Young Professional seeking advice

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
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Rotiv27
Posts: 1
Joined: Thu Jul 28, 2016 4:36 pm

Young Professional seeking advice

Post by Rotiv27 »

Hello everyone,

Ive been a junior Boglehead for about a year and a half now reading various posts and just consuming the wealth of knowledge available here. Ive finally decided to jump in and ask for some advice on my personal finances.

Some background on my situation:

I am 24 and live in South Florida. I have 0 debt and live at home because the housing market down here is not optimal. My salary at my current job is 32k/year and I currently defer 10% of my salary to the 401k program at work. I save about 70% to 80% of my take home pay and the rest is starting to be invested in a T-IRA and a taxable account.

My question and the advice I’m looking for has to do with taxes and how I should go about handling them.
Since I already save 10% (I like round numbers) in the 401k at work, which the funds available are pretty bad (I invest my contributions in the only Vanguard fund available VBINX, the only other fund with a low expense ratio is a LargeCap S&P index separate account. Since I don’t know what a separate account is I decided going with something I am familiar with) I would like some help with the T-IRA I just opened.

One question is can I set up pay check deferrals like I do with my 401k to lower my taxable income? If not how do I get the tax benefit from the T-IRA with after tax money?

I plan on maxing out the T-IRA yearly, but would like to know even if the funds in my 401k aren’t the best should I still be maxing or just boosting that 10% to a high number for the tax benefit?

I don’t claim any one as a dependent and no one claims me either. How should my tax exemptions and deductions be setup for the most efficient possible outcome?

Also any other tax advice or just personal finance advice would be greatly appreciated.

I thank anyone and everyone for their responses. I do understand that the advice I get here should not be taken as law (I take everything with a grain of salt, and research information on my own), but thank the information nonetheless.

Cheers! :beer
c1over8
Posts: 287
Joined: Fri Apr 01, 2016 10:15 am

Re: Young Professional seeking advice

Post by c1over8 »

With $32,000 gross salary, after standard deduction ($6,300) and personal exemption ($4,050), that brings you down to $21,650 max taxable income and the 15% tax bracket. Unless you have a lot of other income pushing you into a higher tax bracket, I question why you are putting so much into a 401k and want to max a Trad IRA.

If I were you, and assuming you don't have a bunch of other income pushing you in to a higher tax bracket, I would only contribute to my 401k up to the match, if any, max a Roth IRA, and invest the rest in taxable. I would not be trying to max out a Trad IRA or 401k until I was at least in the 25% tax bracket but I'll be interested to see what others say.
Bondman
Posts: 25
Joined: Sun May 08, 2016 6:06 pm

Re: Young Professional seeking advice

Post by Bondman »

Hi,

Great job on your savings rate. For your T-IRA, even though you are making contributions today with after tax money, when you file your tax return, it will count it as pre-tax money. I think there will be a question or box about annual contributions to a T-IRA, and it will lower your taxable income accordingly. You can set up automatic investment, but it will still come from after tax money. Just remember that when you file your return, it will get counted as a deferment.

What is the total expense for the VFINX fund in your 401k? If it is low, then only contributing to that fund within your 401k would be fine. You could then use your T-IRA to fill out the rest of your portfolio with bonds/international/extended market to reach your desired asset allocation.

I am not a tax wizard, but this I what I did to determine the right amount of exemptions. Estimate your taxable income by taking your gross and subtracting your expected T-IRA/401k contributions and the standard deduction. With this number, estimate your tax liability using the progressive rate table. Then, choose the number of exemptions that gets your monthly tax withholding close to your estimated liability divided by 12. This should get you close, and prevent excessive over/under withholding.
B0bL0blawsLawBl0g
Posts: 100
Joined: Thu Dec 17, 2015 11:36 am

Re: Young Professional seeking advice

Post by B0bL0blawsLawBl0g »

Roth is your friend. Stop the T-IRA and open a Roth IRA. See if you can make Roth 401k contributions as well. Your tax bracket will likely never be as low as it is now, so deferring taxes until later makes no sense.
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Meg77
Posts: 2835
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: Young Professional seeking advice

Post by Meg77 »

c1over8 wrote:With $32,000 gross salary, after standard deduction ($6,300) and personal exemption ($4,050), that brings you down to $21,650 max taxable income and the 15% tax bracket. Unless you have a lot of other income pushing you into a higher tax bracket, I question why you are putting so much into a 401k and want to max a Trad IRA.

If I were you, and assuming you don't have a bunch of other income pushing you in to a higher tax bracket, I would only contribute to my 401k up to the match, if any, max a Roth IRA, and invest the rest in taxable. I would not be trying to max out a Trad IRA or 401k until I was at least in the 25% tax bracket but I'll be interested to see what others say.
+1

Also, I'll add that I would not be focusing quite so much on retirement savings until you have a pile of cash and a place of your own. Get the 401k match and put any additional retirement funds into a Roth up to 15% of your income max. Then hoard some cash for shorter term goals (security deposit/home down payment, furniture, car, engagement ring/wedding, continuing education, starting a business, etc.).

You could also go ahead and max out the Roth since contributions can be taken back out without taxes or penalty if you end up wanting to use those funds for some of those mid term goals later. Another benefit of the Roth versus the Traditional.
"An investment in knowledge pays the best interest." - Benjamin Franklin
VoiceOfReason
Posts: 412
Joined: Sat Jan 02, 2016 5:54 pm

Re: Young Professional seeking advice

Post by VoiceOfReason »

Get the 401k match
Max a Roth
Additional funds to either 401k or tIRA or build more regularly accessible funds account.

Then figure out a way to make more $
CppCoder
Posts: 921
Joined: Sat Jan 23, 2016 8:16 pm

Re: Young Professional seeking advice

Post by CppCoder »

Invest in the 401k to the match. Don't give up free money. Personally, I would investigate what the S&P 500 separate account option is. You might ultimately choose not to use it, but I wouldn't just avoid it because I didn't know what it was. Investing in VBINX (Vanguard Balanced Index Fund) might be overly conservative for your age. It is a 60% U.S. Total Market index/40% Barclays bond fund in those fixed ratios. Does that match your desired asset allocation?

As for the IRA, I agree with the other posters. At your income levels, I would probably consider a Roth before a traditional. That said, I would not contribute anything to an IRA until you have established an emergency fund. Living at home, you could probably get away with a very small emergency fund for the present, but, if I were you, I would establish a 3-6 month emergency fund based on expenses as if you were living on your own (just estimated rent/utilities for what you might rent if you chose to move out). That way, when you are ready to leave home, you'll have your emergency fund already there on day one. I personally find it hard to stomach any long term market risk before I know I'm even secure in the present.
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