Psycho41 said: uutxs said: Psycho41 said: uutxs said: Psycho41 said: Isn't that just a loophole for wealthy poeple? From the Merriam Webster Dictionary: loophole: a means of escape; especially : an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded The income limit for converting trad. IRA into a Roth was explicitly removed by Congress. There was no ambiguity or omission and this was an intentional act, presumably to get (immediate) additional tax revenue from the conversion.
But isn't converting non-deductible IRA contributions to a Roth still a loophole? If the reason was, as you suggest, to get more revenue, then doesn't the fact that non-dedictible IRA contributions aren't taxed when converted to a Roth IRA totally defeat the purpose? Plus, if it really was Congress's intent to allow people to circumvent Roth IRA income limits by contributing to a regular IRA and then converting, then why didn't they just eliminate the Roth income limit altogether? When you make a non-ded. contribution to a trad IRA, you have a tax basis equal to your contributed amount. When you convert that to a Roth, the "gain" i.e., the IRA value less your basis does get taxed. If it is one single IRA, this calculation is straightforward. If you have multiple traditional IRA accounts with some combination of deductible and non-deductible contributions, they are considered as one big IRA for the purpose determining your tax basis and taxes, even if you convert only one IRA account (in whole or in part) into a Roth.
IOW, if you want to the backdoor Roth today by contribution to a non-ded. IRA and immediately convert to a Roth (presumably with almost zero gain in the IRA value), you may still owe considerable amount in taxes since ALL your existing trad. IRA accounts (presumably with earlier deductible contributions) have to be taken into account for computing your tax on conversion.
There is nothing to suggest that this was due to an omission by Congress or that this is possible due to a clever interpretation of the law/regulation.
True, but the original question was in response to a poster who, for each of the last 2 years, contributed $5k in non-deductible contributions to a regular IRA, and then immediately converted that IRA to a Roth IRA. Since there would be little or no gains to be taxed on the conversion, the IRS doesn't get any money from that, yet the holder of the IRA still gets to circumvent the Roth IRA limits. Since that runs contrary to the spirit and purpose of the law, then in my book, that qualifies as a loophole. Congress didn't write the law to specifically prevent what OP did. Congress didn't write the law so that only folks with IRA with ded. contributions could do the conversion. You are making things up to suit your beliefs. You can keep your beliefs to your books because there is nothing to support those beliefs.
uutxs said: Congress didn't write the law to specifically prevent what OP did. Congress didn't write the law so that only folks with IRA with ded. contributions could do the conversion. You are making things up to suit your beliefs. You can keep your beliefs to your books because there is nothing to support those beliefs.
Obviously we disagree on what a "loophole" is. But I'm not the only one who thinks it's a loophole. CNN shares my assesment:
And Vanguard: "Currently, [investors] can make use of a loophole that allows investors to contribute to a nondeductible traditional IRA each year and then immediately convert to a Roth IRA." http://www.vanguard.com/pdf/rpd21.pdf
Or are they all just "making things up to suit their beliefs"?
Psycho41 said: uutxs said: Congress didn't write the law to specifically prevent what OP did. Congress didn't write the law so that only folks with IRA with ded. contributions could do the conversion. You are making things up to suit your beliefs. You can keep your beliefs to your books because there is nothing to support those beliefs.
Obviously we disagree on what a "loophole" is. But I'm not the only one who thinks it's a loophole. CNN shares my assesment:
And Vanguard: "Currently, [investors] can make use of a loophole that allows investors to contribute to a nondeductible traditional IRA each year and then immediately convert to a Roth IRA." http://www.vanguard.com/pdf/rpd21.pdf
Or are they all just "making things up to suit their beliefs"? Whatever rocks your boat! And you are free not to use the "loophole".
Hello, I tried searching this thread and the internet but I could not find an answer to my question. Hopefully someone can assist. One of my family members asked for assistance with taxes this year due to the fact that they had to raid their Traditional IRA (early withdrawal, and this person is less than 59 1/2 years old) for an emergency. They withdrew the entire amount (approximately $5,800) and no taxes were withheld from Vanguard. I saw the 1099-R and it looks straight-forward.
I explained that there is a 10% penalty for an early withdrawal, and the total amount would be subject to the marginal tax rate for that year (in this case 25%).
Note that this person lives in NJ but works in NY.
I plugged all of this information into Turbo Tax and H&R Block. For Federal, the total amount owed is coming out to about $1,100 (without the IRA withdrawal it would've been a $900-ish refund). However, and this is where i'm getting confused because I think i'm doing something wrong, the state owed amount is coming to about $2,000. This doesn't sound right to me (about $2,000 owed for Federal and $2,000 for state!!, $4,000 total on a $5,800 withdrawal). Should I not be including the $5,800 withdrawal on the state return? I would expect SOME tax for state based upon the income tax rate, but not so much.
Please help! Thank you and let me know if any more details are needed.
iraquestion said: Hello, I tried searching this thread and the internet but I could not find an answer to my question. Hopefully someone can assist. One of my family members asked for assistance with taxes this year due to the fact that they had to raid their Traditional IRA (early withdrawal, and this person is less than 59 1/2 years old) for an emergency. They withdrew the entire amount (approximately $5,800) and no taxes were withheld from Vanguard. I saw the 1099-R and it looks straight-forward.
I explained that there is a 10% penalty for an early withdrawal, and the total amount would be subject to the marginal tax rate for that year (in this case 25%).
Note that this person lives in NJ but works in NY.
I plugged all of this information into Turbo Tax and H&R Block. For Federal, the total amount owed is coming out to about $1,100 (without the IRA withdrawal it would've been a $900-ish refund). However, and this is where i'm getting confused because I think i'm doing something wrong, the state owed amount is coming to about $2,000. This doesn't sound right to me (about $2,000 owed for Federal and $2,000 for state!!, $4,000 total on a $5,800 withdrawal). Should I not be including the $5,800 withdrawal on the state return? I would expect SOME tax for state based upon the income tax rate, but not so much.
Please help! Thank you and let me know if any more details are needed. I assume that you are filing both NJ and NY state returns.
The IRA distribution is NJ source income if he was a NJ resident. NY should not be taxing this.
NJ does not allow a deduction for IRA contributions. Consequently, when the contributions are distributed, they are not subject to NJ income tax. However, distributed earnings as well as the distributions of certain rollovers from employer plans (such as a 401k) ARE subject to tax. See Worksheet C on page 26 of the NJ 1040 Instructions to calculate how much of the distribution is taxable in NJ.
TT and H&R should have done this properly for you if you plugged in the right data. I don't know where you went wrong. (I don't have NY or NJ versions of these programs to try to figure it out.) Make sure you are listing the IRA distribution as NJ income, not NY income. Also, there should be somewhere where it asks you how much the taxpayer contributed to the IRA in previous years for NJ calculation purposes. Make sure you didn't skip this step.
You are filing both a NY non-resident return and a NJ resident return, correct? Which state's tax went up after you entered the IRA distribution?
lastgaspjr said: iraquestion said: Hello, I tried searching this thread and the internet but I could not find an answer to my question. Hopefully someone can assist. One of my family members asked for assistance with taxes this year due to the fact that they had to raid their Traditional IRA (early withdrawal, and this person is less than 59 1/2 years old) for an emergency. They withdrew the entire amount (approximately $5,800) and no taxes were withheld from Vanguard. I saw the 1099-R and it looks straight-forward.
I explained that there is a 10% penalty for an early withdrawal, and the total amount would be subject to the marginal tax rate for that year (in this case 25%).
Note that this person lives in NJ but works in NY.
I plugged all of this information into Turbo Tax and H&R Block. For Federal, the total amount owed is coming out to about $1,100 (without the IRA withdrawal it would've been a $900-ish refund). However, and this is where i'm getting confused because I think i'm doing something wrong, the state owed amount is coming to about $2,000. This doesn't sound right to me (about $2,000 owed for Federal and $2,000 for state!!, $4,000 total on a $5,800 withdrawal). Should I not be including the $5,800 withdrawal on the state return? I would expect SOME tax for state based upon the income tax rate, but not so much.
Please help! Thank you and let me know if any more details are needed. I assume that you are filing both NJ and NY state returns.
The IRA distribution is NJ source income if he was a NJ resident. NY should not be taxing this.
NJ does not allow a deduction for IRA contributions. Consequently, when the contributions are distributed, they are not subject to NJ income tax. However, distributed earnings as well as the distributions of certain rollovers from employer plans (such as a 401k) ARE subject to tax. See Worksheet C on page 26 of the NJ 1040 Instructions to calculate how much of the distribution is taxable in NJ.
TT and H&R should have done this properly for you if you plugged in the right data. I don't know where you went wrong. (I don't have NY or NJ versions of these programs to try to figure it out.) Make sure you are listing the IRA distribution as NJ income, not NY income. Also, there should be somewhere where it asks you how much the taxpayer contributed to the IRA in previous years for NJ calculation purposes. Make sure you didn't skip this step.
You are filing both a NY non-resident return and a NJ resident return, correct? Which state's tax went up after you entered the IRA distribution?
Thanks for the reply. I figured out the problem. I had (wrongly) assumed that I already filled out the NY non-resident return (I didn't). Once I bought the NY return, the NJ tax went down dramatically as expected.
I know someone turning 66 this year, who took out 40k from her traditional IRA in early 2011 to buy an apartment. She is still working, making about 45k/year and not drawing Social Security. This IRA distribution bumped her into higher tax bracket. In fact, she will probably pay higher taxes on this distribution than what she saved when she originally made the contributions in the previous years.
Can anything be done at this point? All I could think of was make a contribution for 2011, thus reducing her taxable income by 6k. She could distribute it almost immediately and pay the lower 2012 taxes on it, correct? If she can wait and distribute it only after retirement in a few years, it would be even better. Perhaps she could even claim Saver credit for making a similar contribution during the year when she retires or turns 70 1/2, whichever happens earlier (if she has earned income past this age, she'd have to contribute it to Roth IRA instead). Am I missing anything here?
Of course, this is just 6k, while her income was inflated by 40k.
i have maxed out our 401K account.close to 200k AGI and i was checking Mint.com and it said i can still contribute to traditional ira $5000 with no deduction. is it advisable to put money there?
i am sure it been answered before but i you can give me link or quick suggestion would be great as its only today and tomorrow..
mindblowing said: i have maxed out our 401K account.close to 200k AGI and i was checking Mint.com and it said i can still contribute to traditional ira $5000 with no deduction. is it advisable to put money there?
i am sure it been answered before but i you can give me link or quick suggestion would be great as its only today and tomorrow..
would really appreciate help here.. Is it advisable? Depends on your personal situation. It comes down to would you put 5k towards retirement vs. keep it in a non-retirement account. Tax deferred growth but incur penalty if withdrawn before retirement vs. taxable growth with flexibility.
With a IRA contribution, you have the chance to do a Roth conversion (may have tax consequences if you already have other deductible IRA contributions from the past).
ETA: You need to be very careful if you plan to make a 2011 contribution. Check with your custodian about deadlines and follow up to make sure it is credited properly as a 2011 contribution. You are cutting it very close.
I am considering setting up a self-employed ("solo") Roth 401k that in can invest in most US stocks and similar securities with no setup or maintenance fees. The only brokerages that I am aware of that provide all of the legal forms and seems to be "set up" for it through their regular web site interface are TD Ameritrade and E-Trade . The principal differences that I notice are in the plan documents. Only E-Trade seems to have no language to support in-plan conversion of certain funds from tax-deferred to Roth (a recent change in law), but only TD Ameritrade's document clearly allows borrowing from both Roth and non-Roth funds together. I'm not sure if either brokerage will open the accounts for me if I edit the documents as I see fit, but I think they will.
Beyond these differences, E-Trade and TD Ameritrade seem remarkably similar. Both brokerages offer limited margin in retirement accounts so you can avoid "good faith violations" of the "T+3" rule described at http://www.sec.gov/investor/pubs/tplus3.htm . This is useful if you want to be able to jump on a brief spike in a stock's price and sell quickly without needing to leave your money in cash three days ahead of time.
Both brokerages charge ~$10/trade for stocks, although E-Trade has a discount to ~$8 for frequent traders. Both brokerages have a selection of commission-free ETF's, but both brokerages charge a fee for holding a commission free ETF for less than 30 days (unlike Fidelity and optionsXpress, which apparently have no such penalty on commission-free ETF's, but don't offer Roth 401k's).
Fidelity and eoption also offer solo 401k's, but they don't allow loans, they don't offer "limited margin" for fast trading, and at least Fidelity does not offer a Roth version.
There may be other "roll you own" options. For example, Fidelity offers "non-prototype" retirement accounts, which I believe can be used to implement a Roth 401k if you know much more than I do, but each withdrawal requires filling out a paper form. Most other brokerages offer "trust" accounts, which I suspect may be used to implement a 401k, but that is presently far beyond my knowledge level. Also, some web sites, such as http://www.irafinancialgroup.com , seem to want to sell more elaborate implementations for more self-directed schemes for IRA's and 401k's, but I believe that their services are not cheap enough to be a lower total cost than going with E-Trade or TD Ameritrade.
Currently, my plan is to go with TD Ameritrade or E-Trade , but edit the set-up documents to add whichever feature is missing (in-plan Roth conversion for TD Ameritrade or borrowing Roth funds for E-Trade .
Any additional pointers would be welcome. Beyond that, I hope this information is helpful to others considering setting up Roth 401k plans.
Update 4/27/2012: Added eoption's rather limited 401k offering.
careful said: . . . The principal differences that I notice are in the plan documents. Only E-Trade seems to have no language to support in-plan conversion of certain funds from tax-deferred to Roth (a recent change in law), but only TD Ameritrade's document clearly allows borrowing from both Roth and non-Roth funds together. I'm not sure if either brokerage will open the accounts for me if I edit the documents as I see fit, but I think they will. . . . Currently, my plan is to go with TD Ameritrade or E-Trade , but edit the set-up documents to add whichever feature is missing (in-plan Roth conversion for TD Ameritrade or borrowing Roth funds for E-Trade .I'm wiling to bet that you will have ZERO chance of either one of them accepting you editing their Solo 401k plan documents. It is a significant undertaking for them to make plan changes. Just because some change is allowed by law, does not mean the custodian will immediately, if ever adopt it.
There is a big difference between the options available to a large company and those present in what is essentially a retail product (Solo 401k). Yes, there are non-prototype retirement accounts available at various custodians. Also, you can always roll your own with a custom plan, dedicated trust, and specialized custodian. However, it certainly wil not be inexpensive.
btuttle said: I'm wiling to bet that you will have ZERO chance of either one of them accepting you editing their Solo 401k plan documents. It is a significant undertaking for them to make plan changes. Just because some change is allowed by law, does not mean the custodian will immediately, if ever adopt it.
There is a big difference between the options available to a large company and those present in what is essentially a retail product (Solo 401k). Yes, there are non-prototype retirement accounts available at various custodians. Also, you can always roll your own with a custom plan, dedicated trust, and specialized custodian. However, it certainly wil not be inexpensive.
Both the TD Ameritrade and E-Trade plans have an attachment for adding "Protected Benefits and Prior Plan Provisions", and lots of other blanks for more narrow customizations (for example, writing your own rules for computing loan interest and maximum loan amount). It looks to me like the documents were intended to allow some customization.
TD Ameritrade's "Qualified Retirement Plan and Trust, Defined Contribution Basic Plan Document 01", section 7.06(B) entitled "Right of Adopting Employer To Amend Plan", appears to reserve the right to withdraw sponsorship in the event of employer amendment, but the only automatic consequence seems to be that the plan becomes an "individually designed plan", and they do have some language that looks like they are serious about allowing employers to make amendments:
"An Adopting Employer who wishes to amend the Plan shall document the amendment in writing, executed by a duly authorized authorized officer of the Adopting Employer. If the amendment is in the form of a restated Adoption Agreement, the amendment shall become effective on the date provided in the Adoption Agreement. Any other amendment shall become effective as described therein upon execution by the Adopting Employer and, if appropriate, the Trustee (or Custodian, if applicable). A copy of a restated Adoption Agreement or other amendment must be provided to the Prototype Sponsor and the Trustee (or Custodian, if applicable) before the effective date of the amendment.
The Adopting Employer further reserves the right to replace the Plan in its entirety by adopting another retirement plan which the Adopting Employer designates as a replacement plan.
In general, when I have discussed possible customizations that I want to make, the phone representatives from both brokerages seemed to me to have the attitude that if they didn't see anything clearly wrong, the only important issue was to make sure that I understood that the legal consequences were on me. Maybe the reality will turn out to be quite different if I try filling in some of those blanks these plan sponsors have provided when I submit the adoption agreement. If and when I try that, I expect I'll post a follow up with the results. At the moment, I am not planning to create the 401k until just before I plan to borrow from it, which I expect will be in about six months to a year.
Here is a list of the few brokerages that I have found that can configure an IRA account to allow unlimited iterations of buy and sell with unsettled cash without waiting for the usual three business days for stock sales to clear: E-Trade , Interactive Brokers, Place Trade, and TD Ameritrade. TD Ameritrade also offers this for qualified plan accounts (such as 401k's). I am not sure if E-Trade offers this on their 401k's.
Here is a list of those that apparently do not offer this unsual feature, based mostly on my phone conversations with each: ChoiceTrade, eOption, Fidelity, Firstrade, just2trade, LightSpeed, MB Trading, Merrill Edge, Muriel Siebert, Options House, Place Trade, optionsXpress, Schwab, Scottrade, Share Builder, Sogo Trade, Speed Trader, Sure Trader, Trade King, TradeMonster, Trade Station, Trading Block, USAA, Vanguard, Wells Trade, Zecco.
Why is this capability useful? One scenario might be that you learn some news that makes you believe a stock is going rise in price for a day or two, and you think you can react before a substantial amount of the price increase, but don't want to bet this hot stock will stay up. Your IRA is fully invested in stocks, ETF's, etc. With or without this capability, you could sell some of your IRA equities and use the resulting unsettled cash to buy this hopefully hot stock. This form of credit is normally available in almost every IRA, and I don't fully understand the legalities of that. However, when using that special form of credit, you normally are supposed to sell the newly acquired hot stock until the sale that was used to pay for it settles or other settled cash to cover the purchase of that hot stock settles. Doing so would result in a "good faith violation", and having more than three of those in a year will result in your account being restricted to buying only with settled cash for 90 days. With this additional limited form of margin, you can go a step further by selling that newly acquired hot stock before it falls, and even continue buying and selling with unsettled cash as much as you like (subject to pattern day trading restrictions if your balance is under $25k, etc.).
You also have this freedom in a regular non-retirement margin account, of course. What is unique here being able to do that with a tax advantaged account. Whether that is worth the loss of the ability to use margin more generally depends on the risks and your situation. I believe that this capability would be primarily of interest to people who are willing to take certain risks with some of their already contributed retirement funds.
By the way, for all of these brokerages that offer this very limited form of margin, it seems to come about as a side-effect of their offering certain options trading capabilities to retirement accounts, and I have very little documentation to back up my understanding, which is based on talking to each of these brokerages (except Interactive Brokers, which seems slightly more direct in their explanations). Here, at least, are some rather vague references to this limited margin capability from the brokerages that offer it. I would be interested in reports of actual experiences with this capability or better documentation of it.
In my most recent conversation with optionsXpress and my only conversation with eoption, the phone representatives took the position that their inclusion of non-leverage margin for options does not exempt their accounts from the T+3 rule. As far as I know, a brokerage is free to enforce that rule even if they don't have to, and I'm not a lawyer. Anyhow, here is a pointer to an optionsXpress statement on the subject: optionsXpress - In http://www.optionsxpress.com/about_us/faq.aspx click on the "IRA" tab and see "Do you offer Margin in an IRA account? We do allow for more advanced equity and index option trading based on the trading level assigned to each investor. [...]"
P.S. I don't know why fatwallet is automatically turning every instance of "E-Trade " into a link. It's not something I'm doing deliberately.
Update 4/25/2011: added Place Trade and Schwab to the lists. Update 4/27/2011: moved optionsXpress to "no", added eOption to "no".
My wife has 2 401K accounts from previous employers. We received notification awhile ago that since she is no longer an employee (laid off) they were increasing the administrative fees.
One 401K is with Fidelity and she has about 36K invested in 2 funds: Fidelity Value and Fidelity Eq Div Second 401K is with Booz & Company ECAP: about 15K between S&P 500 stock index and US Stock fund
So I guess I'm wondering if I should roll these into another account (IRA?) and convert the funds (is that necessary?) to avoid the higher monthly maintenance fees?
She has now gone back to work for a school ditrict and is contributing to the IMRF (Ilinois Municipal Retirement Fund) so I don't think she'll be adding any new money to the existing accounts.
"With our Self Directed Solo 401k, you can buy and sell options, trade on margin, sell stocks short, and invest in many stocks and funds that are usually unavailable to conventional IRA and 401k accounts." -- http://www.solo401k.com/2008/11/29/self-directed-solo-401k-inves...
"Solo 401k accounts & other qualified plans are exempt from UDFI." -- http://www.solo401k.com/2009/02/19/unrelated-business-income-tax... (My possibly incorrect understanding is that Unrelated Debt Financed Income is a tax issue that many other tax advantaged arrangements face if profiting from trading securities bought on margin, among other situations.)
Also, I believe that the following restriction on IRA's might not apply to qualified plans such as 401k's: "If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual." -- United States Code Title 26 section 408 ("Individual Retirement Arrangements") section (e, "Tax treatment of accounts and annuities")(4, "Effect of pledging account as security"), URL: http://www.law.cornell.edu/uscode/text/26/408 .
However, I am also under the impression that the employer and the beneficiary of a 401k are each a "disqualified person" prohibited from doing something like guaranteeing a margin account. So, my guess is that, in practice, only other assets held in the 401k account could be used to guarantee a margin account. So, I am wondering if anybody out there has actually gotten this to work. For example, I understand that Interactive Brokers has a very aggressive policy of selling a customers holdings involuntarily automatically as soon as margin requirements are exceeded, rather than giving the customer a few days to fix it. Consequently, I suspect that they might be set up so that they almost never have to collect a debt.
Anyhow, I would be interested to know the details if anyone has actually set up a real leverage margin 401k account (as opposed to non-leveraged margin that I understand is available on TD Ameritrade 401k's).
Edit 5/1/2012: I hasten to add that I am not vouching for any of the above, and I certainly don't claim to be an expert about this. I'm just relating my possibly incorrect recollections from some possibly incorrect web pages.
I just received 5498-ESA (Coverdell ESA contribution information, for educational IRA) from Penson Financial Services. I have already filed my taxes and deposited the refund check.
Do i have apply for any amendments with this contribution? This is for 2k 2011 contribution. Thanks
My wife has 2 401K accounts from previous employers. We received notification awhile ago that since she is no longer an employee (laid off) they were increasing the administrative fees.
One 401K is with Fidelity and she has about 36K invested in 2 funds: Fidelity Value and Fidelity Eq Div Second 401K is with Booz & Company ECAP: about 15K between S&P 500 stock index and US Stock fund
So I guess I'm wondering if I should roll these into another account (IRA?) and convert the funds (is that necessary?) to avoid the higher monthly maintenance fees?
She has now gone back to work for a school ditrict and is contributing to the IMRF (Ilinois Municipal Retirement Fund) so I don't think she'll be adding any new money to the existing accounts.
Roll both the 401k into an IRA. Are the fund expenses high or is there additional plan admin fee (on top of the fund expenses) that are high. Are the funds available to the general public or are they specific to the 401k? If the latter, you may have to liquidate it.
One simple option is to open an IRA with Fidelity and have them roll over the 401k with Fidelity directly into it. Must be straight forward. The other two funds --- S&P 500 stock index and US Stock fund --- seem quite generic. Liquidate it and roll over the dollar into the Fidelity IRA and buy the corresponding Fidelity funds (or whatever fancies you) inside the IRA.
uutxs said: Roll both the 401k into an IRA. Are the fund expenses high or is there additional plan admin fee (on top of the fund expenses) that are high. Are the funds available to the general public or are they specific to the 401k? If the latter, you may have to liquidate it.
Q]
They are charging additional admin fees on top of the fund fees which is why I was looking to roll them over. Thanks!
So, I start my first real job tomorrow and I have a 401k question. My employer offers a 401k $0.50 match up to $6000, should I take it? Generally, the wisdom is "it's free money so of course take it" but the selection of funds is depressing. Except the Fidelity SP500 SPIDER fund, each fund has expense ratios over 1.2%.
I have $10,000 budgeted annually to invest. I would like to allocate no more than 20% to an S&P500 fund (and I'd prefer a broader US index fund than the S&P500 to be honest). My investment philosophy is 100% stocks via ETFs; the indices I am interested in are 75% emerging market and EAFE stocks, 20% US-based (a la S&P500 or Wilshire 5000) and 5% REIT. I would consider myself as having a high tolerance for market changes.
It seems to me, since I want to invest in low-cost index funds, I should put my $2k into the 401k and get the match, then open a Roth IRA and then finally, put the rest into a taxable account. Is this correct?
I want to invest in low cost ETFs from Vanguard and elsewhere, so it seems it is best to put my entire annual $10k into a Roth IRA, then the rest into a regular taxed account. Is this right? The downside I see to this is that regularly taxed accounts are considered assets for financial aid purposes, so if this stays the same, in 18 years my daughter may not get as much financial aid if I put money into a non-retirement account.
Am I making a mistake by not putting more into these high priced mutual funds that my company offers via the 401k? Too bad we can't pick our own funds!
(and I'd prefer a broader US index fund than the S&P500 to be honest).
The S&P 500 is a huge portion of the US market. You compare the returns of broad US and S&P 500 they are very similar. They are both categorized as Large Blend funds.
unteper said: So, I start my first real job tomorrow and I have a 401k question. My employer offers a 401k $0.50 match up to $6000, should I take it? Generally, the wisdom is "it's free money so of course take it" but the selection of funds is depressing. Except the Fidelity SP500 SPIDER fund, each fund has expense ratios over 1.2%. Getting 50% match and paying even a 2% expense ratio is better than giving up the match entirely. Put at least enough to get max. employer match.
unteper said: So, I start my first real job tomorrow and I have a 401k question. My employer offers a 401k $0.50 match up to $6000, should I take it? Generally, the wisdom is "it's free money so of course take it" but the selection of funds is depressing. Except the Fidelity SP500 SPIDER fund, each fund has expense ratios over 1.2%.
I have $10,000 budgeted annually to invest. I would like to allocate no more than 20% to an S&P500 fund (and I'd prefer a broader US index fund than the S&P500 to be honest). My investment philosophy is 100% stocks via ETFs; the indices I am interested in are 75% emerging market and EAFE stocks, 20% US-based (a la S&P500 or Wilshire 5000) and 5% REIT. I would consider myself as having a high tolerance for market changes.
Even though it doesn't allow for your desired allocation, you are far better off taking the full match offered in a sub-optimal (to you) allocation. You're unlikely to be at the company for more than 7 years. In that little time you will are unlikely to earn back the 50% you would lose by giving up the match to preserve your desired allocation. 6K in 401k, 4K in Roth. Do whatever you want in Roth, sounds like all Emerging/EAFE/REIT. You'll end up with 9K pretax investments and 4K Roth, much better than 3K pretax, 5K Roth, 3K taxable. When you leave your company down the road, rollover to IRA and you can invest in whatever you want.
So, I start my first real job tomorrow and I have a 401k question. My employer offers a 401k $0.50 match up to $6000, should I take it? Generally, the wisdom is "it's free money so of course take it" but the selection of funds is depressing. Except the Fidelity SP500 SPIDER fund, each fund has expense ratios over 1.2%.
Let's see if I understand correctly. If you put $6,000 in, your employer will give you $3000. You are questioning whether to do it since it will cost you about an extra 1% to invest that money in your employer plan. So, it will cost you $60 to accept $3000 from your employer.
domdigs said: I have a very small amount ($250) in a 401(k) account from a previous employer. What are my best options if my goal is to: 1. invest it in stocks 2. cash out with the least taken out for taxes/penalties 3. keep but be able to use(IRA, Roth IRA)
If you already have an IRA with Vanguard or something like that I would just roll it over to that account.
domdigs said: Are there any companys offering deals/incentives/credit for signing up an IRA with them?
TD Ameritrade is currently offering free trades for 60 days or 500 trades, whichever comes first. Thereafter, they charge ~$10/trade. They also offer a small amount of money if you are transferring substantial assets (starting at $100 for $25k). I think you have to keep the assets in the account for at least 6 months to keep the money. The money is paid into the retirement account and, according to the TD phone representative I spoke to, does not count against contribution limits.
TDA has another promotion of $5/trade for 1 year. A phone representative I spoke to said that it only applies to non-retirement accounts, but when I clicked through the offer, there was a button for opening a retirement account.
I think these offers expire on June 15, but, when I search the web, it appears to me that TDA has a history of making similar offers.
If you're just going to buy a few investments and hold, free trades might not be of much value to you.
The best offers from brokerages seem to be for frequent flyer miles, but I have never seen one of those extend to a tax advantaged account. A collection of such offers is maintained at freefrequentflyermiles.com. To see them, click on "finance" on the left, then "stock and bond brokers" on the top.
domdigs said: Are there any companys offering deals/incentives/credit for signing up an IRA with them? You are unlikely to get anything substantial for transferring $250 in IRA assets. Free trades is possibly the best you can get; with $250 to play with, you will very likely not be able to get much going in terms of investments. Minumum opening balance is also something to keep in mind.
domdigs said: Let me be clear, I do not like having my money tied up in a 401(k), I was contributing for a few years then stopped and withdrew the balance. This was leftover from a timesheet error by the employer and they automatically placed it in the 401(k) account. I would rather take my money after tax and invest it on my own rather than keep it hostage until I am 59 1/2, I am currently 29. Maybe I can take a distribution on it penalty free for higher eduacation expenses. $250=textbooks. What is your plan for retirement? At 29, retirement might seems like eons away. But the sooner you start socking some money away for retirement, the better off you will be. If you are going to invest anyway outside of retirement, why not do it in say a Roth IRA. The contributions can be taken out anytime --- "rather than keep it hostage until I am 59 1/2" --- and there are no tax consequences for the trading gains/loses that need to be reported.
At your workplace, if there is any matching provided by the employer, you are leaving money on the table by not participating in the 401k.
I made an excess contribution to a Roth IRA for 2012 due to unexpected income (I should've waited until tax time to fund, I know). I've done a little research and it seems I'm going to have withdraw the excess, plus any income attributable to that excess in order to avoid the 6% penalty. I also understand that I will have to pay tax on those earnings. I don't think the 10% early withdrawal penalty applies (someone correct me if I'm wrong).
My question is this: is there a better alternative? Preferably one in which I can avoid taxes?
defjukie said: I made an excess contribution to a Roth IRA for 2012 due to unexpected income (I should've waited until tax time to fund, I know). I've done a little research and it seems I'm going to have withdraw the excess, plus any income attributable to that excess in order to avoid the 6% penalty. I also understand that I will have to pay tax on those earnings. I don't think the 10% early withdrawal penalty applies (someone correct me if I'm wrong).
My question is this: is there a better alternative? Preferably one in which I can avoid taxes?
Thanks
You don't have to pay the 6% penalty, but you do have to pay the 10% early withdrawal penalty on the earnings.
The 6% penalty is only if you fail to withdraw (undo) the excess contribution. By having the excess contribution returned to you, you avoid this penalty.
The 10% penalty is for early withdrawal (assuming you're under 59 1/2 years old). You only pay it on the earnings (i.e. how much your Roth IRA increased in value between the time you made the contribution and the time you removed it). For instance, if you over-contributed by $5,000, and the value of your Roth (assuming you have no other Roths) went up by 10%, then the amount of your "return of excess contribution" will be $5,500, and you will pay a penalty of $50 (10% of $500). There's no way to avoid this penalty. However, if your IRA has not gone up in value, then the amount returned to you will be $5,000 or less, and you will owe no taxes or penalties.
defjukie said: I made an excess contribution to a Roth IRA for 2012 due to unexpected income (I should've waited until tax time to fund, I know). I've done a little research and it seems I'm going to have withdraw the excess, plus any income attributable to that excess in order to avoid the 6% penalty. I also understand that I will have to pay tax on those earnings. I don't think the 10% early withdrawal penalty applies (someone correct me if I'm wrong).
My question is this: is there a better alternative? Preferably one in which I can avoid taxes?
Thanks
Recharacterize the excess contribution and make it a traditional IRA contribution.
If you don't have any IRAs with pre-tax money, you could then convert this IRA to a Roth with little to no tax.
Recharacterize the excess contribution and make it a traditional IRA contribution.
Thanks for the responses, guys.
I've dug a little into this idea, and it sounds like the way to go. Problem is, I made the full contribution ($5k) to the Roth and the full amount is going to end up being ineligible.
So if I recharacterize the full $5k contribution to a Traditional IRA, what will happen with the earned income on that $5k? The IRA contribution limit will be reached by the converted contribution alone, but what happens to the attributable earnings? Can I throw those in the Traditional IRA as well, or do I have to withdraw and pay taxes + penalties?
If I DO have to withdraw and pay taxes/penalties on the earnings, then it seems there is not much advantage to going this route vs just plain withdrawing the excess + earnings.
Sorry if I'm being dense, I'm going round and round on this. I've learned my lesson to WAIT before making contributions.
No taxes. No penalties. When you recharacterize, it will be as if the entire contribution was made to a traditional IRA from the very beginning. The fact that it is now worth more or less than $5,000 doesn't matter. You'll have made a $5000 contribution into a traditional IRA. You'll have to amend your tax return.
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