tax is up front vs later on. So yeah the gains aren't taxed, but because you're taxed up front (vs the tax break of a traditional), you're still starting out w/less, all things being equal....so it's not so cut and dry as to whether you'll make out better with a traditional vs a Roth as people would have you believe. That said, I do agree on going Roth and "getting taxes out of the way now," so to speak.
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If this "advisor" you're going to talk to is from a brokerage, watch out for recommendations to buy load funds (as warned previously). Load funds are recommended because they put money in HIS pocket, not because they're best for YOU. If you want UNBIASED guidance, go with a fee-only advisor/planner.
No offense but this is very misleading IMO. Roths are taxed, but the tax is up front vs later on.
Of course.
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So yeah the gains aren't taxed, but because you're taxed up front (vs the tax break of a traditional), you're still starting out w/less, all things being equal....
You're starting out with less in that your tax burden will be greater (and yes, that money will have to come from somewhere), but you're not necessarily starting out with less in your ROTH. I think people typically have a certain amount of cash available to contribute to an IRA, regardless of which kind it is, and the fact that a traditional IRA will mean a lighter tax bill in April of next year doesn't often equate to a larger contribution being made now, I would bet. What's "misleading" is that it's usually not made clear that if the traditional IRA's tax savings are NOT invested, the quoted returns/comparisons are usually bogus. People using the online calculators, for example, think investing $3k per year in either yields a certain result, when that's really not the case. Those reading the fine print at the bottom will discover that the $3k annual traditional IRA contribution is really a $3,750 contribution (or whatever). As I said, yes, it makes for a fair comparison (for the reasons you stated)--it's just that many are unaware of it and/or won't actually invest that tax savings, therefore they'd likely be better off with the Roth (assuming they're looking for the biggest payoff in retirement) . That's the point I'm trying to make.
Load mutual funds. I don't mean the early redemption penalties, but the ones that hit you for 5.75%. As far as I'm concerned anyone who pays a mutual fund sales load of that level has lost his or her mind. It's their money to waste, I suppose, but it's my right to consider it idiotic.
Bond conventional mutual funds as a form of bond investing. The problem here is that bond funds aren't bonds, yet people use them as if they were. They are not. They're something different. They have their roles, but not as stand-ins for bonds. They combine pitfalls of equity investing with fixed income return levels, and that simply is not acceptable for anyone whose goal is principal preservation.
Goofy ETFs. The freakier and more leveraged it is, the more nervous you should be and the more likely it is that the people making money from it know more than you. You may find it intriguing to buy JNK, a super-duper-quintuple-short manganese ETF, but you are probably signing up for a hosing.
Bankrupt stocks. They hang around for months and have 5-letter tickers ending in Q. Don't do it. They will eventually die in most cases, and the people making money on them know things you don't. Same for penny stocks: anything under $1/share.
This is getting to be problematic j_k_k: I keep trying to rep you, but city-data wants me to spread it around.
You have more to save with a tax-deductible IRA than a Roth IRA. They both have the same contribution limits. The money you save on the tax deduction now can be put into a savings or investment outside an IRA. If you're in the 37% combined tax bracket for federal and state taxes, this means you can put away another 37% in an investment now.
The other advantage with a tax-deductible IRA is that the withdrawals will be taxable and many of the retirement expenses, such as medical costs, home mortgages, and taxes, will be deductible from the withdrawals and lower the tax burden. All of those categories have historically outpaced inflation.
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