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Another question for my son
Old 11-11-2007, 06:29 PM   #1
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Another question for my son

My son' does not have any pension, 401k or any other employer offered retirement plan. He makes too much for a Roth. Is a Traditional IRA with it's 4k max the only tax qualified option he can use?
Thanks in advance for your help.
Larry
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Old 11-11-2007, 06:32 PM   #2
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You mean besides life insurance and variable annuities?
Magic in Finance, Part 3: Equity-Indexed Life Insurance - Financial Investment
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Old 11-11-2007, 06:38 PM   #3
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Traditional IRA max is 5k this year.

There's always Ibonds. They're tax deferred and you can buy up to 60k worth a year.
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LOL, I am not sure what you mean.
Old 11-11-2007, 06:43 PM   #4
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LOL, I am not sure what you mean.

You wrote:
You mean besides life insurance and variable annuities?
Magic in Finance, Part 3: Equity-Indexed Life Insurance - Financial Investment

If you're serious about life insurance and annuities, the high cost of these products have always turned me off to them. The link you provided seemed to indicate that investing in an index or even a good actively managed fund is better than an equity indexed insurance product.
Am I missing something (besides my mind as my DW often tells me)
Larry
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Old 11-11-2007, 06:47 PM   #5
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Maurice, the Vanguard website says it's 4k for tax year 07' (My son is 35). I will check with IRS website. Where do i get more info about IBonds?
Thanks
Larry
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Old 11-11-2007, 06:56 PM   #6
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Am I missing something (besides my mind as my DW often tells me)
Larry
You are not missing anything. Be careful that your son does not miss anything either because he will get the pitch if he hasn't already.
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Old 11-11-2007, 07:24 PM   #7
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Maurice, the Vanguard website says it's 4k for tax year 07' (My son is 35). I will check with IRS website. Where do i get more info about IBonds?
Thanks
Larry
1) IBonds you can find out about at US Treasury site--google "treasurydirect". Also info on the other series Treasury/savings bonds bills. If he is in an income tax state, US Treasury interest earned is state tax free.

2) IRA limit for under 50 age is $4000 for 2007 and $5000 for 2008. Those 50 and over can put in $5000 2007 and $6000 2008.

Since your son makes too much for Roth IRA, that means his contributions to Trad IRA will not be tax deductible either, even though he can contribute to one.


3) Your son could look at equity investment with taxable dollars, and in a taxable account, as providing some shelter. This simply by being a "buy and hold" longterm type investor. No sell the stocks for gain--no pay the IRS for realized profits! So, by buying stock in growing companies who reinvest their profits back into the business, your son can realize indirectly some tax deferred growth.

At the end, when it is time to start tapping some of those equity profits, he pays capital gains tax rate which is favorable, and he can control the timing of when and how much he realizes those profits. Not an opportunity to be sneezed at!!

4) There is always real estate with its very powerful tax advantages. Now may be an opportune time to be on the buy side. Again, I would advise only being a very longterm investor.

5) Tax deferred annuities, while they do have higher expenses than other vehicles, do provide another avenue for tax deferred compounded earnings within the annuity. You son should be warned to look at only the very lowest cost providers, if he looks at them at all. Vanguard is near the top of the "low cost", USAA may have some as well, not sure who else is ultra low cost, perhaps TIAA-CREF.

If your son looks at tax-deferred annuities, he should be warned to think of them as only the very longest of term investments. Something he should not think of touching in less than 15 years minimum.

Annuities have their disadvantages not the least of which is higher investment and management costs, but for people with no other tax deferred growth opportunities, they do provide that.


Hope this gives you/him some ideas.
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Old 11-11-2007, 07:45 PM   #8
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If he works for a state-related entity, he may be entitled to a 457 deferred comp plan. I'm pumping in $20.5K per year in mine with the over age 50 "catch-up."
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Old 11-11-2007, 07:54 PM   #9
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If he works for a state-related entity, he may be entitled to a 457 deferred comp plan. I'm pumping in $20.5K per year in mine with the over age 50 "catch-up."

That's right. And if he works for a local government entity they may also have 457 plan available. That is basically a 401k for government employees.

Also, if he is a teacher, works in higher ed or lower ed, they may have 403b plans available. Again just another 401k but teacher version.
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Old 11-11-2007, 08:19 PM   #10
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I worked for and retired from NY State. He is in the private sector but a contract worker for an agency. He's making very nice money but no benefits. Fortunately his wife has health insurance and a 401k.
Larry
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Old 11-11-2007, 08:28 PM   #11
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Is he a W2 or 1099 contractor?
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Old 11-11-2007, 08:56 PM   #12
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Maurice, the Vanguard website says it's 4k for tax year 07' (My son is 35). I will check with IRS website. Where do i get more info about IBonds?
Thanks
Larry

Pardon me, you're absolutely right. I am a bit neurotic with this - I mailed my 2007 IRA contribution on Jan 1st, 2007 so when I said 'this year' I was thinking of the contribution I'd make in 45 days or so.... but we're still in 2007 and one can make 2007 contributions until April of 2008. The limit this year is in fact 4000 but next year its 5000. Your son could send in 9000 on January 1st. Two checks is best.

Re iBonds RetireeRobert said it all.
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Old 11-11-2007, 09:39 PM   #13
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Eridanus I am not sure. He does get taxes withheld so I think that makes it a W-2. Does that make sense?
Larry
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Old 11-11-2007, 11:07 PM   #14
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Eridanus I am not sure. He does get taxes withheld so I think that makes it a W-2. Does that make sense?
Larry
Probably he is W-2. The real import of the question is this: if he is a "self-employed contractor" (ie, he sells his services to the firm and they report their payments to him on 1099), then he qualifies for self-employment retirement plans, such as Keough or possibly SIMPLE IRA. Higher contribution limits than plain-jane IRA. Chance to sock away quite a bit more money on tax deferred basis.
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