How Ignorant am I? 5yr on Job, No 401k. 100K collecting dust

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StevenNJ1
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How Ignorant am I? 5yr on Job, No 401k. 100K collecting dust

Post by StevenNJ1 »

Hi all. Glad I found this forum as I see great advice being given to folks here.

Just now I am realizing how stupid I was about my finances.

I have a 6 figure salary and I am single. My taxes that I pay each year are crazy (33% or so). All money that I get paid (60% salary, 40% commission bonus) is just going into my savings account that has absolutely no ROI. My employer offers 5% match on 401K and I have not taken advantage of it for all 5 years that I've been with them. I am only 30 years old. I don't even want to know how much money I lost (didn't gain) throughout all these years.

I also have over 100K sitting in the bank collecting dust.

But ... better late than never .... how do I get myself back on the right path?

I am assuming first thing is to get on the 401K plan and max it out at $17,500?
what else? Stocks? bonds? mutual funds?
In maybe 3-5 years I am hoping to buy my own home. Right now I rent.

I am very beginner in all the financial jargon. Didn't really know much about 401K 3 days ago.

If you were me ... other than shoot your self, :-), what would you do? What should be my action plan?
Any feedback would really be appreciated.

thank you.
CoAndy
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by CoAndy »

LOL! :sharebeer
I think you're being a little hard on yourself. Yes, skipping the 401(k) match is painful but no time like the present to right the ship. Maxing your 401(k) should be your first priority. You might want to list the available funds and expense ratios. Contributing $5,000 to a ROTH IRA for 2013 is still a possibility. I would then rope off some cash for your emergency fund and let the rest of that 100k be the seed money for your future house down payment.
You will be fine going forward.
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mickeyd
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by mickeyd »

Any feedback would really be appreciated.
A good place to start is to pick up a copy of "Bogleheads Guide to Investing." Next, read it. Next, read it again and mark up the book.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle
DSInvestor
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

Max out 401k contribution for 2014. That's 17.5K.
Max out IRA contribution for 2013. $5,500. Deadline for 2013 IRA contribution is April 15, 2014.
Max out IRA contribution for 2014. $5,500

If you have HSA eligible High Deductible Health Plan, max out your HSA contributions for 2013 and 2014.

Check your 2013 W2 form to see if the retirement plan box is checked. If not checked, you're eligible for full Traditional IRA tax deduction no matter how high your income. If you eligible for tax deductible Traditional IRA contribution for 2013, do that ASAP. If this box is checked, you're covered by an employer plan and income limits apply to take the TIRA tax deduction and your 6 digit income will probably not allow any deduction. The next thing is to check to see if you're eligible for full $5,500 Roth IRA contribution which requires that 2013 AGI/MAGI be under 112K.

There is time pressure for the 2013 IRA contribution. Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account. Vanguard is a good company for IRA. Put your contributions in a Money Market Fund (Prime Money Market) inside the IRA until you come up with an investment plan. You can change investments later and there are no tax consequences for selling or exchanging investments inside IRAs.

For 2014, if you max out Traditional 401k, that will lower your AGI and MAGI to help you stay under the income limits for direct Roth IRA contributions.
Last edited by DSInvestor on Fri Apr 04, 2014 2:46 pm, edited 1 time in total.
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by Jack FFR1846 »

While you're setting up your Roth for 2013 (before April tax day), you can do a 2014 one at the same time.
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ps56k
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by ps56k »

StevenNJ1 wrote:My employer offers 5% match on 401K and I have not taken advantage of it for all 5 years that I've been with them.
Hey - my wife is a special ed teacher,
and never told me about the school district's 403b (like a 401k) for 20 years.
She didn't know what it was, and kept deleting the email info...
We just started contributing last year.
Last edited by ps56k on Fri Apr 04, 2014 3:01 pm, edited 1 time in total.
NorCalDad
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by NorCalDad »

While you made mistakes, you could have done much worse. At least you saved.

How big a priority is buying a home? If you live in high-cost New Jersey, you'll probably need much of that money for down payment, taxes, moving costs, furnishings, emergency fund. I might direct $11,000 toward IRA 2013 + 2014, set your 401k so you max out going forward, then preserve the remaining cash in a money market or short-term bond fund for house purposes.
SiteScopeBound
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by SiteScopeBound »

Hey, for whats it's worth, I'd rather be 30 and have 100k in the bank than be 31 and have only 70k in 401k. (oh wait.. who wouldnt!)

Plus you make at least 2x what I make. :)

So, don't be too hard on yourself. After you educate yourself about investing.. start thinking about if there is anything else that you've forgotten about. Do you have a will? Life ins? Do you keep close track of your monthly budget? You say you have 100k, but didn't specify whether or not you have any debt (I'd hope you don't with 100k in the bank..)

I'm a newbie too, but just sharing some thoughts.


Next thing you do is find out what funds are available in your companies 401k, and share that with this board and they can make suggestions on where to start (or educate yourself by looking at previous topics on this board)
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rob
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by rob »

DSInvestor wrote:Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account.
Depending how far into "6 figures", I would suggest NOT funding a non deductible Trad IRA (if over the Roth limit)..... I did that long ago and wish I had kept non-ded contributions out of the mix.

If under the roth limit, then year 2013 roth contrib a no brainer but would hold off on 2014 if there is any type of bonus payment or variable compensation that could push over the limit (forcing a recharacterization later).
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
DSInvestor
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

rob wrote:
DSInvestor wrote:Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account.
Depending how far into "6 figures", I would suggest NOT funding a non deductible Trad IRA (if over the Roth limit)..... I did that long ago and wish I had kept non-ded contributions out of the mix.

If under the roth limit, then year 2013 roth contrib a no brainer but would hold off on 2014 if there is any type of bonus payment or variable compensation that could push over the limit (forcing a recharacterization later).
If OP's income is too high for Roth IRA contributions and cannot take the tax deduction for TIRA contribution, it may still work out for him if he has no other IRA assets. He can convert the entire TIRA to Roth IRA which would consume all IRA basis.

Rob, I agree with you. If you cannot or are not willing to convert the non-deductible contributions (IRA basis) to Roth IRA right away, it is probably better to keep the TIRAs purely pre-tax, particularly if there are no good options to isolate the basis (i.e. your 401k doesn't accept rollovers or has very high cost investment options).
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retiredjg
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by retiredjg »

Well, you were ignorant, no big deal. You weren't stupid because you did save money and that is the first and most important step anyway.

Do the things DSINvestor said by filling your 401k this year and a Roth IRA - via the back door if necessary - for both 2013 and 2014. Consider what is left your emergency fund and a downpayment for your house. Continue on each year.

You may have lost some, but you'll get a house sooner than if you had saved everything for retirement. It will all even out in the end if you continue saving money.
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Crimsontide
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by Crimsontide »

No you are not ignorant, you are like most 30 year olds: you are just waking up. But unlike most 30 year olds you woke up with 100k in the bank. Plenty of time left to play catch up. Get started by maxing the 401 while taking the free money match from your employer.
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StevenNJ1
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

I wanted to do a multiquote to thank every one who wrote back with suggestions, .... just don't see that option here.
oh, found it :-)
DSInvestor wrote:Max out 401k contribution for 2014. That's 17.5K.
Max out IRA contribution for 2013. $5,500. Deadline for 2013 IRA contribution is April 15, 2014.
Max out IRA contribution for 2014. $5,500

If you have HSA eligible High Deductible Health Plan, max out your HSA contributions for 2013 and 2014.

Check your 2013 W2 form to see if the retirement plan box is checked. If not checked, you're eligible for full Traditional IRA tax deduction no matter how high your income. If you eligible for tax deductible Traditional IRA contribution for 2013, do that ASAP. If this box is checked, you're covered by an employer plan and income limits apply to take the TIRA tax deduction and your 6 digit income will probably not allow any deduction. The next thing is to check to see if you're eligible for full $5,500 Roth IRA contribution which requires that 2013 AGI/MAGI be under 112K.

There is time pressure for the 2013 IRA contribution. Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account. Vanguard is a good company for IRA. Put your contributions in a Money Market Fund (Prime Money Market) inside the IRA until you come up with an investment plan. You can change investments later and there are no tax consequences for selling or exchanging investments inside IRAs.

For 2014, if you max out Traditional 401k, that will lower your AGI and MAGI to help you stay under the income limits for direct Roth IRA contributions.
Awesome info and in clear form. Much appreciated. Only thing is I still don't know which one I should pursue .. roth or standard IRA. Seems like Roth gives lesser return but more freedom. I hope I won't need to touch my IRA money till 60, so maybe regular IRA (i hope I am not saying something dumb as, again, 2 days ago i didn't know anything).

I am also interested in doing some stock investing in the near future. Wanted to follow this guy.
http://www.crossingwallstreet.com/buylist

he gets pretty good praise from stock community I guess.

CoAndy wrote:LOL! :sharebeer
I think you're being a little hard on yourself. Yes, skipping the 401(k) match is painful but no time like the present to right the ship. Maxing your 401(k) should be your first priority. You might want to list the available funds and expense ratios. Contributing $5,000 to a ROTH IRA for 2013 is still a possibility. I would then rope off some cash for your emergency fund and let the rest of that 100k be the seed money for your future house down payment.
You will be fine going forward.
:-) I still want that 100K+ to continue growing. So maybe do a lower Roth IRA contribution of let's say $2,500 a year?
mickeyd wrote:
Any feedback would really be appreciated.
A good place to start is to pick up a copy of "Bogleheads Guide to Investing." Next, read it. Next, read it again and mark up the book.
Already on my list of books to read. thanks.
NorCalDad wrote:While you made mistakes, you could have done much worse. At least you saved.

How big a priority is buying a home? If you live in high-cost New Jersey, you'll probably need much of that money for down payment, taxes, moving costs, furnishings, emergency fund. I might direct $11,000 toward IRA 2013 + 2014, set your 401k so you max out going forward, then preserve the remaining cash in a money market or short-term bond fund for house purposes.
Yea, in reality even if I do 15% downpayment, I want to feel good knowing that I gave only let's say 50% of my total capital (not counting retirement funds), so I still want that 100k+ savings to grow. Therefore I am thinking to do a bit less saving in IRA and maybe in year 3, 4, 5 of 401K maybe not max it out .... Does this make any sense?
SiteScopeBound wrote:Hey, for whats it's worth, I'd rather be 30 and have 100k in the bank than be 31 and have only 70k in 401k. (oh wait.. who wouldnt!)

Plus you make at least 2x what I make. :)

So, don't be too hard on yourself. After you educate yourself about investing.. start thinking about if there is anything else that you've forgotten about. Do you have a will? Life ins? Do you keep close track of your monthly budget? You say you have 100k, but didn't specify whether or not you have any debt (I'd hope you don't with 100k in the bank..)

I'm a newbie too, but just sharing some thoughts.


Next thing you do is find out what funds are available in your companies 401k, and share that with this board and they can make suggestions on where to start (or educate yourself by looking at previous topics on this board)
Actually good point .... I do not have a life or term life insurance and I actually need to set one up. At least 20 year term.

rob wrote:
DSInvestor wrote:Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account.
Depending how far into "6 figures", I would suggest NOT funding a non deductible Trad IRA (if over the Roth limit)..... I did that long ago and wish I had kept non-ded contributions out of the mix.

If under the roth limit, then year 2013 roth contrib a no brainer but would hold off on 2014 if there is any type of bonus payment or variable compensation that could push over the limit (forcing a recharacterization later).
this went over my head, sorry. Have no idea what this means.


------------
I have yet to do my taxes for 2013 ... from what I understand, before going to see my accountant, I should open up that 401K with employer ... I guess this monday ASAP. Regarding IRA ... when you guys said as backdoor .. again, meaning my accountant can do this for my when I come see him to do taxes?

On a different note ,... I feel bad for the 100K+ sitting in the bank. I really need to park it somewhere for the next 2-3 years or so before I buy a home. Blue chip stocks?, As long as I get at least 4-5% yearly return I at least get to avoid inflation killing the value.

once again ... thank you.
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by fourwedge »

You should absolutely max out all tax sheltered space every possible year. That means 17.5k in the 401k and 5.5k in whichever IRA you can contribute to. And following some stock picker would be a bigger bonehead move then not contributing to your retirement so far. Stocks are a crap shoot at best. Trust me.... I've been there and done that. It's a losers game.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
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fourwedge
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by fourwedge »

If you need your money in 3-5 years then don't invest it. Put it in a money market acct. you better read the wiki and the books suggested on boglehead investing before you have half of this money left from a stock purchase and are asking for better advice.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
DSInvestor
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

StevenNJ1 wrote:
DSInvestor wrote:Max out 401k contribution for 2014. That's 17.5K.
Max out IRA contribution for 2013. $5,500. Deadline for 2013 IRA contribution is April 15, 2014.
Max out IRA contribution for 2014. $5,500

If you have HSA eligible High Deductible Health Plan, max out your HSA contributions for 2013 and 2014.

Check your 2013 W2 form to see if the retirement plan box is checked. If not checked, you're eligible for full Traditional IRA tax deduction no matter how high your income. If you eligible for tax deductible Traditional IRA contribution for 2013, do that ASAP. If this box is checked, you're covered by an employer plan and income limits apply to take the TIRA tax deduction and your 6 digit income will probably not allow any deduction. The next thing is to check to see if you're eligible for full $5,500 Roth IRA contribution which requires that 2013 AGI/MAGI be under 112K.

There is time pressure for the 2013 IRA contribution. Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account. Vanguard is a good company for IRA. Put your contributions in a Money Market Fund (Prime Money Market) inside the IRA until you come up with an investment plan. You can change investments later and there are no tax consequences for selling or exchanging investments inside IRAs.

For 2014, if you max out Traditional 401k, that will lower your AGI and MAGI to help you stay under the income limits for direct Roth IRA contributions.
Awesome info and in clear form. Much appreciated. Only thing is I still don't know which one I should pursue .. roth or standard IRA. Seems like Roth gives lesser return but more freedom. I hope I won't need to touch my IRA money till 60, so maybe regular IRA (i hope I am not saying something dumb as, again, 2 days ago i didn't know anything).
The choice of Roth IRA contribution vs Traditional IRA contribution will depend on your tax situation.

1. Tax deductible Traditional IRA contribution. Traditional IRA contributions are allowed no matter how high your income but tax deduction is subject to income limits if covered by an employer plan. You employer offered an employer plan but you didn't contribute. The key here is what's on your W-2 form for the retirement plan box. If the retirement plan box is not checked, you were not covered by an employer plan. If you were not covered, you have the option for make tax deductible contributions to Traditional IRA. This is a good option given that you didn't contribute to 401k. If you were covered, your high income makes you ineligible for this option. Move on to next option.

2. Roth IRA contribution. There is a MAGI limit that could disallow Roth IRA contributions. No Roth IRA contributions are allowed if MAGI exceeds 127K for a single filer, 188K for married filing jointly, 10K for married filing separately. You indicated that you have a 6 digit income so this MAGI limit is an issue. If your income allows Roth IRA contribution, this is what you should do. If not eligible, there is one option left.

3. Non-deductible Traditional IRA contribution. If you're covered by an employer plan (retirement plan box checked on W-2), your income will disallow any Traditional IRA tax deduction. I would only make this type of contribution if you were ineligible for the other two types of contributions. Make the non-deductible contribution and immediately convert all assets in the Traditional IRA account to Roth IRA. This is called the backdoor into Roth IRA. This option works best if you have no other IRA assets in Traditional IRA, SEP-IRA, SIMPLE-IRA.

Tricky stuff. Sorry to spring this on you with so little time before the April 15, 2014 deadline.
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by hoppy08520 »

DSInvestor wrote:Max out 401k contribution for 2014. That's 17.5K.
One little point on this -- you mention that your salary is a blend of base + commission. With a variable salary, it can be hard to make sure you hit the max if you choose the contribute based on a percentage of your paycheck, since your paycheck varies. Therefore, if you can, see if you are able to contribute a fixed amount per pay period, rather than a percentage. This will also ensure you earn the maximum company match. Some 401(k) plans will match only a certain amount per pay period, so if you hit the max early, you can lose out on gaining the maximum match. Check with your own plan to be sure, as they can vary.

For example, suppose you get paid twice per month. This means you have 18 periods left (9 months x 2). So see if you can contribute $972.22 per pay period ($17,500 / 18).
dickenjb
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by dickenjb »

1) Stop beating yourself up

2) Immediately fund an IRA for $5500 (2013 contribution) - before 4/15/2014! You need to look at your AGI to determine best path, but if you are a good earner you are probably looking at making a non deductible contribution to a Traditional IRA, then converting to Roth

3) Immediately start maxing out your 401(k) at $17,500 - just put it in a Target Date fund or something until you/we can review your options. Every pay period you don't contribute you are likely losing match

4) Fund IRA for 2014 - no hurry on this one as deadline is 4/15/2015
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by NorCalDad »

StevenNJ1 wrote:Yea, in reality even if I do 15% downpayment, I want to feel good knowing that I gave only let's say 50% of my total capital (not counting retirement funds), so I still want that 100k+ savings to grow. Therefore I am thinking to do a bit less saving in IRA and maybe in year 3, 4, 5 of 401K maybe not max it out .... Does this make any sense?
You should buy with 20% down to avoid PMI. I would try to prioritize retirement saving over house fund until you're ready to set roots somewhere.
StevenNJ1 wrote:Actually good point .... I do not have a life or term life insurance and I actually need to set one up. At least 20 year term.
You're single. I don't think you need life insurance unless relatives are counting on your financial support.
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MikeWillRetire
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by MikeWillRetire »

Get married to someone who makes as much as you do, and saves as much.
Topic Author
StevenNJ1
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

fourwedge wrote:You should absolutely max out all tax sheltered space every possible year. That means 17.5k in the 401k and 5.5k in whichever IRA you can contribute to. And following some stock picker would be a bigger bonehead move then not contributing to your retirement so far. Stocks are a crap shoot at best. Trust me.... I've been there and done that. It's a losers game.
Regarding 17.5 in 401K I get it ... 100% will do right away.
I am however uncertain about the IRA ... you say, "tax sheltered" ... IRA means during my tax time I can write off or save somehow on my taxes because I deposit into IRA?

From what I am seeing, because I am single and I get hit heavy with yearly taxes, I guess I need to find all possible ways to write off as much stuff as possible.
Will buying real estate (home for my self or a condo) be a wise thing to do? I know on average people get 5-8K a year in return if they own property.
fourwedge wrote:If you need your money in 3-5 years then don't invest it. Put it in a money market acct. you better read the wiki and the books suggested on boglehead investing before you have half of this money left from a stock purchase and are asking for better advice.
I checked Money Market accounts and I see that if I park my $100K in it ... 1 year later return is $854 before tax Does that sound about right? (http://www.ally.com/bank/money-market-account/)
DSInvestor wrote:

The choice of Roth IRA contribution vs Traditional IRA contribution will depend on your tax situation.

1. Tax deductible Traditional IRA contribution. Traditional IRA contributions are allowed no matter how high your income but tax deduction is subject to income limits if covered by an employer plan. You employer offered an employer plan but you didn't contribute. The key here is what's on your W-2 form for the retirement plan box. If the retirement plan box is not checked, you were not covered by an employer plan. If you were not covered, you have the option for make tax deductible contributions to Traditional IRA. This is a good option given that you didn't contribute to 401k. If you were covered, your high income makes you ineligible for this option. Move on to next option.

2. Roth IRA contribution. There is a MAGI limit that could disallow Roth IRA contributions. No Roth IRA contributions are allowed if MAGI exceeds 127K for a single filer, 188K for married filing jointly, 10K for married filing separately. You indicated that you have a 6 digit income so this MAGI limit is an issue. If your income allows Roth IRA contribution, this is what you should do. If not eligible, there is one option left.

3. Non-deductible Traditional IRA contribution. If you're covered by an employer plan (retirement plan box checked on W-2), your income will disallow any Traditional IRA tax deduction. I would only make this type of contribution if you were ineligible for the other two types of contributions. Make the non-deductible contribution and immediately convert all assets in the Traditional IRA account to Roth IRA. This is called the backdoor into Roth IRA. This option works best if you have no other IRA assets in Traditional IRA, SEP-IRA, SIMPLE-IRA.

Tricky stuff. Sorry to spring this on you with so little time before the April 15, 2014 deadline.
I looked at my W2 ... that field you're talking about is empty. So I am able to put money into standard IRA?
To be honest, I don't want to go crazy depositing too much money into savings and not being able to access it. I do plan on buying property some time in next 2-4 years and I want my savings to grow.

Or are you saying that with my tax situation it's simply stupid not to do full 5,500 contribution>?
Also ... I am waiting for our HR manager to come back and hopefully he'll be in on Monday. Should the 401K be done before I do my taxes this year? or it doesn't matter?

thank you.
hoppy08520 wrote:
DSInvestor wrote:Max out 401k contribution for 2014. That's 17.5K.
One little point on this -- you mention that your salary is a blend of base + commission. With a variable salary, it can be hard to make sure you hit the max if you choose the contribute based on a percentage of your paycheck, since your paycheck varies. Therefore, if you can, see if you are able to contribute a fixed amount per pay period, rather than a percentage. This will also ensure you earn the maximum company match. Some 401(k) plans will match only a certain amount per pay period, so if you hit the max early, you can lose out on gaining the maximum match. Check with your own plan to be sure, as they can vary.

For example, suppose you get paid twice per month. This means you have 18 periods left (9 months x 2). So see if you can contribute $972.22 per pay period ($17,500 / 18).
My yearly salary is pretty much the same and it's 6 figures. Our employer does not do the 5% on bonuses ... only salary, so ... from them it's pretty much $5,000 a year.
dickenjb wrote:1) Stop beating yourself up

2) Immediately fund an IRA for $5500 (2013 contribution) - before 4/15/2014! You need to look at your AGI to determine best path, but if you are a good earner you are probably looking at making a non deductible contribution to a Traditional IRA, then converting to Roth

3) Immediately start maxing out your 401(k) at $17,500 - just put it in a Target Date fund or something until you/we can review your options. Every pay period you don't contribute you are likely losing match

4) Fund IRA for 2014 - no hurry on this one as deadline is 4/15/2015
How does funding the IRA actually happen? With my accountant? or should that be done before I go do my taxes for this year?
thank you. Great info.
NorCalDad wrote:
StevenNJ1 wrote:Yea, in reality even if I do 15% downpayment, I want to feel good knowing that I gave only let's say 50% of my total capital (not counting retirement funds), so I still want that 100k+ savings to grow. Therefore I am thinking to do a bit less saving in IRA and maybe in year 3, 4, 5 of 401K maybe not max it out .... Does this make any sense?
You should buy with 20% down to avoid PMI. I would try to prioritize retirement saving over house fund until you're ready to set roots somewhere.
StevenNJ1 wrote:Actually good point .... I do not have a life or term life insurance and I actually need to set one up. At least 20 year term.
You're single. I don't think you need life insurance unless relatives are counting on your financial support.
I know about PMI ... but PMI insurance is only being paid for the first year, no? I'd rather keep that extra 10% to invest in something or just hold on to it as a security.

Regarding life insurance ... i do have people that count on me so I do need it ... just in case. $500K payout max. (not looking to give them a celebration if I die) :-)
MikeWillRetire wrote:Get married to someone who makes as much as you do, and saves as much.
haha ... too late :-) I work, she takes care of me. And no, I can't claim her on my taxes.

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

Great info guys. This is probably the best discussion forum I've seen. Goldmine.

Bottom line is ... I am looking to save for my golden years but I don't want to stress too much on it as I don;'t know where life will take me. 401K is a no brainer. IRA is interesting and if it gives a return AND helps me avoid a bit on taxes then I should definitely do it. I am thinking that because I am single with a high earning bracket it maybe makes sense to buy property instead of rent as I've been doing for years. I hear people getting back 5-8K yearly on taxes ... this would make it a no brainer. Rent these days I pay is $2,000 /mo. I can easily buy something at $400K (single family home) or $750K (multi family and rent out part of house). That's where my question about 100K comes in ... does it make sense to buy using that amount as down payment or try to invest it in something else for better return>?

once again ,.,.. thank you all.
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pteam
Posts: 419
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by pteam »

the good news is most of your friends that are 30 have $0 saved and are maybe even in debt and possibly still living at home... trust me I know plenty who fall in at least 1 or all 3 of those categories at 30.

So now your enlightened, better at 30 than at 40. read this forum everyday, and max out your 401k into the lowest cost expense ratio index funds you can. Don't chase individual stocks they're too hard to guess. Start saving as much as you can because you don't want to look at your portfolio when your 40 and say damn I still only have 100k and now I own a house and have debt to boot! Remember 100k isnt alot when you make 100k a year thats basically only 1 years worth of money, the more you save the more you'll enjoy life because lots of worries will go away :)
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kwan2
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by kwan2 »

is it collecting dust in a savings account, some of them may pay 0.75%, put your 6 mo of emergency money there, keep 20% for your 30 year fixed on top of that, unless you want a smaller mortgage, figure out your risk tolerance, buy TSM/TBM accordingly, live more frugally, done.
“The history of Paris teaches us that beauty is a by-product of danger, that liberty is at best a consequence of neglect, that wisdom is entwined with decay."
stlutz
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by stlutz »

Hi OP--

Welcome to the forum!

I'm going to contradict some of the other folks here and just say, slow down!

Here are the steps to follow:

1) Find out how to enroll in your 401K and what funds are available.
2) When you know what funds are available in your 401K, post that list here to get advice on which ones to invest in and *why*.
3) Actually sign up for your 401K
4) Read the Bogleheads Guide to Investing as noted before.

If you make a 6 figure salary and are single, there is a very good chance you have a limited or no ability to contribute to a Roth IRA for 2013. *Do not*, repeat, do not make such a contribution before understanding these limits or life could get complicated fast.

Once you've done the 4 steps above, then would be a good time to setup a Roth IRA for 2014, and either fund it directly or via the "backdoor". Again, once you've done the 4 steps above, then would be a good time to come back and inquire about more details regarding IRAs. Forget about 2013 at this point--the fate of your financial life will not be determined by whether you made a 2013 IRA contribution or not.

How expensive is housing where you live? Having the possibility of a ~$100K home downpayment means much different things in Silicon Valley vs. Dallas, TX.

Lastly, did I suggest that you slow down? Running around setting up all sorts of random accounts, finding internet stock tip newsletters (and yes, finding websites like http://www.crossingwallstreet.com/buylist is a horrible idea) etc. without putting a plan together will just replace one problem with another. Getting things together isn't a months long process, but it probably is a month-long process. During that time, people here will be happy to help you.

Finally, don't do or invest in anything you don't fully understand (yet). Learn the difference between a traditional IRA and a Roth IRA and why high earners often do a "Backdoor" Roth before you setup any IRAs, for example.

Finally, since nobody has suggested it yet, the wiki is an excellent resource: http://www.bogleheads.org/wiki/Getting_started
z3r0c00l
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by z3r0c00l »

SiteScopeBound wrote:Hey, for whats it's worth, I'd rather be 30 and have 100k in the bank than be 31 and have only 70k in 401k. (oh wait.. who wouldnt!)
Except he would have something like 50,000 in the bank and 125,000 in the 401K had he maxed it out for the past 5 years and got the 5% match and a 50% return on money invested in 80/20.

Be a little bit hard on yourself for losing out on 50,000 - $75,000 over 5 years...
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HardKnocker
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by HardKnocker »

StevenNJ1 wrote:
I also have over 100K sitting in the bank collecting dust.
You can't be too dumb if you have $100k in the bank.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
DSInvestor
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

StevenNJ1 wrote:I looked at my W2 ... that field you're talking about is empty. So I am able to put money into standard IRA?
To be honest, I don't want to go crazy depositing too much money into savings and not being able to access it. I do plan on buying property some time in next 2-4 years and I want my savings to grow.

Or are you saying that with my tax situation it's simply stupid not to do full 5,500 contribution>?
Also ... I am waiting for our HR manager to come back and hopefully he'll be in on Monday. Should the 401K be done before I do my taxes this year? or it doesn't matter?
Steven, I assume you only have 1 W-2 form for 2013. If that W-2 didn't have the retirement plan box checked, you were not covered by an employer plan for 2013. This means that you can contribute $5,500 to Traditional IRA for 2013 (deadline April 15, 2014) and take full deduction of $5,500. This will reduce your Fed taxes by at least $1375 if you're in 25% fed bracket, more if you're in higher bracket. State of NJ does not allow Traditional IRA tax deduction, so no reduction in state tax income tax.

Here is a link to IRS Pub 590 which covers Traditional IRA and Roth IRA. This link is to the section in Traditional IRA Am I covered by an Employer plan?
http://www.irs.gov/publications/p590/ch ... 1000230449
Are You Covered by an Employer Plan?

The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The “Retirement Plan” box should be checked if you were covered.

Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered , later.

If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer.
Federal judges. For purposes of the IRA deduction, federal judges are covered by an employer plan.

For Which Year(s) Are You Covered?

Special rules apply to determine the tax years for which you are covered by an employer plan. These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan.
Tax year. Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. For almost all people, the tax year is the calendar year.
That covers the IRA contribution for 2013 which is possible now due to the April 15, 2014 deadline.

Unfortunately it is not possible to contribute now to 401(k) for 2013. That must have been done in the 2013 calendar year. You should still get started with 401k ASAP and contribute for 2014 and beyond. If your 401k offers an employer match that requires that you make contributions every pay period, and with such plans, you need to spread you contributions out evenly through out the year. No all plans work that way. Some plans allow you to max out contirbution in one pay period and get full employer match. Check with HR to see how the match works if there is one.

Participation in the 401k for 2014, will certainly make you covered by an employer plan for 2014. Your 2014 W2 will have the retirement plan box checked. This will impact the kind of IRA contribution that you can make for 2014 tax year. When covered by an employer plan, your income will make you ineligible to take any tax deduction for Traditional IRA. In this case, you should see if your income allows direct Roth IRA contribution. If income too high for Roth IRA contribution, consider non-deductible Traditional IRA contribution and immediate conversion to Roth IRA.

Without a pension, you need to consider your retirement savings seriously. A common suggestion is to take your anticipated expenses and multiply that by 25. If you expect 60K annual expenses in retirement, you need to accumulate $1.5M in retirement assets to be able to afford a 4% rate of withdrawal. Consider your age, your savings rate and run some numbers to see how you can get to your retirement goal. You can borrow money to go to school or buy a house. Nobody will lend you money for your retirement.

Traditional 401k gives you big tax deduction up front and can grow tax deferred. Withdrawals from Traditional 401k are taxable.
Roth IRA contributions are not deductible (no tax break up front) but will grow tax free and withdrawals are tax free.
Taxable accounts are funded with after tax money, dividends, interest and capital gains taxed each year as they occur.

Consider contributions to taxable accounts after all tax advantaged options have been maxed.
Last edited by DSInvestor on Sat Apr 05, 2014 9:16 am, edited 1 time in total.
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cherijoh
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Location: Charlotte NC

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by cherijoh »

StevenNJ1 wrote: Awesome info and in clear form. Much appreciated. Only thing is I still don't know which one I should pursue .. roth or standard IRA. Seems like Roth gives lesser return but more freedom. I hope I won't need to touch my IRA money till 60, so maybe regular IRA (i hope I am not saying something dumb as, again, 2 days ago i didn't know anything).
I think you need to check out these articles in the Wiki: http://www.bogleheads.org/wiki/Traditional_IRA, http://www.bogleheads.org/wiki/Non-dedu ... tional_IRA and http://www.bogleheads.org/wiki/Roth_IRA. They give a good explanation of the things that confuse investors about IRAs.

A brief summary:
1) The annual limit for IRAs is cumulative - so you can contribute $5500 in total to any combination of deductible traditional, non-deductible traditional, and Roth IRAs for which you are eligible.
2) There are limits based on your income and filing status (e.g., single vs. MFJ) that may make you ineligible for a Roth IRA
3) If you have an employer sponsored plan like a 401K, there are also limits based on your income and filing status above which you are ineligible for a deductible traditional IRA
4) There are no similar restrictions on making non-deductible IRA contributions
Topic Author
StevenNJ1
Posts: 270
Joined: Fri Apr 04, 2014 12:56 pm

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

pteam wrote:the good news is most of your friends that are 30 have $0 saved and are maybe even in debt and possibly still living at home... trust me I know plenty who fall in at least 1 or all 3 of those categories at 30.

So now your enlightened, better at 30 than at 40. read this forum everyday, and max out your 401k into the lowest cost expense ratio index funds you can. Don't chase individual stocks they're too hard to guess. Start saving as much as you can because you don't want to look at your portfolio when your 40 and say damn I still only have 100k and now I own a house and have debt to boot! Remember 100k isnt alot when you make 100k a year thats basically only 1 years worth of money, the more you save the more you'll enjoy life because lots of worries will go away :)
I get you .... but it's 100K clean versus 100K+ before taxes :-)

stlutz wrote:Hi OP--

Welcome to the forum!

I'm going to contradict some of the other folks here and just say, slow down!

Here are the steps to follow:

1) Find out how to enroll in your 401K and what funds are available.
2) When you know what funds are available in your 401K, post that list here to get advice on which ones to invest in and *why*.
3) Actually sign up for your 401K
4) Read the Bogleheads Guide to Investing as noted before.

If you make a 6 figure salary and are single, there is a very good chance you have a limited or no ability to contribute to a Roth IRA for 2013. *Do not*, repeat, do not make such a contribution before understanding these limits or life could get complicated fast.

Once you've done the 4 steps above, then would be a good time to setup a Roth IRA for 2014, and either fund it directly or via the "backdoor". Again, once you've done the 4 steps above, then would be a good time to come back and inquire about more details regarding IRAs. Forget about 2013 at this point--the fate of your financial life will not be determined by whether you made a 2013 IRA contribution or not.

How expensive is housing where you live? Having the possibility of a ~$100K home downpayment means much different things in Silicon Valley vs. Dallas, TX.

Lastly, did I suggest that you slow down? Running around setting up all sorts of random accounts, finding internet stock tip newsletters (and yes, finding websites like http://www.crossingwallstreet.com/buylist is a horrible idea) etc. without putting a plan together will just replace one problem with another. Getting things together isn't a months long process, but it probably is a month-long process. During that time, people here will be happy to help you.

Finally, don't do or invest in anything you don't fully understand (yet). Learn the difference between a traditional IRA and a Roth IRA and why high earners often do a "Backdoor" Roth before you setup any IRAs, for example.

Finally, since nobody has suggested it yet, the wiki is an excellent resource: http://www.bogleheads.org/wiki/Getting_started
Awesome info ... really appreciate it.
You are correct ... as they say .. "A fool is soon parted with his money". I really don't want to jump into opening accounts without fully understanding the structure or cost benefit.

I've set up my 401K and it's being submitted today or tomorrow. I will post here the options I have on it in a bit.

Regarding buying property ... it's tricky. I looked at some condos this weekend ... avg price for a 2 bedroom is around $500K. Considering a 10% down payment, it's a mortgage for $450. I may do 15% down however. Either way, trying to see if it's a good investment considering I plan to move out to a diff location 4-5 years from now. Can always rent that place for at least $2,200 / mo.
DSInvestor wrote:Without a pension, you need to consider your retirement savings seriously. A common suggestion is to take your anticipated expenses and multiply that by 25. If you expect 60K annual expenses in retirement, you need to accumulate $1.5M in retirement assets to be able to afford a 4% rate of withdrawal. Consider your age, your savings rate and run some numbers to see how you can get to your retirement goal. You can borrow money to go to school or buy a house. Nobody will lend you money for your retirement.

Traditional 401k gives you big tax deduction up front and can grow tax deferred. Withdrawals from Traditional 401k are taxable.
Roth IRA contributions are not deductible (no tax break up front) but will grow tax free and withdrawals are tax free.
Taxable accounts are funded with after tax money, dividends, interest and capital gains taxed each year as they occur.

Consider contributions to taxable accounts after all tax advantaged options have been maxed.
I am still thinking about the IRA. Will ask many questions this week when I sit to do my taxes with my new accountant.
I understand that this forum really focuses on retirement wealth, etc but I want to not go too crazy with my 30 years from now planning. I still need to grow my money now to live on, buy property, etc.

thank you for all the feedback you provided. Great help.

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

I'll post my new 401k info here shortly.
investor1
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Joined: Thu Mar 15, 2012 8:15 pm

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by investor1 »

1. Start contributing to your 401(k). Put in at least the amount your employer will match. If it is a good plan, max it out.
2. If you are going to buy a house in ~5 years (or less), keep the money for a down payment. Put aside at least 20% of what you think you might buy. You will be able to avoid PMI by putting down 20%. You might want more than that in case you need to repair something. Take this money and buy a CD so you get some interest out of it with very little risk.
3. If you still have money left over after stashing away money for the house, open a Roth IRA and put up to $5.5k in there before the tax deadline. Tell them the money is for a 2013 contribution. If your income is above the IRA phaseout, you'll need to contribute the money to a tIRA first, then convert it to the Roth. The tIRA contribution will not be deductible if you are above the phaseout.
4. If you still have money left over, contribute the extra dough to your Roth IRA for 2014 (up to $5.5k). Use the backdoor Roth approach if you are in the phaseout.
5. If you still have money left over, invest in a taxable account and use I Bonds and TIPS (read the wiki on Tax Efficient Investing). That and enjoy life!
Topic Author
StevenNJ1
Posts: 270
Joined: Fri Apr 04, 2014 12:56 pm

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

investor1 wrote:1. Start contributing to your 401(k). Put in at least the amount your employer will match. If it is a good plan, max it out.
2. If you are going to buy a house in ~5 years (or less), keep the money for a down payment. Put aside at least 20% of what you think you might buy. You will be able to avoid PMI by putting down 20%. You might want more than that in case you need to repair something. Take this money and buy a CD so you get some interest out of it with very little risk.
3. If you still have money left over after stashing away money for the house, open a Roth IRA and put up to $5.5k in there before the tax deadline. Tell them the money is for a 2013 contribution. If your income is above the IRA phaseout, you'll need to contribute the money to a tIRA first, then convert it to the Roth. The tIRA contribution will not be deductible if you are above the phaseout.
4. If you still have money left over, contribute the extra dough to your Roth IRA for 2014 (up to $5.5k). Use the backdoor Roth approach if you are in the phaseout.
5. If you still have money left over, invest in a taxable account and use I Bonds and TIPS (read the wiki on Tax Efficient Investing). That and enjoy life!
Great info!!!
To comment on your points:

Regarding 20% downpayment ,.... I am too conservative ,, I'd want to be left with at least 50K after all the downpayments and considering prices these days, I'd probably do 10 or 15% down. I know about PMI, but that's only for the first year and it would be around $100+/mo.

Regarding CDs ... can't I do a MoneyMarket account that gives 0.90% APY ? At least there I can hold most of the money till I need it and there is no requirement to hold money without touching it. CD rates are not that much higher these days.
investor1
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by investor1 »

If the MM accounts are only 0.9%, you may as well go with a high interest online savings account. Though a three year CD is going for around 1.4% right now, and I'm guessing savings accounts are about 0.85%. I'd take the extra cash.
Topic Author
StevenNJ1
Posts: 270
Joined: Fri Apr 04, 2014 12:56 pm

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

So, our 401K plan is with American Funds .... and my options are:

Growth Investment
RERBX
RGABX
RNGBX
RSLBX

Growth and income investment
RWIBX
RFNBX

Equity-income investment
RIRBX

Balanced investments
RLBBX

Bond investment
RBFBX
RGVBX

Cash equivalent
RABXX

Is that the info you guys need to give feedback?
thanks
sscritic
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by sscritic »

The house is the thing. In another thread, many people talk about how wonderful it is to own a house without a mortgage. Consider the next $200k and a $300k house. Your choices are

1) a $300k house free and clear and nothing saved for retirement.

2) a $300k house, a $200k loan debt, and $200k in a retirement account.

Now a lot of people delude themselves and think that the $200k loan is related to the house, but the above presentation should make it clear that you have the house either way; the loan is strictly to allow you to invest. The choice is yours: house free and clear or borrow money to invest in your retirement account. The other choice is not to buy a house ever, which is another good choice for some.
investor1
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by investor1 »

StevenNJ1 wrote:Is that the info you guys need to give feedback?
No. See http://www.bogleheads.org/forum/viewtopic.php?t=6212
MrWinky
Posts: 81
Joined: Wed Jun 11, 2008 10:16 am

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by MrWinky »

This wasn't addressed, but if you put less than 20% down on a house you will pay PMI every month until you have 20% equity in the house. Considering that what you pay on the mortgage starts off going to the interest and not the principal, you could be paying PMI for many years before it goes away automatically.
corysold
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by corysold »

If you are conservative by nature, purchasing a home with a 4-5 year time horizon can be risky.

Assuming 10% down, you'd have 50K into a 500K home. Most of your payments are to interest in the early going, so you won't have paid much principal down after 4 years. If we have a flat housing market for the next 4 years, there may not be much appreciation to speak of. It costs around 6-7% to sell a home, so you may end trying to sell in 4 years for roughly the same price you paid now, minus 6% selling fees, a loss of $12,000 on your $50,000 investment, plus whatever principal payments you had.

Yes, there are mortgage deductions along the way if you qualify and you could end up renting the place out vs. selling, but could you handle 2-3 months vacancy? What if it stretched to 6? What if the rental market sunk and you could only get $1800? What if the housing market went down again and your home is only worth $450K in 4 years?

Ideally, you get 3% appreciation and in 4 years make a little profit and move on, but if you are conservative in nature, you have to look at the potential downside, which in real estate in such a short time horizon, can be pretty dire.
Topic Author
StevenNJ1
Posts: 270
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

Regarding 100K collecting dust ....... I am surprised no one suggested placing that money into Vanguard mutual funds accounts like VTSAX, VIMAX, VFIAX .... consistent return of 20% back ... even 10% would have been better than nothing. :-)
DSInvestor
Posts: 11423
Joined: Sat Oct 04, 2008 11:42 am

Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

StevenNJ1 wrote:Regarding 100K collecting dust ....... I am surprised no one suggested placing that money into Vanguard mutual funds accounts like VTSAX, VIMAX, VFIAX .... consistent return of 20% back ... even 10% would have been better than nothing. :-)
There is no such thing as consistent 20% returns in stocks.

Here's a growth of 10K chart compariing the three funds you indicated against Total Bond Market (yellow). Notice how steady the bond fund was and how the stock funds are much more squiggly:
Image
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Topic Author
StevenNJ1
Posts: 270
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by StevenNJ1 »

DSInvestor wrote:
StevenNJ1 wrote:Regarding 100K collecting dust ....... I am surprised no one suggested placing that money into Vanguard mutual funds accounts like VTSAX, VIMAX, VFIAX .... consistent return of 20% back ... even 10% would have been better than nothing. :-)
There is no such thing as consistent 20% returns in stocks.

Here's a growth of 10K chart compariing the three funds you indicated against Total Bond Market (yellow). Notice how steady the bond fund was and how the stock funds are much more squiggly:
Image

I completely understand but 100K sitting in a bank for 10 years ... it lost the most.

By the way ... where did u get that tool to compare stocks/bonds for 10yr period?
DSInvestor
Posts: 11423
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by DSInvestor »

morningstar.com. look up any fund there. At the fund page, click on chart tab. Once in the chart, you can add tickers for other funds, change time period etc.
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co_investor
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Re: How Ignorant am I? 5yr on Job, No 401k. 100K collecting

Post by co_investor »

rob wrote:
DSInvestor wrote:Examine your tax situation to see which type of IRA contribution is best for you and then open the IRA account.
Depending how far into "6 figures", I would suggest NOT funding a non deductible Trad IRA (if over the Roth limit)..... I did that long ago and wish I had kept non-ded contributions out of the mix.

If under the roth limit, then year 2013 roth contrib a no brainer but would hold off on 2014 if there is any type of bonus payment or variable compensation that could push over the limit (forcing a recharacterization later).
Do you mind elaborating? Why do you wish you had kept non-deductible contributions out of the mix?

I ask because I have a 401(k) and was planning on opening a TIRA this month (I'm over the roth limit).

Thanks.
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