InHondorous, first of all, thank you for your help in supporting the service. Hondorous is such a third world country and the people so desparate. (My husband did medical missions there). I don't know when you might be leaving Hondorous but if you believe you will be buying a house, going to school or any other high cash need, I would begin an investing program of after tax money. Schwab, Vanguard or many other reliable investment companies can help you open an account online. Vanguard has a lot of educational pieces to help you. You can use retirement calculators on many websites, ours has one frazierfinancialconsultants.com
Whoops InHondorous, I wasn't quite finished. You should calculate your retirement given your current assets before deciding to add more to the 401(k).
June, we always withhold taxes from our clients RMD's. One because its better for them to not have to come up with it at tax time, and the other because depending on your tax situation, there could be penalties for not paying a certain amount of taxes throughout the year. i.e. estimated payments. As for reducing the tax bite, the only thing you can do is to reduce your over all tax bite by either increasing deductions, or reducing income (if you are taking money out of a retirement that exceeds you
HI Dan, you've got a couple of issues going on here. You always want to have a globally diversified investment strategy, so your initial thoughts on the individual shares should be around how to use those assets within that strategy which generally amounts to liquidation and conversion. From an overall financial strategy standpoint you want to get yourself into a position of having an adequate emergency fund (6 mos of living expenses generally), no credit card debt, paid off student loans etc. Prioritizing how you want to get there based on the information at hand within this forum is difficult to do. I hope this helps!
Alex, congratulations on making such a good start with your finances. You know it isn't always about what you make as much as it is about what you spend and save. Starting young will make a HUGE difference in your end result. As for where to put the money, first I want you to have a boring emergency fund. If you are single (or your spouse doesn't work) I want you to save up 6 months (at the very least 3) worth of expenses. This is such boring advice but having a cushion like that will make for smoother sailing if the seas get rough. You won't make much money on your cash in this environment but it is worth it. Next is the car loan as it is the highest interest rate. I want you to pay if off more agressively once you have your emergency fund. Once it is paid off, I still want you to make some sort of payment monthly....to yourself. Then the next time you need a car, you'll have the money and won't have to take a loan. If you plan to drive your car until it drops dead (you will save so much over a lifetime if you do this), you may be able to save less than your current payment and still have the cash you need when it is time to buy the new car. You can use any excess cash to:
June: Between retirement (often age 65) and the forced start of Required Minimum DIstributions (RMDs) is frequently an opportunity of little or no income. We call these the "Gap Years" and try to fill them with Roth conversions at the lower tax brackets. This reduces your ultimate RMD and reduces income in the higher tax brackets.
And Deborah, I'm glad I sent InHonduras' question to you! Who knew you'd have that connection. Thanks everybody.
Alex: re: excess cash once car is paid off: fund your retirement (at least up to any employer match though understand you will need to save about 15% for your entire life to live your current lifestyle in retirement...not all of the savings has to be in retirement accounts). Don't address the student loans until after you get the advanced degree. Then use some of the extra money you should earn because of that degree to retire those loans as early as possible. Good luck!
We have two big-picture questions from "chatlive" that I'd like to address to all the advisors. I think they're on a lot of people's minds right now.
First up, an investing question ...
Chative, you should not let tax issues alone determine your investments. You should always use a broad approach. Have some income producing items (best in retirement accounts as all withdrawals will be taxed as ordinary income anyway) and some growth stocks (best in taxable accounts where you get capital gains rates or in Roths where you won't have to pay any tax at all). Putting the right investment in the right account will increase overall after tax returns.
Depending on your situation, I would put high dividend earners and high interest payment in qualified (retirement) accounts. This will fully maximize the tax deferred status. However, I would not do this if it will sacrifice liquidity and your ability to draw money from taxable accounts. Muni bond funds that stay toward the short end of maturity would be a good bet for taxable accounts and escape federal taxation.
I think you have to continue to work with your strategy and make adjustments as you go that will best facilitate your progress. This is usually best done AFTER we have the fact not before. A fully diversified investment strategy already has you properly positioned.
Chative, just because you should let tax concerns drive the boat, you do need to be aware of them so that you make any decision with full knowledge. For instance, some of my clients do think the Bush tax cuts will expire and they will be taking some gains this year to insure they get the 15% rate (I am almost 100% certain it will never be lower than this).
A follow-up question for the advisors: How much do you think tax issues should influence investment strategies?
chatlive, it is a frustrating time for all investors and if the things you mentioned in your terrific question come to fruition, it will become even more difficult. For us, the difficult portion of the investing piece is the short term. I still have faith in the long term for companies that we invest in. The tax rates that may come have been dealt with before. The Bush tax cuts were never meant to be permanent. Continue with diversification, diviidend paying stocks, high quality bonds and don't invest money that you will need in the next 2-3 years. If the bush tax cuts do expire, it might be wise to look at taking some profits out of your taxable accounts. You can buy the stock back, which if you want to take profits on Apple but don't want to sell it. Sell it and buy it back.
Finally Chative, I know some retirees who try to live off income as it is strictly defined so that most of their investments pay dividends or interest. I strongly suggest that they replace the notion of "living off the income" with drawing down their assets at a given percentage...many use 4%. That 4% can come from that strictly defined income or from capital gains. You can do a much better job of managing for tax with this philosophy.
Taxes are a fact of life, they have to be paid when you earn money, whether it is earned money from employment or investments. We believe that taxes should be a part of the investment decision, not swing the whole decision.
It should be in the forefront of their mind, but it should not compromise their risk tolerance or overall financial plan. Such as getting out of bonds and into stocks with high capital gain potential because the bonds will be too highly taxed on the revenue.
Chatlive: You never want to let the tax tail wag the dog. However, I good investment strategy DOES take advantage of tax diversification through the proper use of different types of accounts and the investments they contain. People in different circumstances have different opportunities. But generally speaking long term gain assets belong in taxable accounts and interest/income producing assets belong is tax qualified accounts.
Chative I meant you should NOT let tax concerns drive the investment boat.
So tax considerations should no:
This story looks at a retirement nest egg drawdown strategy based on the rules for required minimum distributions -- www.kiplinger.com/magazine/archives/dont-run-out-of-money-in-retirement.html
Chatlive: here's a good rule of thumb that I will attribute to my friends at the Alliance of Cambridge Advisors (acaplanners.org), "Save money in the most efficient way that you can, and when you need it, take in the most efficient way that you can."
Bill, I love the Cambridge quote. By being efficient in accumulation and withdrawal strategies, you can really pump up the amount of money you are able to withdraw over your retirement.
Great, thank you everyone! Some very helpful strategies there. I have one more big-picture question from "chatlive," and then we'll turn back to the individual Qs again. It's about the Affordable Care Act.
David, I don't think many knew about the -0- percent cap gains rate for those in lower income tax brackets. During the steep business decline for some of my small business clients, we were able to use their losses in those years to do things like sell at the -0- rate or convert traditional IRAs to ROTHS. Even bad economic times offer opportunities.
Chatlive: Whether or not the ACA impacts YOUR taxes and investments depends primarily on your income level. There are additional taxes associated with the act that impact those making over $250k.
Hi Rich! Sorry we lost you. We're talking about how the Affordable Care Act will impact investments and taxes -- a big issue, for sure.