Is a company 401K the only way to save pre-tax dollars? - FFCars.com : Factory Five Racing Discussion Forum
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post #1 of 45 (permalink) Old 10-30-2017, 02:38 PM Thread Starter
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Is a company 401K the only way to save pre-tax dollars?

(I hope this forum is still traveled enough to get some advice here.)

My current job is with a private company that has a 401K but no match. I max out my 401K contributions at about $18,000 per year which is around the maximum. Of course, this is pre-tax money. Also, obviously, this brings down my taxable income, and the best I understand that means I pay a less in taxes. (I don’t know this specific number.)

In cue, I have a fantastic new job opportunity with a small, but stable private company. There is no 401K program at all. They are willing to offer me more money, but it’s not going to be another $25,000 so I can save a total of $18,000 after-tax dollars in a Roth IRA plus other mutual funds.

Not to mention the loss of reduced taxable income.

Is there anything I can do?

Edit: I just found this pre-tax savings calculator. I don't know enough to confirm accuracy.

https://ffcalcs.com/pretax_savings



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post #2 of 45 (permalink) Old 10-30-2017, 02:47 PM
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I used a Health Savings account associated with a "plan 3" high delectable company insurance plan to save $7500 a year to reduce my income (pay no tax on that money). You have to use the account only to pay health care associated bills over the rest of your life but that worked out well for me since I retired this year. You can still save to it after retirement and can invest the money in funds, bonds, and CD's just like a 401, if you like.

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post #3 of 45 (permalink) Old 10-30-2017, 03:22 PM
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Agree with Greg, all limits set by the IRS, you can also save via a 529 for education expenses, any kids on the way that you know of????

IRA gives you the flexibility to invest where you want, unlike a 401K that has limited investment options. What you will miss out on without a 401k is the company match that can be substainial at some companies. This really adds up year over year.

Another area this new company may not offer (unlike a publically traded company) is you can't purchase the stock discounted (usually 15% discount) again can really add up over the years.

Hopefully this new company has other incentives that can offset what you may be giving up.

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post #4 of 45 (permalink) Old 10-30-2017, 04:05 PM
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You could ask them to set up a Simple IRA otherwise known as SEP IRA. They can put as much as 25% of your income into it. But, I believe they would have to do it for everyone and other employees may want their money now not when they retire. Otherwise, (although I haven't checked lately) the most you can save is $4000 / year in an IRA. Of course there are the two options mentioned above the medical savings and the 529 plans. If you do put money in the medical savings plan DO NOT USE IT TO PAY MEDICAL BILLS! Let it continue to grow tax free.

You might consider having him set you up as a contractor. Then you could set up your own SEP and put up to 25% of your income into it. You could also potentially use it to reduce a lot of other taxes you pay, but I won't get into that in a public forum.

Now to a slightly related discussion. I would advise where possible use a ROTH. Yes, I know that means you are paying more taxes in the present. But, it can easily be shown mathematically that given the same marginal tax rate now and when you pull the money out at some future date there is no difference in the total after tax return regardless of the ups and downs in between. Yes that may sound surprising to some people but trust me the basic laws of algebra are not suddenly suspended just because we are talking finance.

Of course the basic assumption of marginal taxe rates being the same now and in the future is a big one. But, consider this. If you are maxing out your contributions chances are you are fairly high income and have a high savings rate so you will very likely be in a high marginal bracket when you retire. Also, in my lifetime I have seen rates go up and down numerous times so who the heck knows what they will be in the future. At this point we don't even know what they will be next year.

So, why Roth then? Well, first off it allows you to shelter far more total dollars. So, if you were putting money in a Roth you are actually sheltering 24k per year of pre tax dollars rather than 18k. (When you go over 50 years old it is even higher because you can make catchup contributions.) So, even a $4k Roth is like sheltering maybe $5.3k pre tax instead of just $4k pretax. Secondly, when you retire some day a lot of things are income related and non Roth withdrawls count as income whereas Roth withdrawls don't. It's crazy but true. So, the amount you pay for medicare part B will be less. If for some reason your income ends up being low (maybe a late in life gambling problem) you might be able to avoid tax on social security because again non Roth counts as income for calculating the tax on social security and Roth does not. Also, there might be state tax breaks for seniors again Roth income won't cound in the income limits for them. Also, here in NJ, the price you pay in the state veterans homes are income based not asset based. So, once again you could get a break with a Roth. I am sure there are others I have not considered.

One last parting comment. As I mentioned above, there is no difference in the total return if you go Roth or non Roth. However, there is a quite significant difference if you are using tax shelted accounts vs. not tax sheltered. So, yes put every nickel you can spare into whatever opportunities you have.

Oops, one more one last comment. If you have spare cash sitting around you could use it to start converting some of your existing non Roth accounts into Roth. As mentioned above even though you will shell out a lot of tax now, the net effect is having far more total pretax dollars sheltered.
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post #5 of 45 (permalink) Old 10-30-2017, 04:14 PM Thread Starter
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Re: above - I thought max Roth contri per year is about $4500? I did I mis-read something?

----------------

No kids. (Girlfriend is 47, the same age, no kids.) Know the 80’s terms Yuppie (young professional) and Dinks? (Double income no kids.) I guess I am in the dinks category!

I actually just left a job that had 401K match and profit sharing. The new job gave me a 6K raise which goes to Roth IRA to help make up for it.

So the “new new” company is the one with no 401K at all and once again they are not going to lay out another $25K because then I will be making the same as the manager hiring me!

I will contact Fidelity, I have a tax-deferred IRA with them (old 401K rollover). Hopefully they will have advice.

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post #6 of 45 (permalink) Old 10-30-2017, 04:38 PM
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Quote:
Originally Posted by NiceGuyEddie View Post
Re: above - I thought max Roth contri per year is about $4500? I did I mis-read something?

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Probably is, I haven't looked in quite a while since not eligible.

As to the 18k, I was referring to if you have a 401k with a Roth option at work. So intended for the larger audience not just your situation. sorry for any confusion.

The real stupidity in all of this (hopefully without getting political) is why can't they just simplify and give everyone access to the same dollar amounts and plans? If you work for someone else you can put aside $18 (plus another 4 or 5 in catchup if over 50.)even if all you earn is 18k and you can go roth or non roth. But, if you work for yourself you can put 25% aside so you can go over teh $18k if your income is big enough but can't go up to that number if your income is less than $72k. Meanwhile if you work for a non profit such as a hospital, college or church then you have a 403b with its own set of rules and no Roth option. And as in your case if you work for someone else who doesn't have a plan then all you can put aside is the $4500.

Why not one set of rules for everyone. Talk about tax simplification. This would be a good place to start!
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post #7 of 45 (permalink) Old 10-30-2017, 04:50 PM
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HSA is what popped into my head.

Tax deductible at time of contribution, no taxes on any gains, and tax free as long as used for legitimate medical expenses. It is actually one of the only programs I know of that does this...YOU NEVER PAY ANY TAXES ON THESE FUNDS, unlike 401(k), IRA, etc.
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post #8 of 45 (permalink) Old 10-30-2017, 05:02 PM
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Quote:
Originally Posted by NiceGuyEddie View Post
Re: above - I thought max Roth contri per year is about $4500? I did I mis-read something?

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Roth IRA max $5500. Catch-up at 50+ is $1000.
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post #9 of 45 (permalink) Old 10-30-2017, 07:34 PM
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Eddie: I suggest you look for a certified financial planner to help you with your options. Look for one that has Fiduciary license, they are required to act in your best interest.
I had always invested through my Companies 401K, however I have found there are many aspects of investing that way that are not in the best interest of the investor. For example, with standard municipal funds, they are regulated such that they want you to stay in the fund when the market is in a downturn drawing down your money. Your fund manager will likely tell you to ride out the downturns, not a good idea for the investor. You can always move to cash on your own which I did several times over the years.
After retiring and moving out of CA, we were fortunate to find a local financial planner who is a licensed fiduciary. In hind sight, I wish I had looked for help with my investing long ago.

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post #10 of 45 (permalink) Old 10-30-2017, 08:40 PM
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Eddie: I suggest you look for a certified financial planner to help you with your options. Look for one that has Fiduciary license, they are required to act in your best interest.
I had always invested through my Companies 401K, however I have found there are many aspects of investing that way that are not in the best interest of the investor. For example, with standard municipal funds, they are regulated such that they want you to stay in the fund when the market is in a downturn drawing down your money. Your fund manager will likely tell you to ride out the downturns, not a good idea for the investor. You can always move to cash on your own which I did several times over the years.
After retiring and moving out of CA, we were fortunate to find a local financial planner who is a licensed fiduciary. In hind sight, I wish I had looked for help with my investing long ago.

Alan
Good advice there, "Buy high, sell low."

Not only did I stay in the entire time of the worst down turn in 80 years, but continued to plow more money in. Doubled my money in short order. My friends who got out got burnt.
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post #11 of 45 (permalink) Old 10-30-2017, 10:09 PM
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& if you ever get the opportunity create a 401-k solo & invest it yourself....
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post #12 of 45 (permalink) Old 10-30-2017, 10:55 PM Thread Starter
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I have an appointment tomorrow with a financial advisor from Fidelity services that helped me chose funds for a personal savings account a few years ago. I did not want anything crazy, for this fund (only) it was enough to keep up with inflation plus a little more. He knew his business very well, hopefully he can help.

About the health care account, I am confused. I am very healthy, why would I put money there? It can only be moved to interest-gaining investments after retirement?

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post #13 of 45 (permalink) Old 10-31-2017, 12:39 AM
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About the health care account, I am confused. I am very healthy, why would I put money there? It can only be moved to interest-gaining investments after retirement?
That is would be a restriction the company puts on it. They are allowed to allow it be invested at any time.
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post #14 of 45 (permalink) Old 10-31-2017, 01:38 AM Thread Starter
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Now to a slightly related discussion. I would advise where possible use a ROTH. Yes, I know that means you are paying more taxes in the present. But, it can easily be shown mathematically that given the same marginal tax rate now and when you pull the money out at some future date there is no difference in the total after tax return regardless of the ups and downs in between. Yes that may sound surprising to some people but trust me the basic laws of algebra are not suddenly suspended just because we are talking finance.
Thank you for writing this, it encouraged me to break out my retirement spreadsheet and expand on it. for the first time in my life, I understand the math.

I understood the benefits of a Roth, and that it was good in supplementing a 401K with a Roth IRA, but it was not until today that i realize the net is the same after taxes.

For some reason - and I am embarrassed to admit this - I always thought those pre-tax dollars would be multiplying over time, thus beating a Roth IRA.

It turns out that pre-tax part - maybe 30% - is "off on the side" and getting bigger but it's not yours, and never will be.

Two things happen:

1. The NUMBER in your balance looks bigger.

2. If anything, you are investing for the Government, you will pay them at retirement

NOW: those extra pre-tax dollars you never get.... are the fund's fees higher because of them?

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post #15 of 45 (permalink) Old 10-31-2017, 01:39 AM
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HSA. It's like a Roth IRA that you can withdraw from and contribute to for your entire life. You can choose how to invest the balance from day one and make changes as required. The only restriction is the withdrawals must be used for healthcare. You must participate in a qualified high deductible insurance plan.

i got my HSA in 2009. I used it to stash 7500 bucks pre tax a year and invested it conservatively. It's good to have that stashed for when you get sicker as you age. Plus it is tax free.

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post #16 of 45 (permalink) Old 10-31-2017, 02:24 AM
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Quote:
Originally Posted by NiceGuyEddie View Post
I have an appointment tomorrow with a financial advisor from Fidelity services that helped me chose funds for a personal savings account a few years ago.
Eddie: Fidelity is a good company, but recognize they sell their "products" limiting your investment options. Also, as I posted earlier, it is not in their interest to get you out of one of their products should the market tank. If you wish to minimize the impact on your portfolio, you will have to move to cash on your own.

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post #17 of 45 (permalink) Old 10-31-2017, 10:38 AM
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I second fidelity.

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post #18 of 45 (permalink) Old 10-31-2017, 01:19 PM Thread Starter
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I have Fidelity for an IRA, was once a 401K, managed fund with increased fees, but doing better than the S&P 500 (with fees)

I have Fidelity for a personal savings account. Money market fund, small risk, just looking to maintain or beat inflation, so far so good (1.5% or 2.5% return)

I have TRowe Price for another IRA, was recently a company 401K, just rolled over.

I know the consultant at Fidelity so that is why I am stopping by. I will of course ask someone else as well.


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post #19 of 45 (permalink) Old 10-31-2017, 01:29 PM
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Mutual Funds offered by Fidelity and others are great for the most part during times like now when the stock markets are consistently up and the bond markets are stable.

One of the guys mentioned to "move to cash when the market crashes" is perfect advice. Had I done this in the 2000 dot com crash, and again in the 2008 financial market meltdown, I would not need to be still working in Corporate America. However, the "Fidelity man" didn't call me to provide me with this advice, nor would he ever. A 50% loss in account value requires a subsequent 100% gain just to get back to where you were prior to the loss. This exact scenario played out in 2000, and again in 2008.

So - how can we know when the market is "crashing", and how can we know the "all clear" signal once the market is done crashing and it's time to go back into the stock-based mutual funds???

There is a signal that all of you can set up and easily monitor ... as easy as monitoring your dash gauges when driving your car - which you all like to do or you wouldn't be on this forum. The chart to watch is a chart of the S&P500 index. Add two simple daily moving average plots to the chart - one at 50 days and one at 200 days. If you do this now, you will see that the 50 day moving average is much higher than the 200 day moving average. At some point, the market will cool off and pull back. When this starts, and you see the 50 DMA cross down over the 200 DMA - that is the signal to exit your stock mutual funds and move on the sidelines into a money market. This gets you out of the way of the locomotive of a down market that may be signaled by this cross-over. Once the dust settles, and the 50 DMA crosses back up over the 200 DMA ... this is essentially the "all clear" signal to move out of the money market and back into the stock based mutual funds.

I have a brief power point that explain this better ... what exactly the signal looks like on a chart and how to set one up for yourself. I'm not able to attach the document, but let me know if you are interested and I'll send to your personal e-mail address. And please - I'm not selling anything here. Not now, and not later.
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post #20 of 45 (permalink) Old 10-31-2017, 04:52 PM
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I was not happy w/ Fidelity at all. I had a small 401k when I retired. moved it to an IRA w/ Fidelity. Maybe 3 years ago the markets and my IRA were dropping. I'd get a statement every 3 months and the balance was always lower. After a year I called and had a long talk. about their fee to me which was about $2000 per year. I asked why my balance was dropping if they were such a great management firm. The answer was that my IRA had dropped x % less than the overall market had dropped due to their excellent work. I said I sure don't know much about investing which is why I was with them. I said I did know there are other ways to invest besides the stock market. So, if we have been seeing the market falling for 4 quarters now, why the hell are we still in the market? They had no answer. I took my money and left.
One thing I have realized is that I don't think 401Ks are such a great deal. Especially if there is no employer match. Think about what you have earned each year since you were say 20 yrs old. Think about inflation. Think about tax rates rising. So the idea was that you would save on taxing that money now and tax it later when your income is lower so theoretically your would pay less taxes. Due to the above increases, your income when you retire, in the dollars of that year, may not be a lot lower than it was for a large portion of your working life.
See the red line on the first chart.
https://www.advisorperspectives.com/...ar-perspective
It's hard to see the exact number in 66 but looks to be in the $15-17k range and went to $59k this year. That is AVERAGE family income. Now most families move upward in their careers over a 45 year period (starting work at 20 and retiring at 65) so for any one person or family, they started out at just above minimum wage and increased their income by getting into higher level employment. So if one earned $20k that first year and was earning $100k at 65 what will the retirement income drop to? Don't know but let's say it drops to $60k. That is still more than they earned over a lot of their life so all the benefits of paying taxes after retirement are on that 401K are lost for a lot of those years.

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post #21 of 45 (permalink) Old 11-01-2017, 03:12 AM Thread Starter
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^^^

Like Craig, I also have almost exactly $2,000 in fees with a "managed" fund with Fidelity. I also have another IRA with another company in one of those so-called 2035 retirement funds. I am three years into both, the Fidelity is doing OK, in a few more years I will have do carefully examine both and see if the manged account is worth it.

------------

I learnt only a few things when speaking with the adviser.

Turns out you can indeed contribute to a tax-deferred/tax-deductible IRA on your own, and the way it works is you contribute on your own through your checking or however you get paid. At the end of the tax year, you get a statement for your tax guy that makes an adjustment for not being taken out pre-tax by your employer. but the maximum you can do on your own is just over $5000 per year, and if you do this you can't contribute to a Roth IRA.

the adviser did bring up the idea of setting me up as a contractor. good idea but probably a long-shot.

I did not ask about the health care savings account and i should have. (not sure if a Fidelity guy would know.) I am still trying to sort the details - i am pretty much perfectly healthy and there are no genetic or otherwise unusual health risks for me. you need to have a high deductible health plan, i have no clue what plans this possible new company offers. looks like you can save $6,750 a year into it (2017)

my goal is about $18,000 into the 401K, plus max out Roth at about $4500 per year. (I think the Roth part might cost me $6,000 pre-tax base salary.)

this online calculator pops out ballpark what my entire tax return has been the past 8-10 years. I don't want to lose that money in my pocket!

https://ffcalcs.com/pretax_savings

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post #22 of 45 (permalink) Old 11-01-2017, 11:25 AM
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The thing for me when talking to Fidelity was my results followed the stock market almost exactly. I had that 401K for maybe 18 yrs at two previous jobs and took the huge hit in 08. I commented to Fidelity that if one looked at my 401k from 08 on (converted to an IRA when I retired in 12 or 13), nearly any idiot could have gotten the same results as the stock market slowly, slowly recovered until that downturn in 14 or 15. They may have smoothed out the ups and downs a little but that is all they accomplished. Of course in the last 9 months my wife's 401K has been doing great.

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post #23 of 45 (permalink) Old 11-01-2017, 11:50 AM
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The wife and I are invested through fidelity. We each have a managed account, several non managed accounts, and a Roth IRA.

When I retired a few months ago, we met with our guy and established a risk/growth/income balance on the managed accounts. The managed accounts are very diversified. Our risk level is a 6 so we have bond funds that pay when the market drops. Our return YTD is around 14%. We set up the roths with more exposure to risk. We keep cash invested in CDs and a money market. It's about having various buckets to draw from to mitigate market fluctuations. The HSA pays for our medical copays and a few pills.

If you want to maximize your market gains to exceed the market movement, you can pay someone to actively manage your money. They will move it more frequently than fidelity does in their managed account. It might cost you 1 to 4% of your investment portfolio every year vs what fidelity charges us at 0.6% yearly.

I meet with our fidelity guy once a quarter. So far so good. So far we are living 100% off my pension. Our living costs are so low we may never "need" to take distributions. Of course that's not possible so I really need to get my head around spending more in retirement instead of saving. For us, it's a hard thing to overcome an old habit.


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post #24 of 45 (permalink) Old 11-01-2017, 12:35 PM
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Some good responses here. I was very fortunate throughout the years to work for companies that had pretty decent 401K matching, so it was a no-brainer to maximize my contributions to take advantage of that. Especially once our sons were grown and we were through the college expense years and could afford it. Plus we used an HSA for health expenses which my last employer heavily added to in order to encourage its use. So another no-brainer.

But the best advice is to get a financial planner. One who is properly qualified and certified, that you trust, and most especially can't sell you anything. A good one will take you through your entire financial picture, goals, budget, etc. It's not cheap if done right. But should more than pay for itself and give you some peace of mind about a very complicated subject. We started working with one several years before I retired. He's been outstanding, and my only regret is I should have done that much sooner. For years I had a pretty simple approach to selecting funds, typically using the "Retirement 20xx" blended funds. There are much better and lower cost options. Our planner helped us select the best mix of low fee funds for our situation. We do an annual asset allocation review. We have our accounts at Vanguard, which I've been happy with and recommend. But I don't use them for our personal planning.

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post #25 of 45 (permalink) Old 11-01-2017, 02:13 PM
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Quote:
Originally Posted by Greg_M View Post

If you want to maximize your market gains to exceed the market movement, you can pay someone to actively manage your money. They will move it more frequently than fidelity does in their managed account. It might cost you 1 to 4% of your investment portfolio every year vs what fidelity charges us at 0.6% yearly.


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Study after study after study has shown that almost no one can consistently beat the market over time. Most managed accounts end up lagging the market. Then when you subtract out their management fees you come out way behind.
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post #26 of 45 (permalink) Old 11-01-2017, 02:40 PM
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Agree totally with that. That's why my goal is low management cost with a reasonable 8% return, moderate volatility and some income growth over the long term.

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post #27 of 45 (permalink) Old 11-01-2017, 04:23 PM Thread Starter
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I actually never thought of this…

About the current new job…. The retirement services are only in cue – waiting on paperwork, etc. (I am only a few weeks in.)

Can I save to 401K the maximum allowed $18,000 per year PLUS contribute the maximum ~$4500 (after tax) to a Roth IRA?

This was the plan.

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post #28 of 45 (permalink) Old 11-01-2017, 05:26 PM
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I actually never thought of this…

About the current new job…. The retirement services are only in cue – waiting on paperwork, etc. (I am only a few weeks in.)

Can I save to 401K the maximum allowed $18,000 per year PLUS contribute the maximum ~$4500 (after tax) to a Roth IRA?

This was the plan.
Yes, but see link: https://www.fool.com/retirement/2017...1k-at-wor.aspx

As good an engineer you seem to be, you might be making the big bucks and get tripped up by the contribution limits based on income.

As I mentioned way back earlier in this thread, if you want to shelter more income convert some of your existing stuff to Roth. Yes, I know if feels like you are paying more tax but really only paying it sooner. Another way of thinking of it is all that money you have in traditional 401k or traditional IRA isn't really yours. You are a partner with the govt for 33% of it (again assuming a tax rate for a high paid engineer.)

Or, if your employer has a Roth option just use that instead. Your are sheltering 33% more income!!
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post #29 of 45 (permalink) Old 11-01-2017, 06:27 PM Thread Starter
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I did not know there was something called “Adjusted Income Limit”! I read the link and associated links twice, I still don’t get all of it but I will try again later.

Seems to be related to extra tax money you get back. If you make $100K and save 18% to a 401K, your adjusted gross income is not $82K. Or is it?


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post #30 of 45 (permalink) Old 11-01-2017, 07:11 PM
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Eddie, I would consult a financial planner. I have been with a guy for 20 years now. Small company, knew the guy in high school.
They can help with all of this. I have a simple and SEP IRA. I am self employed. The SEP allows 20% max of my guaranteed payments each year, but I also have to give any employees the same amount. So, there are pros and cons with each type that is available to you. If your AGI is too high, you can't do a ROTH IRA. That's been the case with me personally for a while now. It is really complicated and I leave it to the experts. Also, the rules change all the time. I contribute some to retirement accounts and also buy and sell my own individual stocks, some real estate deals etc. All in efforts to earn towards retirement some day. I'm on a plan to work until 65-70. Hopefully will have someone to buy me out of the company that I built for decades. I don't count on that sale - just icing on the cake if it works out.
Seems like since the 2008 hell, there are a lot of funds available with this move to cash in large market drops. There return isn't as quick when compared to other funds but it is safer in case a 2008 bomb hits again.

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