Financial Planners?

[aberkowitz]

The rest of the advice was pretty good but the above is almost entirely false.

- There has always been an earnings cap for eligibililty for contributing to a Roth, it isn't new, and that limit just went up this year. As you approach the limit your allowable contribution goes down. I hit the limit last year and my allowable contribution was only $2600 - still a bit more than half of the max.

Which is why I think a Roth is a bad idea for a younger person who is upwardly mobile from an income perpsective. I don't know the OP's job- but if within the next 5 years he/she will be scraping that ceiling (I'm personally already ineligible to make Roth contributions) then it almost becomes a lost investment.

- The penalties for early withdrawal from a Roth are identical to a 401K. If you are under age 59 1/2, you pay tax at ordinary income tax rates plus get a 10% penalty. You can however withdraw your contributions at any time without penalty because after all they have already been taxed (A Roth is after-tax contributions). Just like a 401K there are exceptions to the rules too - you can take 'substantially equal' withdrawals over your expected lifetime without penalty (other than income tax).

A Roth is just an investment vehicle with certain rules governing contribution limits and tax treatment. You can invest anything you want in a Roth - stocks, bonds, mutual funds, whatever. With a 401K you are limited to the investment choices offered by your plan provider although they can be substantial.

You are correct- I was typing so much that I mixed myself up. Thanks for correcting that.

- Having both a 401K and a Roth provides tax diversification as you can't realistically predict whether you will be in a higher or lower tax bracket in retirment or what the current tax rate will be.

Agreed- I just think for a younger person they should max out their 401K before they max out their Roth, especially if matching is involved.

Also consider that a Roth has no minimum distribution requirements like a 401K and the entire balance can be left tax free to your heirs. It's just another tool for saving for retirement. One should do both if at all possible.

A bit of a misleading statement.... a Roth will pass totally tax free only to your spouse upon your death. For all other beneficiaries the Roth will be included in your taxable estate and be subject to estate taxes. The Roth does allow you to deduct the total amount of taxes paid on contributions from the total amount of your estate, effectively lowering the amount of your estate that is subject to taxes, but after that deduction if your estate is above the $1.5 million threshold taxes are fair game.

 

[masak_aer]

Speaker cable: $25
Transformer DVD: $15
Internet connection: $49.99
Getting financial advise from AH members: PRICELESS....

 

[evilkat]

Guys, thanks so much for the wonderful advice, as contradictory as some of it has been I feel however that there's a ton of useful information for me to take away from here...and that perhaps I shouldn't be wasting my money on a financial advisor, when I really should take the initiative and learn this myself.

Although a few of you have pointed out that u'd be crazy to ask audioholics for fin advice, u gotta figure that this is an expensive hobby and people who can afford it probably know wth they're doing when it comes to money matters And I mean that in the sense that they know how to collect just as well as they know how to spend it
Upgrades are always one product cycle away!!

I'll have to think about this though. I do have a 401K plan, but I only put in as much as my company matches. Sounds like I should aim to do the full match. I guess where i'm struggling is where to allocate the funds (more bonds because the market is flakey..or persist with growth sectors?). Maybe i need to subscribe to WSJ

Another thing I'm wondering is whether to concentrate on finishing my car loan (just under 10K left @6.7%) or to keep investing in 401K and other plans. Currently I'm doing a bit of both, but I really want to get this loan off my back. I keep paying more than what my payments require of me, but I feel like i want to put more into it and get it over with. I've had the loan for like 2yrs now, and the biggest reason i've let it drag on (apart from the lack of funds ) is to build credit history (of which i had NONE when i got the loan). Is 2 yrs enough for this?

 

[Nimrod]

401k that I max out every year

Also a Defined Pension plan

Then even if your wife doesn’t work, open plan for her.

Invest in quality companies (stock market) for the long Haul. Even in this brutal market you can do well.

Open college savings (529) plans as soon as children are born. My wife *****ed and moaned, fought me on this “we could use that money now….” when things where tight. My older boy starts college this year; and his first year (plus) is free.
My younger boy wants to go to Boston College….. (gulp) not sure if his first year will be paid off, but he's way ahead


Then of course credit cards = don’t carry over debt at 20% plus your throwing money away

 

[STRONGBADF1]

Speaker cable: $25
Transformer DVD: $15
Internet connection: $49.99
Getting financial advise from AH members: PRICELESS....

Made me laugh

There is some good advise here and the only thing I can add is to start as soon as possible. Better to do something than nothing. This all gets very confusing to alot of people and then some of them don't do anything.

Other than that buy lotery tickets! (joke)

SBF1

 

[aberkowitz]

I'll have to think about this though. I do have a 401K plan, but I only put in as much as my company matches. Sounds like I should aim to do the full match. I guess where i'm struggling is where to allocate the funds (more bonds because the market is flakey..or persist with growth sectors?). Maybe i need to subscribe to WSJ

I definitely recommend maxing out if you can afford it. As for fund specifics, while you're young you want to be as aggressive as possible. The reward over the long-haul is definitely worth the risk. 85% of your money should be in stock related funds, and a decent portion of it (about 30% of total) should go into International funds.

The WSJ is a good read if you know what you're reading, but the web is a decent resource as well. Look up the funds that are offered on Yahoo Finance, there are links there that will explain to you what type of funds they are as well as the Morningstar rating (a quality rating).

Another thing I'm wondering is whether to concentrate on finishing my car loan (just under 10K left @6.7%) or to keep investing in 401K and other plans. Currently I'm doing a bit of both, but I really want to get this loan off my back. I keep paying more than what my payments require of me, but I feel like i want to put more into it and get it over with. I've had the loan for like 2yrs now, and the biggest reason i've let it drag on (apart from the lack of funds ) is to build credit history (of which i had NONE when i got the loan). Is 2 yrs enough for this?

That depends on your own personal finances. If you tried could you pay down the loan in 1 year? If that's the case then maybe it's worth saving less and getting rid of the loan ASAP. If not, then maybe you do a hybrid model for 2 years.

As for your credit - you did a smart thing by establishing credit through a car loan, but you have to keep it going. Find yourself a no-fee credit card and use it a few times a month to buy small to medium sized items, then pay it off in full at the end of each month. That's a great way to maintain your good credit because you can develop a long history of on-time payments.

Remember, you can look at each of your 3 credit score reports free once a year, so every 4 months be sure to sign up and get a copy so you can see what your score is.

 

[mtrycrafts]

but if within the next 5 years he/she will be scraping that ceiling (I'm personally already ineligible to make Roth contributions) then it almost becomes a lost investment.
.

How so? Why move it or cash it in? It will compound tax free and at 59.5 you can get it all also tax free.

 

[Audioholics]

Research the Roth IRAs. Money growing tax FREE beats money growing tax DEFERRED every time. Max out your Roth IRAs until you are disqualified due to making too much (currently over $150,000 for a married couple.)

The only way I would invest in 401k first is if the employer matches. Then contribute to get the max amount of free money. After that contribute to max out your Roth IRA.

$1000 of after-tax money growing tax FREE for 30 years. When you withdraw it (at retirement) you pay NO TAXES on any of it. Period.

vs.

$1000 of before-tax money growing tax DEFERRED for 30 years. When you withdraw it (at retirement) you PAY TAXES on it at your then-current income tax levels.

The math on this is absolutely mind-blowing. Roth IRAs are almost a loophole they are so delicious. I wish they'd ditch the earning caps. Makes no sense to deter ANYONE from saving for retirement.

 

[MDS]

Research the Roth IRAs. Money growing tax FREE beats money growing tax DEFERRED every time. Max out your Roth IRAs until you are disqualified due to making too much (currently over $150,000 for a married couple.)

Were it so simple.

If you will be in a lower tax bracket at retirement, the upfront tax deduction of a tax deffered plan like a 401K is worth more becuase you would get a higher deduction on your contributions than you would pay in taxes when you start withdrawals.

The huge catch is that you if you invest wisely and earn a decent return there is practically no way that you will be in a lower tax bracket in retirement. Add to that the fact that you have no way to predict what ordinary income tax or even capital gains taxes will be when you retire and it becomes a crap shoot as to which is 'better'.

I say if you have the opportunity to contribute to a 401K do so and also fund a Roth IRA. The idea that you have some investments that are tax deferred and some that are tax free is called 'tax diversification'.

I just don't agree with the notion that has been put forth that a Roth is a bad idea due to contribution limits or income restrictions. It is a an investment vehicle with certain rules - just like everything else. I could say 'I don't like traditional deductible IRAs' because I was ineligible the day I got my job 15 years ago. But that is irrelevant - for a lot of people a deductible IRA is a good choice. Weigh the various choices and choose the vehicle (or two or three..) that benefit you the most.

Bottom line though: do something. I butt head with old friends that are of the mindset that 'you can't take it with you' and so save next to nothing. These are the same people that when getting drunk on the front porch will say 'If I had X, I'd but this and that' but never make the connection that it takes time and effort to get to that point.

You don't get rich by spending your money people and TIME is the most important variable in finance.

 

[evilkat]

Okay, sounds like the priorities should be:

.Max out 401K match with employer (but not to the 15K limit just yet)
.Tinker with Mutual fund asset allocation & 401K asset allocation
.Pay off car loan ASAP
.Startup a SMALL 529 college fund (time being most important variable -MDS)
.Then Startup Roth IRA
.Max out Roth IRA
.Max out 401K

I seem to be doing rather poorly with my 401K and Mutual fund asset alloc because I'm getting only around 7% I think. Since my car loan interest rate is around 6.75% my net gain is almost not worth it...tying up my money in the loan doesn't seem to have too much of an opportunity cost, so i think I'll pay that off as fast as I can. Since I have less than 10K left, I think it will be difficult to refinance.

Is the 529 college fund tax deffered?

Also some of you mentioned that you should save 3-6months worth of emergency funds. I assume by this you mean 'maintain a liquid asset some place that allows you to withdraw money on short notice'.

What do you guys use for this? Do you use internet banks like ING w/higher interest rates ? Or do u prefer brick & motar banks with savings accounts (pretty crappy interest rates though). CDs seem to be not worth it.

 

[aberkowitz]

Add to that the fact that you have no way to predict what ordinary income tax or even capital gains taxes will be when you retire and it becomes a crap shoot as to which is 'better'.

I agree with that statement. Doing both is a good idea, I just believe that you do the 401K well before the Roth- particularly if your company matches and you can get yourself up to the 15.5K level each year.

 

[Rickster71]

Although you may be eager to invest, you need to do what is best for your bottom line.

The answer to paying off your car loan vs. investing in a 401k, can be solved with this one statement:
If you can earn a higher after-tax return on your investments, than the after-tax interest rate expense on your debt, you should invest.
Otherwise, you should pay off your balance.