Wait....the 401K scares you, yet you are going with it?

Roth is post tax 401K is pretax. Diversify your investments tax wise.

2/26/2008 11:21:22 PM

what exactly are you scared of?

you are always entitled to whatever you contribute. the vesting refers to the employer match. if you stay the full 3 years you get the match, otherwise you might only get a % or none. i see no reason to be scared.

2/26/2008 11:26:50 PM

its a roth 401k

i really want to stay 3 years so i can get the match - they got me

2/26/2008 11:29:01 PM

that's pretty sweet. I wish my employer had a roth 401k.

2/26/2008 11:33:49 PM

haha, i don't have any 401k.

well, I have the Federal Thrift Savings Plan, but no matching contributions, so I don't use it.

of course, the reason they don't match contributions for me is because I have the option of staying in for 20+ years and getting a pension.

2/27/2008 12:49:30 AM

Oops. Didn't see that it was a roth 401k. Although, there are still important differences between the roth IRA and the roth 401K.

2/27/2008 7:50:18 AM

Quote :

"I wish my employer had a roth 401k."

2/27/2008 8:30:48 AM

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true

This is how the housing bubble occured

2/27/2008 8:52:01 AM

It depends on how good the investment options are in your 401k.

Personally, I'd max out the roth IRA with $5,000 because of the flexibility in investment options and withdrawals and then put ~$10,000 in the roth 401k if $15,000 is the amount you're looking to save.

2/27/2008 8:53:52 AM

Quote :

"put ~$10,000 in the roth 401k if $15,000 is the amount you're looking to save."

I would still put some in the regular 401K. It doesn't make sense to pay taxes up front on all your investments.

We just got a roth 401K this year, but all my contributions are going to my regular 401K.

2/27/2008 9:29:17 AM

Quote :

"Personally, I'd max out the roth IRA with $5,000 because of the flexibility in investment options and withdrawals and then put ~$10,000 in the roth 401k if $15,000 is the amount you're looking to save."

Very very true

Same goes with ^ David0603

Quote :

"http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true "

And this made me laugh . Short, cheesy, and to the point

[Edited on February 27, 2008 at 9:41 AM. Reason : ]

2/27/2008 9:36:25 AM

I still disagree. Why would I want to pay 25% taxes on a bunch of money now, when I could invest some of it pretax and pay lower taxes when I retire?

2/27/2008 9:50:42 AM

what if taxes go up

2/27/2008 9:55:50 AM

You think in the future the lowest tax bracket will be higher than 25%? Keep in mind, I'm not advising that you invest all of your assets pretax.

2/27/2008 10:06:52 AM

Quote :

"I still disagree. Why would I want to pay 25% taxes on a bunch of money now, when I could invest some of it pretax and pay lower taxes when I retire?"

I'm agreeing with you.

You both made valid points. I technically wouldn't want all of my money in accounts taht have already been taxed.

2/27/2008 10:06:56 AM

Most federal employees can participate in the 401k plan (with matching agency contributions) and the federal pension.

Although these benefits vary from agency to agency.

2/27/2008 10:19:43 AM

^^ Gotcha

Hurry up and post your response Ben.

2/27/2008 10:31:32 AM

Quote :

"You think in the future the lowest tax bracket will be higher than 25%? Keep in mind, I'm not advising that you invest all of your assets pretax."

possibly. who has that foresight?

Also, I dont know how it works, but it doesnt seem to me as if I would qualify for the lowest tax bracket, at the level of funds im looking to retire with. Is there a stipulation somewhere I'm not aware of that would tie you to this bracket if you're retired/drawing income from your retirement investments?

im not sure where im going with this either, but it obv. doesnt seem to be best to vest yourself in a single structure, be it pre or post tax investing.

just to use a horrible metaphor, what's to say it's not going to end up the same way as people with ARMs... 35 years from now, everything's gone to shit and the min tax rate is 55%... who's to say it's not?

(this is all based of course on my ignorance of knowing if 401k investements are strictly tied to a particluar tax teir upon withdrawl, and my own dumb fears.)

Then to validate, personally, at this point im not ready to be maxing the 15k for pretax contributions (it is nice how comp. contributions are not included in this cap, it's also nice to have a benefit program that includes ~double figures% match) along with maxing a roth and other investment vehicles. at some point i will be, but not at the amount i make right now. i'm oddly close though . I'm trying to wait till the bottom of this housing crunch, and potentially buy some point in time this year. There's other reasons why I must do it this year though, but those pretain to getting in on the first time home buyer's programs from ths state, and their income caps. After that though, it's crankin' up the contributions, capping the 401k, capping the roth, and various other investments. I'm kinda a fan of heavy front end loading and letting compounding interest do it's thing.

2/27/2008 11:48:23 AM

Quote :

"but it doesnt seem to me as if I would qualify for the lowest tax bracket, at the level of funds im looking to retire with. Is there a stipulation somewhere I'm not aware of that would tie you to this bracket if you're retired/drawing income from your retirement investments?"

Well lets say I was retiring right now with a roth 401K and regular 401K. I made 60K before I retired and I want to withdraw 60K a year. I could withdraw 30K from the roth tax free, and then withdraw 30K from the regular 401K and pay 15%. Alternatively I could have put it all in the roth 401k, but I would have paid more than 15% to do so.

[Edited on February 27, 2008 at 12:00 PM. Reason : ]

2/27/2008 12:00:17 PM

ok yeah that makes sense

but i was also under the pretense that i'd be withdrawing 2-3x from the 401k in relation to the roth wd, as opposed to 50/50

[Edited on February 27, 2008 at 1:06 PM. Reason : e]

2/27/2008 1:01:42 PM

roth wd?

2/27/2008 1:20:24 PM

withdrawl.

2/27/2008 1:23:05 PM

Ah ok. This will be the case if you can only put money in a roth IRA but obviously with a roth 401K you could have a 1-1 ratio.

2/27/2008 1:27:13 PM

see even you guys can't agree on this stuff

i have already opened a roth ira i just haven't put any money in it

the money i put aside i'm keeping since i just bought a house (i need furniture)

they're probably gonna close it if i don't

2/27/2008 2:27:52 PM

Retiring in luxury > new furniture

2/27/2008 2:33:26 PM

i at least need a couch

2/27/2008 2:37:32 PM

Quote :

"of course, the reason they don't match contributions for me is because I have the option of staying in for 20+ years and getting a pension."

This does assume that you don't get passed over for promotions multiple times, of course.

2/27/2008 2:40:10 PM

pensions+contributions, ftw

2/27/2008 2:48:00 PM

I cant predict the future for certain but heres a few things:

1) Your retirement income will be higher than you think. Social security will still exist and that is taxable income. Don't listen to the dolts who think its on the way out. Too much political pressure not to extend it past 2040.

2) Tax brackets will rise. Its easier to slide a percentage upwards by a few percent than it is to rewrite the books. Consumption tax sounds pretty but youll never convince the elderly or the undeducated. Coincidentally this makes up 90% of the country even though only 30-40% of the aforementioned bother to vote.

3) Black people and nigger whites arent saving money. Someone has to be taxed to pay for these niggers. I'm not being racist I'm calling 90% of this country niggers. They need it now so you have to pay for it later. Trust me, I deal with these niggers on a daily basis. They aren't phased by the 10% penalty.

2/28/2008 12:00:24 AM

^^^

true, but the odds are greatly against that happening

and i suspect it's even less likely for aviators...they have a whole, whole lot of money invested in me.

2/28/2008 12:50:57 AM

So then, ASIDE from Roth IRA, and Roth 401k (and all variations that lock away money until an age that I may not make it to, much less be useful during), is there any other way to get a tax break? Are mutual funds and stocks the best remaining option?

Next question, going back to my real estate investment, it occurs to me that I calculated my return based on the value of the investment, not the cost of the investment. I have only "invested" 45k or so in the first house. Does that mean my return is much higher percentage wise? I already counted the expenses of the loan against the return total.

Let's say all the nightmares come true, and I only make a total of 6% in returns on a real estate investment. But my investment capital and my opportunity cost are only a fraction of the investment value...does that not mean that one should always buy a house over stocks? One cannot borrow the amount of money needed for a house purchase to use as a personal loan, and simply decide to invest it in stocks. Or at least I cannot. My personal loan credit is roughly 1/50th the size of my home loan credit (because of the equity).

Although while I'm discussing using other people's money to invest, I suppose I could try to swindle someone into giving me money to invest, and then granting them a portion of what I make off the capital. That sounds like I am trying to open my own bank however. I'm not sure that's the best idea.

I may be missing something obvious again.

2/28/2008 9:42:55 AM

you could always invest in a variable or fixed annuity....depending on how risky you want your investment to be. these are probably what you should look into....message me if you want to discuss this in more details as i specialize in financial products such as these.

2/28/2008 10:41:05 AM

fixed annuity at his age?!?!?

Quote :

"is there any other way to get a tax break?"

If you are self employed you can set up another type of account.

Quote :

"Are mutual funds and stocks the best remaining option?"

Yes

Quote :

"Next question, going back to my real estate investment, it occurs to me that I calculated my return based on the value of the investment, not the cost of the investment. I have only "invested" 45k or so in the first house. Does that mean my return is much higher percentage wise? I already counted the expenses of the loan against the return total."

That's true, just don't forget to include all costs, closing, selling, maintenance, interest, pmi, hoa, insurance, etc. I still want to know what inputs you used in the calculator to show you were paying $350 of your $700 mortgage towards principal.

Quote :

"Let's say all the nightmares come true, and I only make a total of 6% in returns on a real estate investment."

From where do you get this figure? 6% would not be a nightmare. 6% would be fucking fantastic. Negative % - 0% would be a nightmare. I just hope my place keeps up with inflation.

Quote :

"Although while I'm discussing using other people's money to invest, I suppose I could try to swindle someone into giving me money to invest, and then granting them a portion of what I make off the capital. That sounds like I am trying to open my own bank however. I'm not sure that's the best idea."

You want a personal unsecured loan? The high APR will negate your profits most likely.

2/28/2008 12:11:17 PM

Quote :

"fixed annuity at his age?!?!?"

perhaps you missed that dude's thread where he was peddling his services as an insurance salesman this morning.

yeah, buy an ad and quit spamming, douche

2/28/2008 12:46:29 PM

Yeah, I missed it. I do recall some saleman posting in Jim's thread about life insurance a while back but not sure if it was the same guy.

2/28/2008 1:07:22 PM

Here's a pretty good unbiased article about stocks vs real estate

http://tinyurl.com/ywvq99

Quote :

"my investment capital and my opportunity cost are only a fraction of the investment value...does that not mean that one should always buy a house over stocks?"

It works both way. If I invest $10,000 in the stock market, the most I can lose in $10,000. However if you invest $10,000 for a $100,000 home, you stand to lose $100,000.

I also think the liquidity factor as rally mentioned earlier is highly underrated in this thread. I can liquefy my entire portfolio in one day if I need the money asap, but its not so easy if all your money is tied up in property. Back in the day everyone had home equity lines of credit they could tap, but with almost every lender freezing these or tightening their standards, it can no longer be used as an emergency fund to tap principle for cash.

http://tinyurl.com/3x7bms

2/28/2008 2:27:31 PM

This thread gets a B-

2/28/2008 3:56:37 PM

If you are investing in a brokerage account I would not purchase mutual funds or stocks. The capital gains and dividends make them unfriendly outside of a tax deferred account.

If you're going the brokerage route I'd go with an ETF because they will keep you from realizing gains until you sell them and that means huge tax savings over the long run.

2/29/2008 8:45:41 AM

You have to pay taxes on unrealized capital gains in a brokerage account?

2/29/2008 9:56:12 AM

^^ or simply add low turnover rate to your criteria for picking mutual funds

2/29/2008 1:43:46 PM

^^ yes, mutual funds are pretty unfriendly in brokerage accounts.

When the stock market goes down people panic and sell their shares.

This causes the fund manager to have to raise money to pay the shareholders. This means he will have to liquidate positions. Usually he doesn't want to sell the positions he believes are oversold so he will sell some of the gainers. This creates capital gains which he in turn passes on to the shareholders.

A great example of this would be the internet bubble. People were watching their accounts drop from $100k to $70k and then getting a tax bill at the end of the year for realizing $10k in capital gains. It's a brutal setup. Mutual funds belong in tax sheltered accounts for that very reason.



[Edited on March 1, 2008 at 11:25 AM. Reason : a]

3/1/2008 11:24:38 AM

Ah, makes sense now.

3/1/2008 12:56:25 PM

That article is useful, thank you David. I don't think it discusses landlord income in much detail, though. I would guess that the performance aspect of the investment would be much higher if it did. The effort section would be even worse, however. It's all a big trade off I suppose.

I would submit that real estate allow for one additional advantage/disadvantage that they only touched upon in that article. The ability to accurately identify a "good price", and the ability to negotiate the acquisition of that investment, are key elements of each of my purchases that I believe make my investments more valuable than stock purchases. What can I do with stocks, other than hope it hits a certain dollar/share ratio, and have a computer automatically set up my account to purchase it when it does?

With houses, I can negotiate huge deductions in closing costs, overall price, and even some additional smaller, harder to track assets (like appliances, etc.). I have done so to great advantage both times I bought a house, more so the second time than the first. In both cases however, the additional margins I negotiated (coupled with the leverage of the mortgage to purchase) clearly place them WAY higher than your original estimates of expected return (for both real estate or stocks, or most other things for that matter).

My conclusion:

My investments should include real estate as a portion of my portfolio (probably the number of rental properties/primary residences I have currently is more than healthy). I need to diversify my investments anyway, and stocks seem like a good place to move from here. I think I am at my capacity for credit anyway.

To this point, my instincts tell me that I have been "lucky" with both of my real estate investments. I suppose it is unfair to judge stocks and mutual funds so negatively, seeing as how I could just have easily gotten "lucky" with those as well. My returns also seem artificially inflated because the current market impact hasn't been reflected in those silly little value finders I have been using.

3/3/2008 3:18:32 PM

Agreed.

Although I still want to see what kind of crazy mortgage puts half the payments towards principle after 2.5 years.

3/3/2008 3:39:49 PM

I was wanting to get into real estate early in my life (like right now)...and was actually close to purchasing a really nice condo in downtown Charleston before the real estate "depression" hit and the jumbo loan I was going to get fell through.

Now I think the only real estate I'm going to get into is going to be my first house...then maybe when all the "dust settles"...I'll look into it again.

I guess I'm just a little too conservative with my money right now to risk throwing it all into a house/condo/apartment with the possibility of it not selling for its purchase price 5-10 years from now.

3/3/2008 3:53:14 PM

Quote :

""dust settles"...I'll look into it again. "

so you'd buy when prices were high but not now that they've dropped like crazy and interest rates are very low?

3/3/2008 3:59:57 PM

^Well...that will happen when I do buy my first house in the next year or two.

But just for investment purposes...I'm not trying to own a house/apartment/condo I don't live in for the next twenty years...and I have no idea how long this recession is going to last.

So if I buy into some real estate and need to get rid of it in the next five years...and the recession is still in place...then I'm going to lose money. I also live in a place...where if the market is good...real estate appreciates extremely well. So if the real estate market is back to normal, you're a safe bet to make good money in a small amount of time.

[Edited on March 3, 2008 at 4:02 PM. Reason : .]

3/3/2008 4:01:38 PM

^^ I think a lot of people believe home prices will fall much lower.

The real estate market tends to be sticky on the way down because of the emotional attachment but overreacts because sellers reach a point where they have no choice but to sell.

I'm not trying to place a prediction but I sure wouldn't buy a house right now.

If credit has dried up, inventory is backlogged, and resetting rates are forcing people from their homes where are the buyers going to come from?

3/3/2008 8:48:02 PM

Ok, ok, so you've been begging for the input. My remaining balance on that mortgage is near 90k. I have 5% flat (the seller paid some discount points, at the market low point 3 years back). Escrows are cheap at the second, because I had over paid last year, but the monthly pay remains fixed. I was off on my total payment too. Currently I pay 774 a month I think not 754.

so 774 - 375 for interest = 399 - escrows (roughly 70ish) = $329/month. I rounded up to make my numbers pretty, and easier to calculate with.

Remember "after 2 years" means nothing. Amortization charts don't care how long you have had a loan. They care only what the remaining balance is and the interest rates.

As it happens, however, after reading up on leverage a bit, it seems that my decision to pay off a substantial part of the house was a mistake. My investment appears to perform much better with the smaller initial investment. Am I correct in assuming that with real estate, I should nearly always invest as little as possible, and save the rest of the money for a stock portfolio?


[Edited on March 4, 2008 at 1:54 PM. Reason : As it happens...]

3/4/2008 1:51:18 PM

Quote :

"Remember "after 2 years" means nothing. Amortization charts don't care how long you have had a loan. They care only what the remaining balance is and the interest rates."

Thanks for the mortgage 101 lesson. I am well aware of how amortizations charts work, but for those numbers to work out correctly you would have had to have prepaid around $35,000 in 2.5 years (varies based on when the extra payments were made) Given your balance this actually seems quite likely although this is an extremely bad practice. You were paying 5% for this money BEFORE taking into account the fact you could write off the interest come tax time. You could certainly beat that in the market with even conservative estimates. To answer your question, you shouldn't always invest as little as possible. You should invest as much as you can until you can get a better return elsewhere. I could have put 0% down but the extra mortgage + higher rate or pmi didn't make it worth it so I put 20% down and plan to prepay nothing.

[Edited on March 4, 2008 at 2:09 PM. Reason : sp]

3/4/2008 2:08:37 PM