Ask the Readers: Life After a Maxed-Out IRA?

@Jaime -
If you want to persuade others to share your point of view, try a little honey, sugar.

I think the best thing to do is to start your own business. You can increase your income and decrease your taxes.

One thing that came to my mind was opening a college savings fund to start saving for his future child’s education.

Many of them do offer various tax advantages. I am not sure if that is up your alley, but it is something to consider.

Best,
Tomas

WRT CD ladders, slightly is the operating word. Perhaps even miniscule. I think all CD rates up to several years out are below the inflation rate. What is the point of locking in negative return rates?

JR: Why not ask for more details before posting these questions? Waste of time otherwise.

@Nicole:

Trying not to overdo the details too much, my expenses look roughly like this:

Out of my (pre-tax) base salary, roughly 20% goes directly towards my 401k and house savings. Over 30% goes to taxes. 17% goes to rent.

That means about 70% of my base income is accounted for with just those things, and there are other, shorter-term smaller things I save for, like vacations. I put about 5% of my base salary towards vacations, about 8% is my wife’s allowance, 2% is medical insurance.

That leaves 15% of my base salary for everything else, like food and clothes and gas.

Could I max out a 401k *and* keep putting $1250/month towards the house down payment? Probably, but it would definitely require me to start skimping in other areas to the tune of nearly $1000/month, which would make things tight. I’d probably have to cut out vacations, or tighten my wife’s allowance, and I’d have to give up on new equipment for my hobbies (surfing and cycling).

It’s possible, but it’d require more sacrifice than I’m willing to make right now. Just because I’m not saving as much as is possible doesn’t mean I’m not saving enough.

Also, none of this includes less-predicatble forms of payment, like annual bonuses and stock awards. Those come in big chunks and are handled differently. I expect most of those to go towards the house down payment fund in the next couple years, because at $1250/month, it’ll take almost 7 years to amass that $100k goal, and that’s longer than I want to spend. In reality, including all my bonuses and stuff, I expect to put between $30k and $50k in to the house down payment fund in 2010.

Not that anyone needed that level of detail on my finances.

After the emergency fund is secure and he’s spent a little money on himself (you have to live it up a little bit), I would consider a regular taxable (single account). Instead of mutual funds, I would lean more towards ETF’s. Primarily, they should give him less of tax burden (which I know isn’t much since he’s in school, but every little bit counts)since most ETF’s have lower portfolio turnover and therefore should pay less capital gain distributions at the end of the year. This will become more economically viable as he ages and the account and his income grows.

If he does lean more towards bonds (funds or ETF’s) be careful to not get any too long term. When interest start to spike, he may see an unexpected drop in principal. Stick to short term to intermediate bonds, at longest.

Assuming that Jeff has no debt and is in a PhD program:

It’s a good thing he’s got 5-6 months of expenses set aside, but I might suggest he bulk that up even more, actually. Given what the job market in academia is like in many fields right now, a hefty emergency fund seems absolutely crucial to me. If, like many grad students, after graduation Jeff winds up moving from visiting to visiting position for a couple of years before finding a tenure-track job, this will generate lots of moving expenses, not all (or much) of which will be paid for. If, even worse, he winds up having to cobble several adjunct teaching gigs together for a year or two to make ends meet, he may not even have health insurance, in which case an EF is doubly important. 5-6 months worth of current expenses will work for a while if he can stay where he is now while he’s looking for a tenure-track position, but in case he can’t, it’s better to have as much set aside as possible.

Once Jeff has a tenure-track job, his EF target should shift to cover 5-6 months of his new expenses. Then start saving for down payment/ wedding.

@66 Miraj, I checked out SmartyPig and started an account. I was annoyed, however, that you can’t set up automated deposits from two separate accounts for one goal. I have checking accounts at two different banks, and I wanted to put in money from each checking account, but one has to be done manually each month.

Hey J.D.– I searched and discovered that while Your Money and Your Brain by Jason Zweig has been mentioned quite a bit here in the 2 years since it came out, you’ve never reviewed it. How ’bout it?

Matt

For starters I would check out reallocating his Roth IRA (if not already done) to more small cap and small cap value funds such as Vanguard’s excellent small cap or small cap value indexs, and emerging markets and international funds (again from Vanguard if available). The Roth IRA is non taxable and these sorts of potentially rewarding funds are not tax-efficient, thus perfect for the Roth IRA if long term gains are sought.

And then I would take any money that can be saved beyond the Roth IRA and start building the taxed investment account using the same service (vanguard for vanguard, fidelity for fidelity, etc). I would invest using more tax-efficient index funds like vanguard total stock index or 500 index (it is tax efficient because these are large cap stocks). You can also buy treasury bills on your own or invest in short and intermediate bond fund. In any case, you want to buy and hold outside of your Roth IRA as well, and think of your Roth plus your taxed investment account as one meta-portfolio, made up of different parts but leading to a better outcome overall. I recommend using a couple of books to learn more about this type of strategy: William Bernstein’s The Four Pillars of Investing and Bill Schultheis’ The NEW Coffee House Investor. Good luck and never stop learning!

Shane

@69 Shiela, Hmm I am sorry I didn’t realize that, but you could provide feedback to them as they are trying to improve their service. I only have one checking account so I didn’t notice that issue. My suggestion is for you to create two separate goals for each account and you could merge it manually once the goal expires and you withdraw the cash. I still think it’s a great deal @ 2.01%. Would be interested if anyone has a better deal (interest rate wise) with 0 hoops to jump around and that is not temporary?

1) From the little I know about it, I wouldn’t suggest it, but I’d like to hear what others have to say about it. Is it ever a good idea to put money the extra into a whole/universal life policy?

2) If Jeff is interested, he could start saving up to buy and manage rental property.

Personally, I tithe first, then still have money to max out the IRAs… so I’d consider that always, giving some of the money and your time to help others. It feels good, and I think God honors it.

Financial planner, $250+, might be a great call to help you.

Yes, debt payoff is the best guaranteed return, and emotionally hard to beat!

If debt is paid off (and not deferred, student loans being what they are…) you might try other things.

Practically, when trying to decide where to park the same money, having looked at 529 Plans (and I’d mention that if you haven’t thought about it…) for just a good parking place, that would justify the return… after that it was tough looking around for something that would be accessible, but also return something with a limited amount of risk…

I found 18% return this last year in a high yield (read Junk…) Vanguard Muni-bond fund (571 issues, meant even if a particular city defaulted… there would be income, yield was 4-5%, and was tax exempt/free… so imagine I’m looking at CD’s which pay only 2%, and you get nothing usually if you pull it out to soon, vs. keep it for a year, need it, free withdrawal anytime, and earn (past performance no indication of future) 4-5% without taxes — in your bracket, perhaps only 1%, say 6% in real terms… now, it could also have gone down. Not nearly as risky as stocks (we learned that) or Corporate junk bonds… 40%!

However, as some have pointed out, if you take a loss and want to use the money that’s left to pay into a Roth, you had better understand the wash rules. Likewise, as some have pointed out, using a different mix outside the Roth from what you have in makes sense.

My logic was — security, security, security, it was Nov 2008, and I wanted to get some kind of return, even if the fund had lost money that year — and it had as part of the general flight of money to US treasuries… however, outside of taxes, what did it offer — better/wiser heads at Vanguard doing the picking vs. buying a single issue myself… too much work. Overtime, the particular fund’s returns had not been spectacular, but steady, and way more than any fixed rate security would return… little more risk… but would they default when now with the government bailing out and stimulating everywhere… and interest rates lower than the yield, ability to raise taxes, etc.

18% return is wonderful, but at the same time, the International ETF and directed ETF I purchased returned in some cases 73% — it was a weird year.

Don’t chase returns, but consider the big picture… what do you need the money for — if it’s past the 6-9 month expenses fund, then you really have freedom.

If you can hold it for a year, the taxes become not your normal rate, but 15%, but also realize the ETF or mutual fund can pass on expenses to you… Capital gains, something that one can ignore in the IRA land.

So, with any thing you plan to do, spend some of the money and your time learning more about how what ever investment works, and then be thankful you have the chance to plug more money into the game.

Dave Ramsey & other courses come to mind, if you’ve not already taken them…

I could also mention sector funds, etc. but here’s the thing, past performance is no indication of future returns… let that seep into your brain, and then find out if you’ve done the rest

1. give
2. debt
3. secure return (for smallest part)
4. risky but greater chance of better return

I just looked at it as a parking location which I wouldn’t have to worry about the yield being taxed… but if I had taken more risk… I could have paid the taxes and had a better return… however, there is also the ability to deduct losses on taxes yearly, sell, and move the investment into something else… painful, but a choice.

Note I don’t suggest an individual stock… we played that game as well… my son’s pick did much better than mine, he was up 25% (notice about the same as a market index…) my pick stayed flat! My wife got to pick two and they still didn’t do as well as the index, and the commissions are going to further reduce the benefits vs. buying a mutual fund — if one has $3000 to start, or perhaps something like sharebuilder.

Go back and look at your needs, the 3-5 years from now need, vs. sooner, 1-2 years, and go from there.

There are many, many more exotic things, but what I’ve seen for someone like yourself, is your time spent trying to decide, watch, manage, etc. isn’t likely to be justified for the size of the account. Find something that’s easy to contribute too — and the more autopilot adding you can do (CDs don’t lend themselves to this…) the better.

Thx.