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 Post subject: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 7:15 am 

Joined: Fri Oct 05, 2012 6:53 am
Posts: 5
question for anyone out there who knows about the in an outs of various retirement funds: I am 28 and make around $240-$280k per year depending on bonus (formerly investment banker, now in private investments). I live abroad (I'm american) in Dubai and so I also pay a lot less income tax than usual because of the foreign earned income exemption, etc... anyways, the point of this explanation is that, now that my student undergrad/mba loans are paid off and I'm debt free, plus I don't yet have and dependents (working on the girlfriend thing...) I have a considerable amount of money to save if I can maintain discipline (50k per year). So far I haven't opened a retirement account (had student loans), but I'm realizing now that clearly I should so that I can get the tax benefits. I thought the best thing to do would be open a roth IRA (I remember a finance professor recommending that in school), but I've been reading mixed reviews and hearing its not the best for people with high incomes because you can't make deductions or something... What I'm looking for is something I can put a considerable amount of money in (at least 10k per year), get a tax deduction and have ability to invest flexibly (I'd like to be able to choose individual securities - as I'm an investment professional anyways I feel there's no reason for me to pay mutual fund fees). Early withdrawls without penalties and barowing against the account are not critical at all to me, as I have/will have other money segregated for non-retirement purposes.

Anyways- is a 401k the way to go here? As my employer (a boutique investment firm) doesn't have anything set up for me and I have to do it myself, what's the best way to go about setting one up and can anyone advise on a bank that does it easily with good online services? I'm already with bank of america for various other services, is it easiest just to stick with them?

Lastly- the reason I've mentioned my age... I'm not going to be retiring for 40ish years... do any of you think one type of retirement account will be more secure than another against future policy changes and tax regulations? I know that's impossible to predict, but any insights on to how one might assess that risk (i.e. does one form of account really NEED a change) would be much appreciated

Thanks to anyone who read this and sorry for the long post


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 7:55 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
Let me get this straight:
  • You're 28 years old
  • You earn an average of over a quarter million dollars a year
  • You're in investments
  • You're an MBA
  • You can save $50K/year
  • You want to invest at least $10K/year and get a tax deduction

And you want to ask an Internet forum what you should be doing with your money instead of asking what reference materials to look at so you can decide what to do for yourself? Why? You don't behave like any investment banker or private investment adviser I've ever known, and I've known quite a few.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 9:05 am 

Joined: Fri Oct 05, 2012 6:53 am
Posts: 5
What's the reason for your hostility?

If you must know, my question is about tax planning / optimization. It's clearly not about investment/what to do with my money - I don't have any questions on that front. And if you read the post closely, part of why I'm asking is because I want a flexible account where I can pick my own stocks and so forth. Also - private wealth managers are completely different from investment bankers (in the conventional sense, i.e. people who raise debt/equity and work in M&A). A private banker would likely know the answer to this question, whereas people such as myself might know a lot about corporate finance or how to value a chain of drug stores, but very little about personal finance & retirement planning. Especially someone like myself who has limited assets and hasn't had to begin this type of planning yet.

And yes, clearly I've begun reading materials online and so forth. But I also like to use forums/the experience of others to make a more informed opinion.

Relax brah.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 9:59 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Well, you came seeking opinions, and you'll get them. You can accept them or reject them, that is up to you. As you are free to ask questions, we are free to opine how we see fit.

A roth IRA/IRA is a rather simple thing to learn about. You can either google it, bing it, read about it in pub 590 and/or read a book, such as the Boglehead's guide to investing (I recommend this book to every one). You will find these annual contribution amounts to be relatively small. And with your income (assuming you get a w2), you're otherwise screwed for tax advantaged accounts.

I would recommend the max contribution via backdoor roth and a "taxable" brokerage account. You should note the amount of tax dividends receive and capital gains receive and when the tax is applied. Also noteworthy is what will happen if congress fails to change anything this fall. You can insert your own opinion if congress will/will not act. And what the ramifications are for doing so.

Your savings could definitely be higher, as I have had a family, made about half of what you did and saved approx that much (of course, that included employer 401k match). I'm not asking you to justify your savings rate, nor do I care to hear your reasons, I'm just simply pointing out that you could save more if you so desired.

Good luck, brah.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:06 am 

Joined: Fri Oct 05, 2012 6:53 am
Posts: 5
Thank you! that's the kind of response I am looking for. Certainly the savings rate could/should be higher, but I'm trying to be realistic about what I'm going to save... I've been smart about getting my loans paid off, but now that I'm in the clear I don't see myself holding back too much. Also Dubai is a pretty expensive city , not sure if you've spent much time in the UAE, but other than gas (which is almost free), things generally cost a lot...

And I agree people can say whatever they want... being critical is fine and, indeed, par for the course (this is an internet forum, after all). But there's nothing to say one shouldn't respond after they get called out for potentially being a "troll"... granted if it were to continue I'd get bored and give up the fight, but once or twice?


Last edited by PEboy on Fri Oct 05, 2012 10:13 am, edited 1 time in total.

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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:11 am 
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Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
I don't really see VinTek's post as hostile. Just kind of bewildered. Frankly, I am too. It astonishes us that someone can have an MBA and a $250k+ job in high finance without understanding basic ideas that a lot of us here take for granted. But your explanation is reasonable.

At your income level (well above $122k) you cannot contribute to a Roth IRA. Sounds like you would be eligible for a Traditional (deductible) IRA, but the maximum contribution is $5k per year. Bichon Frise alludes to the "back door" method of getting money into a Roth IRA, but we are still only talking about $5k per year. 401k limits are higher but they are only offered through an employer; can't just be "set up" on your own. So without getting really creative, I think you are stuck with taxable investing.

No idea who offers the best brokerage for trading individual securities. Even for people like you, I think picking individual securities would be a lot of time, effort, stress, and brokerage fees for the reward of probably just matching an index fund (which you can set-and-forget for as little as 5 basis points at Vanguard).

Spending $200k per year as a single person is absolutely mind-blowing, but if you plan to work in high finance until age 70 you'll probably be OK.

Tim


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:13 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
Not being hostile; just trying to figure out what you're really looking for. Remember, most of us here are not Americans living overseas, so our personal experience wouldn't actually apply to you.

The thing is, I've never known anyone with your kind of background to be much more hands-on about their personal finances, reading up on materials and then asking questions to attain clarification or fill knowledge gaps. As such, your questions are surprising to me.

That said, I think Bichon's advice is spot on. You don't qualify for a 401(k) if your employer doesn't offer one. You can't do one as self-employed individual since that's not what you are, and even if you were, you might be limited in your tax deferral as and HCE (Highly Compensated Employee).

You earn too much for a tax-deferred Traditional IRA or Roth IRA, so your best bet now is to put $5K (the maximum) into a non-deductable TIRA and convert that to RIRA.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:17 am 

Joined: Fri Oct 05, 2012 6:53 am
Posts: 5
Okay, okay, I understand. The post was a bit all over the place, now that I read it over again. Thanks to everyone for their consul on this one.

Part of the reason I don't know anything is because I've spent my career abroad in very "ex-pat-ish" locations... most of the other guys I work with tend to be Europeans, and the U.S. is one of the only countries that taxes you while you're abroad (I think it's the only one). So they have nothing to offer on this front.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:24 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
timwalsh300 wrote:
I don't really see VinTek's post as hostile. Just kind of bewildered. Frankly, I am too. It astonishes us that someone can have an MBA and a $250k+ job in high finance without understanding basic ideas that a lot of us here take for granted. But your explanation is reasonable.

At your income level (well above $122k) you cannot contribute to a Roth IRA. Sounds like you would be eligible for a Traditional (deductible) IRA, but the maximum contribution is $5k per year. Bichon Frise alludes to the "back door" method of getting money into a Roth IRA, but we are still only talking about $5k per year. 401k limits are higher but they are only offered through an employer; can't just be "set up" on your own. So without getting really creative, I think you are stuck with taxable investing.

No idea who offers the best brokerage for trading individual securities. Even for people like you, I think picking individual securities would be a lot of time, effort, stress, and brokerage fees for the reward of probably just matching an index fund (which you can set-and-forget for as little as 5 basis points at Vanguard).

Spending $200k per year as a single person is absolutely mind-blowing, but if you plan to work in high finance until age 70 you'll probably be OK.

Tim


I would actually do as Tim says and do the deductible IRA. $5k deduction, but every little bit counts. Do note, if you ever become married and your spouse is eligible for an employer plan, you will have a to contribute to a non-deductible IRA. At that point, it would make sense to convert to a Roth IRA, but you will have to do so pro-rata against all your other "traditional" IRA accounts.

PEboy wrote:
Okay, okay, I understand. The post was a bit all over the place, now that I read it over again. Thanks to everyone for their consul on this one.

Part of the reason I don't know anything is because I've spent my career abroad in very "ex-pat-ish" locations... most of the other guys I work with tend to be Europeans, and the U.S. is one of the only countries that taxes you while you're abroad (I think it's the only one). So they have nothing to offer on this front.


you can always hand over your passport. A minor clarifying point, the US requires you to file a tax return, which doesn't necessarily mean taxation.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 10:43 am 
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Joined: Mon Jun 23, 2008 6:54 am
Posts: 636
VinTek wrote:
You earn too much for a tax-deferred Traditional IRA...


I don't think this is correct. My understanding is that the limits would only apply if he has an employer provided plan, and it seems that he does not.

Tim


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 11:13 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1560
timwalsh300 wrote:
VinTek wrote:
You earn too much for a tax-deferred Traditional IRA...


I don't think this is correct. My understanding is that the limits would only apply if he has an employer provided plan, and it seems that he does not.

Tim

You are correct. For some reason, I was thinking of my own situation, which does not apply to the OP.

Still, I think a Roth is a better path for a couple of reasons:
  • Tax rates this year are low at record lows. At this point, he's probably better off taking the tax hit now. It's likely that tax rates will be higher when he pulls the money out. Better to take the hit now rather than the higher hit later (assuming he'll still be in the same bracket).
  • He'll have more in the account when he retires. Mathematically, it's all the same, of course. We've all done the math. But he's basically allowed to put more into his account because he's putting in post-tax dollars rather than pre-tax dollars.

Also, I don't have any faith that the conversion option will still be on the table if and when the OP gets married.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 11:53 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1558
Location: Seattle, WA
Bichon Frise wrote:
Your savings could definitely be higher, as I have had a family, made about half of what you did and saved approx that much (of course, that included employer 401k match). I'm not asking you to justify your savings rate, nor do I care to hear your reasons, I'm just simply pointing out that you could save more if you so desired.


I could have written that same paragraph, word for word.

Truth be told, you really should be saving more of your salary. $50k is about 20%. You should probably be saving more than that to retire comfortably.

Your high income means your savings rate has to be higher than a normal income person for various reasons. You pay more taxes, now and in retirement. You get less of your income replaced by social security (assuming you're even paying into social security right now). Your income may be at risk to changes in the financial markets, so you might not be able to keep earning it until 70.

And not related to your income per se, your lack of access to tax-advantaged retirement accounts is another reason you should up your savings.


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 12:51 pm 
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Joined: Mon Jun 23, 2008 6:54 am
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I've never been to Dubai, but I passed through the airport in Kuwait City recently and the exchange rate was killer - turns out I paid something like $12 USD for a hamburger and fries. Between that, and city of Dubai itself probably having a cost of living similar to Manhattan, I guess I can start to see where $200k goes.

Tim


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Fri Oct 05, 2012 1:38 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
stannius wrote:
Bichon Frise wrote:
Your savings could definitely be higher, as I have had a family, made about half of what you did and saved approx that much (of course, that included employer 401k match). I'm not asking you to justify your savings rate, nor do I care to hear your reasons, I'm just simply pointing out that you could save more if you so desired.


I could have written that same paragraph, word for word.

Truth be told, you really should be saving more of your salary. $50k is about 20%. You should probably be saving more than that to retire comfortably.

Your high income means your savings rate has to be higher than a normal income person for various reasons. You pay more taxes, now and in retirement. You get less of your income replaced by social security (assuming you're even paying into social security right now). Your income may be at risk to changes in the financial markets, so you might not be able to keep earning it until 70.

And not related to your income per se, your lack of access to tax-advantaged retirement accounts is another reason you should up your savings.


of course, this only applies if the OP has any desire to retire. Or perhaps, they are happy to retire in a shack in the middle of Mississippi eating Nutria. Some people put a heavier emphasis on today, and I don't think that is wrong. Just different.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Young w/ high income - Retirement fund question
PostPosted: Sat Oct 06, 2012 1:07 am 

Joined: Fri Oct 05, 2012 6:53 am
Posts: 5
Well, the 50k savings is sort of a base line I've set for myself, but you're all right in that I should be able to save more. Also, bonus is a relatively sizable portion of total comp, so that's variable and you don't know how you're gonna do - if it comes in high I could save more (or invest in a watch?).

Thanks for all the help, everyone.


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