Brandon: Yes, you may be phased out of the Roth fairly quickly once your fiancee is done with residency. But, once full time work starts, I assume you will be in the position to begin rapidly saving for retirement and paying down debts. Think of it like this: you are essentially borrowing money at 6.8% interest to make your Roth contributions. Could you earn a long term return to overcome the 6.8% cost? Maybe. But, at this point in your life, I think a better bet is to just avoid the interest cost and only borrow the money you absolutely need.
OK, Travis here is a question for you from jcoliveros
Travis, you can take this next question from Jimmy
jcoliveros: I agree. Sometimes a risk/reward scenario will help narrow some of those things down for you. I wish you the best
Pat, here is one for you from Halzonski
Halzonski, a contribution to a regular 401k reduces your taxable income (and is only deductible once, not from both personal and business income - unless you are thinking of the arrangement where you pay yourself a salary, defer income from that salary into your 401k, and then make a profit sharing contribution from the business; but the total contribution is not double, you must observe the deferral and contribution limits). All contributions grow tax deferred, but withdrawals are taxable (and you must start withdrawing from a 401k at a certain age). Roth 401ks are a bit more complicated; you can defer up to 25% of compensation AFTER tax (no reduction of personal taxable income) to a Roth 401k, but any profit sharing contribution goes in pre-tax (reducing your business income). For that reason, it's a more complex vehicle than a straight up 401k and I would recommend that you consult with an accountant to figure out what would work best for you.
Delia, you can take this one from Sand
sand: This really varies. Some look at an index and analyze it in terms of trailing returns, such as trailing price/earnings or P/E ratio, and some use forward (estimated) price/earnings. It's often vague.
sand: fair value of an index is based on someone's estimate of value of the underlying companies in that index. So the 1450 you heard is someone (or some organizations') estimate of the value of the index. You would have to look at their specific calculations to understand how they arrived at that estimate.
And Delia, when you're ready, here is one from Steve P
Steve P: Taking on a bigger (and possibly more expensive?) home at this stage of your life might not be the best course of action. Ideally you'd sit down with a planner to review the longer term projections of savings, investments, your cost of living in retirement, etc.
If you're only saving $5k/yr and then you sign up for higher living costs your savings may go down to zero. And that may not be good for your retirement plans.
As for your investments, I'm a big fan of low-cost balanced funds such as those provided by Vanguard to help people who have difficulty picking their own investments. Consider checking out a few of their offerings and talking to someone there; they also have target-date funds that may also be a good fit. You need to add a bit more structure to your plan than just considering it a rental property and some investments you're not happy with.
Delia, here is a question from Allie
And Delia, when you're ready, here is one from Matt Rado
Matt Rado: In your income bracket the best opportunity you have to reduce your taxable income is your employer-provided plan. In 2013 you can contribute $17,500/yr. So I'd start there.
As for a "very friendly" ESPP, what do you mean by that? The discount offered is very friendly? I assume you I assume you're describing a stock purchase plan.
You might also look into making non-deductible contributions to a traditional IRA and then converting them to a Roth (this works best if you have no other IRAs because you'd owe pro-rated taxes across all IRAs). I'll defer to my more tax-savvy colleagues if you need more info on this. I always like having both the 401k and Roth because it hedges against future taxes...who knows what's going to happen, but it's sure nice to have tax-free growth that a Roth offers, especially since you're so young.
Also, do check to see if your state offers tax deductions for contributions to a 529 plan, and if so, whether you're using the right one. If not, do shop that 529 plan to be sure you have the lowest fees and best selection of funds. I like Vanguard's, either purchased directly from them or through the state of Utah (and there may be others).
As for refinancing the house, this is a question that should be considered as part of your overall plan. I'd first be sure you have sufficient life and disability insurance, auto and homeowner's coverage, an estate plan, etc.
Delia, you can take this question from Matt. He has a followup from earlier
Matt Rado: Sorry, I meant the 401k. Employer-plan contribution maximum limits are the highest for all retirement plans except those for self-employed folk or business owners. For example, the max for a 401k contribution this year is $17,500, but only $5,500 for an IRA.
Delia, here is a question from Matt
Matt: Actually, to max out a 529 plan takes thousands and thousands of dollars, depending on the state. In CA it's around $350k. You may mean that you're maxing it out to meet your educational goals.
Again, you've used the 7% for the 401k, where at $100k each in earnings you could be saving 17.5%. Some companies offer a Roth 401k, in which case you could talk to your tax person about the best contribution to both types of 401ks to maximize the tax advantage.
As for the next steps, if you want something to invest in outside of a retirement/Roth account, then consider a taxable account using low-cost low-capital gains types of investments, such as low-cost index funds; low-cost exchange-traded funds; or even individual stocks. This is where it depends on your interests in managing your money or leaving it to a fund.
Matt Rado: Yes, that's exactly what I mean. Just because the match is only 7% doesn't mean that you don't still get a tax benefit from the remaining contribution. Why thrash around looking for a better deal when you can shelter another 10% from income taxes?
No, not in a 401k; that has to be through payroll deduction. But you do have until April 15th to contribute to an IRA.
Pat, when you're ready, here is one from Big D
BigD, there are many excellent advisors out there, with very different investment strategies; the most important aspect of investing is to choose a strategy and stick with it. DFA works with many excellent advisors, who essentially agree with DFA's investment philosophy, go through their educational process, and have essentially agreed to limit their recommendations and implementation to those funds. DFA Funds have very low expense ratios, and advisors will add their fee on top, which could range anywhere from 0.50% to 1.50% of assets under management. DFA offers a wide range of funds representing a lot of asset classes; some funds are better than others, which would be typical of any large mutual fund company - not everything they offer is "best of breed." Using DFA funds doesn't make an advisor "better," it's simply a reflection of the advisor's philosophy about investing. You should be comfortable that the advisor will listen to you, give you great advice, and make you comfortable with your overall situation. In terms of investment philosophy/implementation, there are a lot of ways to go, DFA is simply one direction.
Jimmy: I have always dealt with and had great customer service with Charles Schwab and TD Ameritrade. Both of these companies have reasonable commission charges for stock/etf trades (lower with online statements and trade confirmations
) as well as many no-load, no-transaction fee mutual funds.
Readers, bear with us a few minutes here while we transition advisors
Good Afternoon! My name is Phil Hogg. I am a CERTIFIED FINANCIAL PLANNER (TM) Professional with Hogg-Murnighan Financial Planning located in Park Ridge, IL and the world wide web at www.hmfinancialplanning.com I hope to answer all your questions today regarding saving for retirement.
Phil, you can take this question from IBRed
Hi IBRed At a young age follow your instincts and go with your passion. Invest in your 401k with an investment at least to take advantage of the employer match. You don’t want to leave free money on the table. Work on obtaining a 6-month emergency fund and if you have the ability to save more, open a ROTH account. Good Luck!
IBRed, As a follow-up if you are in a low tax bracket and have many years to invest, a ROTH may be a better choice if your employer's 401k does not match your contributions.
Travis, you can take this one from Rob C