You are the only one who can provide for your retirement, so that should be the priority. What lifestyle will you want in retirement, what bills will still be due. Can you achieve this with what you have, or do you need more savings? You do get tax credits for the education, so that helps on taxes, does it help enough to mitigate what you would defer to retirements accounts? These are some of the questions for you to mull over.
Thanks, all! When you're ready, here's our next one from Bobby1
Bobby - you may want to read more about this on the irs.gov site. it's pretty specific citing:
Bobby you may want to read more about this topic on the irs.gov site. the employer has tow options 1. matching contribution capped at 3% OR a 2% non elective contribution. They can't do both.
Hi Bobby1 - the employer contribution should come from the employer. Are you sure that's not your employee contribution that in turn is being matched? Can you check the statement for your SIMPLE-IRA?
The SIMPLE-IRA must meet certain matching requirements, depending on what has been elected: either a 3% match (employer only contributes if you do) or a 2% flat contribution, not dependent on employee contribution.
When you're ready, here's our next one from Joe
I have had clients with over a million in there retirement accounts, and only that account to draw from in retirement. It didn't lower the tax bill, and they had no options for doing that, and it impacted their SS. Having money in a ROTH or a taxable account allows you to be more flexible about where your retirement money comes from, so you can mitigate your taxes. I guess it all depends on your lifestyle needs in retirement, but most don't want to live for the 10% bracket
Hi Joe you're correct in your assumptions about a traditional IRA. Conversely when contributing after tax dollars to a ROTH (401K or IRA) one benefits who expects to be in a higher tax bracket upon getting funds distributed to him or her. Many folks in their early career days are in lower tax brackets than they might be in their later years.
Hello JoeM - Yes the tax deferral piece of the 401k plus current tax deduction (using pre-tax money) is the advantage. The disadvantage is you will be paying income tax on the withdrawals at ordinary income rates. The ROTH 401k is a different animal. With a ROTH 401k, you contribute with after tax money and the money grows TAX FREE as long as you meet the 5 year requirements and age requirement of 59 1/2.
Hi Joe - you're correct about the general idea/wisdom of pre-tax (401k/IRA) contributions while working - and withdrawing later when not working and *presumably* in a lower tax bracket. Note the accent on presumably. I think of Roth contributions (whether in 401k or IRA) as "tax diversification". Just as we diversify across stocks and bonds, we should diversify across taxable and non-taxable. If all money is in pre-tax accounts, there is no flexibility later on for withdrawals, and no ability to manage taxable income year to year, etc. For many clients, I have them do both: contribute to their pre-tax 401k, and contribute to a Roth IRA (assuming eligible).
All earnings and dividends inside of an IRA/ ROTH come out tax free after 59 1/2. Using an ETF or mutual fund investing in REIT's does not alter this. There are tax implications if you buy real estate inside one of these vehicles, but not using funds or ETF's.
Sorry, the money coming out of a regular IRA is taxed coming out as income, the Roth is tax free.
Hi Deeko - assuming the REIT distributions stay in the Roth, there would not be tax upon withdrawal from Roth (assuming qualified distribution, e.g. 59 1/2, 5 years, etc.). I'm not sure if you're referring to UBTI - unrelated business taxable income - which can be taxed even in an IRA - but only if over a certain amount. UBTI has been a concern with MLPs (Master Limited Partnerships), I have not seen it an issue with a REIT mutual fund.
Alright, looks like we're ready for our next question from Meera
Hi Meera - WOW, you're doing great! It's hard to answer specifically without knowing more. For example, are you implying that the $50k equity you have in your home will not be enough for a down payment when you move? I also am curious why you're only saving $300/month with your employer, when obviously (given $3000/month other savings) your cash flow would allow more - and I assume the employer plan is pre-tax, so the contributions would reduce your taxable income. Also, what is the rate on your student loans? Given your large amount of cash on hand, I'd consider paying them off.
Hi Meena -- before I or anyone should give you funds or investment vehicles I recommend you and your husband sit with an advisor and do a financial plan. Clearly you know how to save money and you're ahead of the curve on that front. You are in the thrust of those accumulation years when you're balancing operating costs of a family, short, intermediate, and long term goals and then retirement. With clients like you I have them use a "bucket" approach where we move monies from the medium term (3-5 years) to short term, then move monies from the longer term(s) to medium term. It's all goal driven in a plan that's well laid out at the onset, then implemented over years and monitored. You are in the position to do well by saving for the long term or doing VERY well by setting spend goals, savings goals, then recalibrating your plan and its implementation as the years go on. Kudos to you both for starting down this path .
Hello Meera - It is great that you are able to save so much of you take home pay. Your investment goals need to reflect your short-term and long-term goals. The money you will need in the next 3 years probably needs to be a in liquid account for easy access and not dependent on the stock market's ups and downs. Sounds like you are working for the state - good and bad depending on the state pension plans. Is the $300 a month a contribution to the state pension plan or is it in a different type of retirement savings plan?
Readers, please bear with us as we welcome a new round of advisors to the chat.
Hi Everyone! This is Theresa Chen Wan, CFP®, CFA, Principal and Financial Planner of TCW Financial Planning in Dumont, NJ. www.tcwfinancial.com
Mark Berg, CFP of Timothy Financial Counsel, Inc. from Chicago, IL signing in.
Good Afternoon! My name is George Kiraly. I am a CFP and the president of LodeStar Advisory Group, LLC located in Short Hills, NJ. We are a fee-only wealth management firm. Glad to be with you this afternoon!
Here's a question from Michael B
Hi Michael - it's great that you have a couple of years of college saved up already for your children. I think it's a good idea to save both for college and retirement at the same time. Make sure that you're getting the full match from your employer in retirement plans and save more if you can. But saving for college through 529 plans are also beneficial because withdrawals are tax free if used for qualified educational expenses. You still have 20+ years to save for retirement, so take it one step at a time and save what you can in your retirement plans.
Hello Michael B - Saving for your retirement should be your number 1 priority. There are loan and financial aid options for your children's college, but none of these options are available for your retirement. Not only is there financial aid but merit aid available. Be sure and max out your employers retirement plan, plus IRA and ROTH if you are eligible.
Michael B. - great job! On the college front, I would recommend you begin by determining how much you and your spouse wish to contribute towards your kid's college. Make it measurable and communicate it to your kids (assuming they may have a role). I would then determine how much margin you have remaining to address college. Be realistic, as your kids have decades more time than you to pay for college than you. Well done. Teresa has some more specific guidance on the 'how to'.
Steve - Panic is a strong word. As you get closer to your goal, you lose the benefit of compounding. Therefore, the earlier you start, the better off you will be. Take this one step at a time and just get started. The goal here is to avoid ever getting to the stage of panic :)
Hi Steve - no need to panic. Just try to get started as soon as possible. If your employer offers a 401k, participate and start putting 3-5% of your salary away in the 401k. This way you won't see it in your bank account and you'll have to adjust your spending. Over time, try to increase that percentage as your income goes up or you reduce your spending.
Hello Steve -- Start to save once you have 3-6 months of expense saved in a emergency fund. If your employer has a 401k or 403b plan, then this is a tax deferral way of saving. Start small -- a little each pay check and once that is not a shock to your system, then up it a little more. Also, in the mix is if your employer has a defined benefit plan in place and if you will be there in the future to qualify. Basically, just start today with a small amount and continue!
Steve, I would suggest you start with a budget and track your cash flow. Part of any surplus savings should be used to fund a retirement account. Do you have a plan available through your employer?
George, we have a follow-up for you
Ben - Frankly, there just aren't many attractive options for cash these days. You could certainly explore online savings accounts, as they sometimes offer better rates than can be found at your bank. Additionally, depending on your cash flow and when you might intend to use the funds, you could explore utilizing CDs or create a CD ladder.
Ben, if you're still there, can you please clarify what you mean by cash alternatives? In a retirement account?