Explain retirement fund options to me...

[wikiwiki]

I need a quick explanation of retirement funds so I fully understand it.

DH works for a corporate company and saves 12% in an employer sponsored 401k.

I opened an Etrade account awhile ago but haven't been contributing up till now so it is almost at the min to invest in a Fidelity retirement fund.

What else should we do - open separate Roth accounts? Is that what "maxing out retirement" means, and what are the limits? Are there limits with the employer based account?

This is slightly confusing to me and I want to understand it going forward so we know what to aim for.

Thanks!

[dczech09]

When you open an account with Etrade, it is typically a "taxable brokerage account." This just means that it is an account with no tax benefits.

A 401k is an employer sponsored retirement arrangement. An important thing to understand is that the 401k is NOT an account or investment- it is simply a tax shelter.

Imagine that you have some stock certificates or gold bars and you put them in a safe. The stock certificates and gold bars are the investment; the safe is the shelter.

So a 401k is nothing more than a safe that provides additional tax benefits. Thats it! Simple! Thats what a Roth IRA is to. Just think of it as a safe that the government does not know how to open and you got it!

You can contribute to your 401k and your employer can match your contribution. But the government cannot touch your money until you pull it out of the safe.

THE RULES:

This is where things start to get confusing, so please bear with me.

Under current tax laws (which are subject to change) the limit for a 401k is $17,000 per year per person. So DH can contribute UP TO $17,000 per year himself. That $17,000 limit does not apply to the employer match (there are different rules for that, but dont worry about that). If DH is 55 or older, he can contribute $22,500 per year max.

The Roth IRA has a limit of $5,000 per year per person. But in order to qualify for the Roth IRA, you have to make less than a certain amount of money. The max income depends on marriage situations and stuff like that.

The Roth IRA offers some of THE BEST tax benefits, so it is only made available to those who make less than a certain amount. If you make over $150,000 per year, you probably will not qualify (depending on marriage and filing status).

When someone says they are "maxing retirement," they are simply saying that they are maxing the contributions on a retirement arrangement. For example, I am maxing my Roth IRA so sometimes I will say that I am maxing retirement.

WOOOO! Thats a lot to say!

Your DH is doing 12% in the 401k which is great! The conventional wisdom is to set aside 15% of income for retirement, so if you qualify, I would definitely recommend that both of you open Roth IRAs. As long as you don't make too much, you both can set aside up to $5,000 per year in your Roth IRAs (total of $10,000).

Get some good investments in the Roth IRA and reap the benefits!

I know this stuff can be confusing for some, so please let me know if you have any questions. I may be young, but I know almost all there needs to be known about these things.

[Gailete]

I had an opportunity a few weeks ago to read and review a book called Saving for Retirement. You can see more info about the book here Saving for Retirement (Without Living Like a Pauper or Winning the Lottery) Updated and Revised: Gail MarksJarvis: 9780132963039: Amazon.com: Books

Although I have read and tried to understand everything I could about retirement accounts prior to this book, this book really made things clear for me, especially when trying to understand Roth IRAs.

After reading the book I wanted to figure out how, on extremely limited funds, I could also start a Roth IRA. I was very pleased to find that I could open an account at Sharebuilders (a branch of ING.com) with no minimum investment. I was able to buy shares of an index fund for less than $100. Each time you buy shares it costs you only $4 so a very good value. There should be no reason to dump hundreds of dollars into buying your investments.

Anyhow two recommendations for learning and investing that I have found helpful.

[kv968]

After reading the book I wanted to figure out how, on extremely limited funds, I could also start a Roth IRA. I was very pleased to find that I could open an account at Sharebuilders (a branch of ING.com) with no minimum investment. I was able to buy shares of an index fund for less than $100. Each time you buy shares it costs you only $4 so a very good value. There should be no reason to dump hundreds of dollars into buying your investments.

Sharebuilder is good if you don't have the money to meet the minimum to open a brokerage and/or mutual fund account and just want your money automatically invested in stocks and/or ETF's. However to me it's not as great as it seems.

The money you put in the automatic investment plan is invested every Tuesday regardless of the price of the security you're investing in. If you're investing for the long haul that may not really make a difference since with dollar cost averaging you're really not too concerned with the prices you're paying anyway. Although just know you don't have any control over the price being paid via the automatic investment plan.

Another possible problem is the commissions. $4 may not sound like a lot but if you're investing only $100 per transaction that's 4% of your investment. Basically it's like buying a mutual fund with a load. And another thing they don't readily point out is that when you sell the stock or ETF you have to pay a live trading fee which is $9.95 if you're not an Advantage member. So all told you're paying $13.95 to get in and out of a trade or almost 14% on a $100 investment.

Again, it seems good if you have limited funding but if you're dollar cost averaging with a small amount, the commissions really add up.

[dczech09]

Yeah I like to dodge those commissions and fees. That is why I stick to T Rowe Price for my Roth IRA. The mutual funds that I am invested in charge low annual fees (usually under 1%). Also, since my balance exceeds $5,000, I don't pay a management fee. And they also give discounts for automatic monthly deposits and paperless statements. Pretty good deal!

I used Scottrade before, but the commission was $7 per trade. Sharebuilder I know is $4 as you all have been saying.

The thing with those discount brokers is that they charge regressive commissions. Whether your trade is worth $100 or $1,000, your commission is the same.

The big dogs like T Rowe have minimum investment requirements for mutual funds, but eliminate the regressive costs.

Regardless of anything, you need to have at least SOME money to invest for lower cost. The less money you have, the more its going to cost you (proportionately).

[Gailete]

Another possible problem is the commissions. $4 may not sound like a lot but if you're investing only $100 per transaction that's 4% of your investment. Basically it's like buying a mutual fund with a load. And another thing they don't readily point out is that when you sell the stock or ETF you have to pay a live trading fee which is $9.95 if you're not an Advantage member. So all told you're paying $13.95 to get in and out of a trade or almost 14% on a $100 investment.

Since it can take me 3-4 months to save up that $100 I would rather invest it when I can rather than wait all year earning a pittance of interest. One of the reasons that I like Sharebuilders is that I can invest when I want to and have the money. If I knew I had more, I could set up automatic investments. Sharebuilders will allow you (for a larger fee) invest immediately and not wait until Tuesdays. I have removed money from my account and have NEVER paid a fee when withdrawing money so what you mentioned about the $9.95 is WRONG. There is only a charge if you want to sell on a specific day, which you can just about work around by setting up your tade on a Monday to sell the next day unless you are absolutely convinced that the market will collapse the next day.

However, I do understand that for those with several thousand to dump into an investment all at once they can do that for the same $4 which is how dollar cost averaging works in general, and then keep dumping with a $4 fee. I was pointing out what I do with minimal funds so that others with MINIMAL funds know that there is a place where THEIR money is welcomed and they too can start saving for their future. Currently my investments (that I paid the $4 fees for) is up over 16% which does offset that fee I believe and if I had waited until I had the whole large amount to invest it would maybe be 1-2% if that.

This is a saving advice forum and that is all I was giving, was a way for those on limited funds to be able to participate, open an IRA or a Roth IRA, or just buy some stocks and no one is going to tell them to wait until they have more money or they can only sign up if they agree to automatic investments each month. They can be a problem or two with just about any way of investing, but those of us who don't have much need to know how we too can save when funds are limited. Having an account that we can continue sending money into gives a psychological boost to your brain and keeps you investing as it will keep saying to your mind "I'm here, don't forget to invest for your future". Once money is invested and the car breaks down, I really will try to problem solve the repair bill to avoid taking anyhting out of savings, but that is just me.

[jpg7n16]

If you're that concerned about commissions, most brokerage firms have a list of index ETFs that you can trade completely commission free.

Free is better than $4. And ETFs you can buy shares when you have the money, you don't need $1000's to get started.

Having said that, $50/month won't get you to a comfortable retirement. If you're worried about how to invest less than $100, it's time to start thinking bigger.


For the OP, I think dczech answered the plan limits above.

17,000 his work
+ 5,000 his IRA
+ 5,000 her IRA
+ possible her work plan
+ possible catch up on all the above
= maxing retirement

Maxing retirement just means putting as much as you can (the max) into all your retirement savings vehicles. I would be more concerned with putting away enough for your situation, rather than trying to "max" everything.

AARP Retirement Calculator - How to Retire, Plan for Retirement

[Petunia 100]

Since it can take me 3-4 months to save up that $100 I would rather invest it when I can rather than wait all year earning a pittance of interest. One of the reasons that I like Sharebuilders is that I can invest when I want to and have the money. If I knew I had more, I could set up automatic investments. Sharebuilders will allow you (for a larger fee) invest immediately and not wait until Tuesdays. I have removed money from my account and have NEVER paid a fee when withdrawing money so what you mentioned about the $9.95 is WRONG. There is only a charge if you want to sell on a specific day, which you can just about work around by setting up your tade on a Monday to sell the next day unless you are absolutely convinced that the market will collapse the next day.

However, I do understand that for those with several thousand to dump into an investment all at once they can do that for the same $4 which is how dollar cost averaging works in general, and then keep dumping with a $4 fee. I was pointing out what I do with minimal funds so that others with MINIMAL funds know that there is a place where THEIR money is welcomed and they too can start saving for their future. Currently my investments (that I paid the $4 fees for) is up over 16% which does offset that fee I believe and if I had waited until I had the whole large amount to invest it would maybe be 1-2% if that.

This is a saving advice forum and that is all I was giving, was a way for those on limited funds to be able to participate, open an IRA or a Roth IRA, or just buy some stocks and no one is going to tell them to wait until they have more money or they can only sign up if they agree to automatic investments each month. They can be a problem or two with just about any way of investing, but those of us who don't have much need to know how we too can save when funds are limited. Having an account that we can continue sending money into gives a psychological boost to your brain and keeps you investing as it will keep saying to your mind "I'm here, don't forget to invest for your future". Once money is invested and the car breaks down, I really will try to problem solve the repair bill to avoid taking anyhting out of savings, but that is just me.

It is hard to get started when you don't have much principal. The first IRA I opened was with ShareBuilder. When I started, I was able to buy with a $2 commission, which soon rose to $3. I was buying individual stocks with little to no understanding of how to choose them. I'd have been better off to choose a broad market ETF, like you are doing. Eventually, I realized I needed to stop dabbling in individual stocks and build a diversified portfolio of low-cost mutual funds. When I sold my individual stocks, I was charged $16 per position. Ouch!

Gailete, once you reach 1k of principal, you will have a lot of options. At that point, I hope you will at least consider them.

[wikiwiki]

Thank you for the replies - this is becomming more clear.

So for DH's 401k - he has options for Before Tax and After Tax, and Roth Basic. We have 3% in the Before Tax and 9% in Roth - comes out to about $10k/year. If we were to add another 1-3%, where is that best placed? I would think Roth because of the idea that he thinks he'll earn more than he is now later in life. (Hence pay taxes on it now rather than later) I'm not entirely sure though...

For the separate Roth accounts with the $5k limit - is it best to just open them with a different brokerage (possibly Fideilty) or open it in the same one he has his 401k with (Vanguard) What do others do?

Can I contribute to a different account other than the ROTH even though I am a self-employed independent contractor? I have close to the $1k needed to open something somewhere, just not sure where to put it yet!

[dczech09]

Yes there are options for the self-employed independent contractor types:

Traditional IRA
Roth IRA
SEP-IRA
Solo 401k
Variable Annuities

There are so many options that it is very difficult to get to a point where you have literally MAXED everything out and have no more options.

[kv968]

Since it can take me 3-4 months to save up that $100 I would rather invest it when I can rather than wait all year earning a pittance of interest. One of the reasons that I like Sharebuilders is that I can invest when I want to and have the money. If I knew I had more, I could set up automatic investments. Sharebuilders will allow you (for a larger fee) invest immediately and not wait until Tuesdays. I have removed money from my account and have NEVER paid a fee when withdrawing money so what you mentioned about the $9.95 is WRONG. There is only a charge if you want to sell on a specific day, which you can just about work around by setting up your tade on a Monday to sell the next day unless you are absolutely convinced that the market will collapse the next day.

Sharebuilder must have changed their selling policy since ING took them over because it used to have to be a direct sale at full commission. If you can get out for less that's better and I stand corrected.

As far as withdrawing money, I never said there was fee for removing money from your account. I was just talking about the commission when selling stock which you do pay.

However, I do understand that for those with several thousand to dump into an investment all at once they can do that for the same $4 which is how dollar cost averaging works in general, and then keep dumping with a $4 fee. I was pointing out what I do with minimal funds so that others with MINIMAL funds know that there is a place where THEIR money is welcomed and they too can start saving for their future. Currently my investments (that I paid the $4 fees for) is up over 16% which does offset that fee I believe and if I had waited until I had the whole large amount to invest it would maybe be 1-2% if that.

This is a saving advice forum and that is all I was giving, was a way for those on limited funds to be able to participate, open an IRA or a Roth IRA, or just buy some stocks and no one is going to tell them to wait until they have more money or they can only sign up if they agree to automatic investments each month. They can be a problem or two with just about any way of investing, but those of us who don't have much need to know how we too can save when funds are limited. Having an account that we can continue sending money into gives a psychological boost to your brain and keeps you investing as it will keep saying to your mind "I'm here, don't forget to invest for your future". Once money is invested and the car breaks down, I really will try to problem solve the repair bill to avoid taking anyhting out of savings, but that is just me.

It is good to know that there's a place for people with limited funds to go and invest and it's great that you made it known. I just wanted to point out the fact that when investing with such a small amount, the commissions can kill you.

I'm glad you're up 16% (definitely better than a saving account although MUCH riskier). However even if a round-trip was only $8 that's still an 8% hurdle you have to overcome just to breakeven.

It's unfortunate that T. Rowe stopped their automatic investment plan where you didn't need any minimum, just $50/month.

[jpg7n16]

Thank you for the replies - this is becomming more clear.

So for DH's 401k - he has options for Before Tax and After Tax, and Roth Basic. We have 3% in the Before Tax and 9% in Roth - comes out to about $10k/year. If we were to add another 1-3%, where is that best placed? I would think Roth because of the idea that he thinks he'll earn more than he is now later in life. (Hence pay taxes on it now rather than later) I'm not entirely sure though...

Based on your expectations, I would go with the Roth option as well.

For the separate Roth accounts with the $5k limit - is it best to just open them with a different brokerage (possibly Fideilty) or open it in the same one he has his 401k with (Vanguard) What do others do?

It's usually easier to manage your accounts at one place. If his 401k is at Vanguard, and you're happy with the service, it would make your life easier to have your IRAs there too.

[kv968]

Thank you for the replies - this is becomming more clear.

So for DH's 401k - he has options for Before Tax and After Tax, and Roth Basic. We have 3% in the Before Tax and 9% in Roth - comes out to about $10k/year. If we were to add another 1-3%, where is that best placed? I would think Roth because of the idea that he thinks he'll earn more than he is now later in life. (Hence pay taxes on it now rather than later) I'm not entirely sure though...

I would say stick with the Roth options. However if your DH's earnings become substantially more later in life (i.e. higher tax brackets), you may want to consider switching some of the money to pre-tax to save on the taxes.

The decision to go before or after tax isn't really how much you're going to MAKE in your later years but how you're going to "make" in retirement.

For example, a simple way to look at it is if you're in the 35% tax bracket now and expect to only be in the 25% bracket in retirement then it would be more benenficial to go before-tax now. If you're in the 15% bracket now and expect to be in the 25% in retirement then the Roth is more beneficial. Of course this a very simplistic look at it and it's hard (if not impossible) to determine where you'll be tax-wise in retirement since you might not know where you'll fall in the tax brackets or what they'll actually be when the time comes.

I tend to diversify even in that aspect. I have a 401k where I get the tax benefit now and a Roth where I'll get the tax benefit when I retire. Unfortunately I have much more in the 401k than the Roth so I'm going to have more taxable money than I'd like in retirement but with the options that were available to me at the time that's the best I could do.

With that said, under the current tax brackets it seems most people are likely in the 25% tax bracket and will probably be in the same come retirement if they have a substantial amount of their income coming from a 401k and/or traditional IRA. If that's the case and the tax brackets when working and in retirement are a wash, then I'd say as rule of thumb go with the Roth.

My ideal situation in retirement would be (under current tax laws) to take taxable income (SSI, pension, 401k distributions, etc...) up to $35,350 per year and anything needed after that use the Roth. Doing so would keep me in the 15% tax bracket since anything after that $35,350 would put me in the 25% marginal tax bracket. Of course this is all going off of current tax rates and who knows what the tax structure will look like then but overall that's what I'm trying to accomplish.

[jpg7n16]

My ideal situation in retirement would be (under current tax laws) to take taxable income (SSI, pension, 401k distributions, etc...) up to $35,350 per year and anything needed after that use the Roth. Doing so would keep me in the 15% tax bracket since anything after that $35,350 would put me in the 25% marginal tax bracket.

Quick point of clarification -- the tax brackets are not based on income. They are based on TAXABLE income (meaning after deductions, etc.)

So you can make much more than $35,350 and be in the 15% bracket.

For 2012, the standard deduction is $5,950 and you get a personal exemption of $3,800.

So technically, you can make $45,100 and still be in the 15% bracket.


May not matter much today, but I hope you remember this in retirement (or that other reader's near retirement considering the same strategy read this). That's about $10k extra each year of income you'd be missing out on.

Don't need $45k one year? Convert to Roth to capture the 15% bracket.


This is also why people should not be 100% in Roth money. Because Roth distributions aren't taxable, you waste your deductions. @ $10k/year, from retiring at 65 if you live to 85-90, that's $200k-250k of deductions you wasted.

[kv968]

Quick point of clarification -- the tax brackets are not based on income. They are based on TAXABLE income (meaning after deductions, etc.)

So you can make much more than $35,350 and be in the 15% bracket.

For 2012, the standard deduction is $5,950 and you get a personal exemption of $3,800.

So technically, you can make $45,100 and still be in the 15% bracket.

True, and thanks for pointing that out.