Jump-Start Your Retirement Plan Days 2 -- Saving for Retirement Transcript - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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Jump-Start Your Retirement Plan Days 2 -- Saving for Retirement Transcript

NAPFA advisors took your questions about IRAs, Roth IRAs, 401(k)s and more.

  • 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
  • Hi, my question has to do with 401k and college loans. I'm 24 , with a 75k salary, and I have a 90k loan from college (B.S. and M.S.). Should I focus on paying off the loans or should I still contribute to 401k?
  • jcoliveros: First and foremost you should create a "slush fund" that will allow you to cover 3-6 months of expenses. After this I would contribute whatever amount is "matched" by your e
    mployer. Your next step really depends on how high the interest rates on your loans are and how you deal with debt. Some people hate to be in any debt at all, some don't mind as long as it is kept manageable. If your student loans are 5-7% or above I would focus on paying these down first. If there are at 2-4% and the economy is doing well, investing maybe a better option. Here is a great link that may answer some more of your questions: www.kiplinger.com I hope this helps.
  • Travis, you can take this next question from Jimmy
  • I want to start a roth ira with an online brokerage and monitor it myself. Which brokerage companies are recommended?
  • Thanks Travis. I already have an emergency fund (setup for 6 months of expenses). I'm contributing 8% of my paycheck, which is what my employer matches, and separately have a Roth IRA (about 10k) that I do not currently contribute to. All my loans are less than 7%. Thanks for the link. My problem is that there are other things I want to save for such as wedding/engagement, house, and a car (will need one in a couple of years). I find it difficult to decide which to prioritize.
  • 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
  • I have a sole proprietorship business. If I contribute $X to a 401k, is this deductible as both a business expense AND a personal contribution? How is it different for a Roth 401k?
  • 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.
    by Pat Jennerjohn edited by Amanda Lilly 2/19/2013 5:34:15 PM
  • Delia, you can take this one from Sand
  • This question got lost in the shuffle. Can I repost? How do you find fair value of indice or a fund? The other day someone mentioned the S&P was at 1550 but fair value was 1450. don't understand how to get these numbers.
    by sand 2:15 PM
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 5:34:19 PM
  • 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
  • We're 50ish, no debt, but havent done well with stock/fund picking for our retirement investing. Not much more than 15 yrs ago sadly. Typically I contribute 5K/yr to Roth. I co-own a duplex (ideal rental property) and have lived in it for over 10 yrs in coastal san diego, only 7 yrs left on a 15yr fixed mortgage. We need more space in which to live. My plan is to buy something bigger, ( I have cash for 20% down, plus a 4-5 month emergency fund), Not re-fi the duplex so as to pay it off in 7 yrs despite today's lower interest rates, and decrease my retirement contributions for 1-2 yrs to afford the new house. Any red flags in this plan?
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 5:34:26 PM
  • Delia, here is a question from Allie
  • For the first time In years, I was able to reduce my MAGI to a level where I could contribute to a traditional IRA. I have room to grow my salary before I make it to the 28% tax bracket. Is it worth doing a back door Roth with the traditional IRA money from 2012?
  • And Delia, when you're ready, here is one from Matt Rado
  • Hi - question about how to execute beyond the basics. My wife and I are both early 30s with an infant. We both save 7% into 401k as our companies match half of that. Another 10% of my income goes to my company's ESPP plan which is very friendly. We save about $300 per month into a 529 plan for our son's college. We have a bucket of about $30k in cash that has slowly accrued beyond what I've previously listed in a simple savings account that I don't know what to do with. What should I do with that plus the $1k or so a month that's left over for our investing? Specifically I'd love to find a tax shelter as we make a combined $220k annually. I've been toying with the idea of converting our 30 year mortgange to a 15 year (would only increase the price from $2700 to $3500). Thoughts? Thank you!!
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 5:36:03 PM
  • Delia, you can take this question from Matt. He has a followup from earlier
  • Thank you Delia! I was referring to a company stock plan. When you said the best tax shelter was my company plan, did you mean 401k or stock plan? They cap the stock plan participation at 10% of salary unfortunately.
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 5:36:18 PM
  • Delia, here is a question from Matt
  • Hi - my wife and I are both 34 and have a baby and both make just over $100k each. After 7% to 401k, and 10% for my company's ESPP, and maxing out a 529 plan for my son, what should be our next investment priorities? We have a bucket of $30k or so to start with that we are unsure of what to do. Any kind of tax shelter would be helpful.
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 6:59:22 PM
  • Thanks Delia. Also - that question from "Matt" was me, I had to refresh the page and wasn't sure if my first question went through, sorry. So, last question, you are saying even if my company only matches 7% it's best to max out the 401k beyond 7% because the tax-free contributions will make up for whatever else I could do with the money post-tax?

    Do you know if it's possible to contribute more now before april15 to shelter some taxes from 2012 income?
  • Thank you Delia, and Kiplinger, for the advice. This Q&A for both my questions and others' is much better than an article or a blog post.
  • 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.
    by Delia Fernandez, MBA, CFP edited by Amanda Lilly 2/19/2013 6:59:59 PM
  • Pat, when you're ready, here is one from Big D
  • I'm hoping to hire a financial advisor fo the first time. I'm looking at a CFA with ties to the Dimensional Funds Advisor (DFA) what should I expect for fees? any concerns with DFA? I have about 250K in total assets, roth ira, reg ira, savings, checking, mutual funds, coins in the cushions, etc..married both in mid 40's, make 160K combined per year..generally savers by nature. Are we behind the power curve and should we go with a DFA advisor for our first Financial Advisor?
  • 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.
    by Pat Jennerjohn edited by Amanda Lilly 2/19/2013 7:00:20 PM
  • 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
  • I just turned 28. I have a law degree from top five school, but because of the recession, I am an assistant DA making around 41k. There isn’t a lot of upward mobility in salaries and, in law, if you don’t get a big law job (those start around 160k) starting out you rarely have a chance to get back in. I’ve found I love my work so I may try to make a career with out very small salary and horrid retirement options. If I do, is there any reason to put money in a Roth IRA instead of making unmatched contributions to my 401k? I don’t see how after a lifetime of government service, my tax rate would be higher when I retire. Is the 401k the right way to go? I already have 15k in it. Is there an advantage to a Roth IRA that I am unaware of?
  • 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
  • I am 49 years old and will receive a 75% pension when I retire. I currently have 250,000 in a deferred 457 account and contribute 5,000 to that annually. I also have two Roth IRA's that I max out annually with current balance around 65,000. I plan on retiring at 65 and was wondering if I am saving to much money and should I enjoy some of that money now? My mortgage will be paid off when I am 62 years old. Thank you.
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