New and way behind the pack

[Novaxterra]

So I am back to the forum after posting last year and I really had to clear some debt up to even be thinking about saving and retiring. I get a tad depressed after looking at some people's numbers because I feel like i am going to be working until I'm 80!!

Well, I have pushed hard and have paid off all of most of my debt and really need some advice! My apologies if this isn't the right place to post.

My current salary (Gross) 93,000 and I rent in Northern Virginia. After taxes I net about 5400.00 a month.

After my bills and budgets (Gas, food, Etc.) I am left with about 2,300.00

Now, here is where I am stuck. I am a contractor(W2), I don't have a 401K through my employer but I know I need to set one up.

I was going to call Vanguard and open an account, but should I open IRA or 401K? If one or the other, which one do I open and how much should I contribute.

I do understand the pre- and post tax differences so no need to explain that. I am trying to figure out what account I should contribute to and how much I should send from my paycheck. When I called Vanguard, they were standoff-ish and wouldn't really help me figure it out.

As a side note- I own a small business that is registered and I pay taxes on that nets me about 1,000 a month.

Thanks for all of your help in advance!

 

[Ronstar]

Welcome back, Novaxterra! I'm no expert on this, but I believe that 401k's are through employers. I don't think that you can have a 401k through your employer unless the employer sets one up. Given that you own a small side business, you may be eligible for a solo 401k. Maybe - you should contact a CPA or other professional that can point you in the right direction.

You can open up an IRA with or without having a 401k.

 

[Novaxterra]

You're right and I knew that! So would you recommend just opening an IRA? Should I open a Roth also?

 

[Ronstar]

I'd recommend talking to a professional tax/investment person. There are a lot of variables involved in choosing Roth/conventional IRA.

 

[Whisper66]

The key point is open an IRA and start contributing the maximum you can for yourself (probably $5500 if a long way from retirement). If married, do the same for wife. What type of IRA is secondary consideration because of the guesswork you have to do to estimate the expected benefits. Neither is a slam dunk over the other.

Choosing a Roth vs Traditional is mainly a guess at which will benefit you more considering their characteristics (see Vanguard description of both here). How much benefit each will be is highly dependant on your current and future tax bracket and how / if the tax laws change. No one can answer those questions with any certainty so anyone you go to for advice will just offer their best thoughts on the matter.

For what it's worth, I have told my children to expect future tax rates will most likely increase and that putting their savings into Roth IRA will most likely benefit them more. Also told them that is just one person's guess and that they should think it through and make whatever decision is most comfortable to them. Besides my belief that tax rates are more likely to rise than fall, the fact that current law requires minimum required distributions (and associated tax hit) at 70.5 yrs old is a big factor to me.

Congrats on working your debt issue, sounds like you are making great progress!

Edit to add: Just remembered that Boggleheads wiki also has a nice discussion on this topic here

 

[Novaxterra]

The key point is open an IRA and start contributing the maximum you can for yourself (probably $5500 if a long way from retirement). If married, do the same for wife. What type of IRA is secondary consideration because of the guesswork you have to do to estimate the expected benefits. Neither is a slam dunk over the other.

Choosing a Roth vs Traditional is mainly a guess at which will benefit you more considering their characteristics (see Vanguard description of both here). How much benefit each will be is highly dependant on your current and future tax bracket and how / if the tax laws change. No one can answer those questions with any certainty so anyone you go to for advice will just offer their best thoughts on the matter.

For what it's worth, I have told my children to expect future tax rates will most likely increase and that putting their savings into Roth IRA will most likely benefit them more. Also told them that is just one person's guess and that they should think it through and make whatever decision is most comfortable to them. Besides my belief that tax rates are more likely to rise than fall, the fact that current law requires minimum required distributions (and associated tax hit) at 70.5 yrs old is a big factor to me.

Congrats on working your debt issue, sounds like you are making great progress!

Edit to add: Just remembered that Boggleheads wiki also has a nice discussion on this topic here

I have noticed that the 5500.00 is minuscule compared to what I should be saving, regardless, I'll put that money away and open a Roth also. Just to clarify, I can only put away 5500.00 for the traditional and the same for the Roth?

Thank you for the links to Boggleheads, I am enjoying the process of learning this info myself.

 

[exnavynuke]

There are a multitude of calculators available that will let you run various assumptions (regarding tax rates) and see whether a traditional or Roth option will work best for you. Either way, you should try to max out your IRA every year going forward.

Additionally, if you have no other employees, you should possibly look into solo-401k, SIMPLE, and/or SEP IRA options and see if any of those will work for you. This article breaks them down fairly simply if you're not familiar with these plans at all SEP vs. SIMPLE vs. Solo 401(k) — Oblivious Investor

 

[exnavynuke]

I have noticed that the 5500.00 is minuscule compared to what I should be saving, regardless, I'll put that money away and open a Roth also. Just to clarify, I can only put away 5500.00 for the traditional and the same for the Roth?

Thank you for the links to Boggleheads, I am enjoying the process of learning this info myself.

The $5,500 contribution limit is cumulative across all IRA's you have of any type. Contribute $2,500 in a roth IRA and $3,000 in a tIRA = you've maxed out your contributions for the year.

 

[Novaxterra]

The $5,500 contribution limit is cumulative across all IRA's you have of any type. Contribute $2,500 in a roth IRA and $3,000 in a tIRA = you've maxed out your contributions for the year.

Ohhh, Definitely didn't know that. So with no options for a 401K and a Max of 5500 across all IRA's, where do you most keep your money for retirement to make it grow? Just investments in the market?

 

[Fedup]

I'm not sure he can open a solo 401k because he gets paid with W-2.

 

[brewer12345]

NovaxTerra, if your small business (sole proprietorship? LLC?) nets 1k per month of taxable income and you have no employees, look into opening a solo 401k. You can contribute the first 18.5k of earnings plus 20 or 25% of profits. This will allow you a much larger contribution limit than an IRA. We have had a solo 401k for my wife's sole proprietorship for over a decade with Fidelity and they have made it easy and free.


If you have money to save beyond what you can stash in a solo k or IRA, put the money in taxable brokerage account.

 

[Novaxterra]

NovaxTerra, if your small business (sole proprietorship? LLC?) nets 1k per month of taxable income and you have no employees, look into opening a solo 401k. You can contribute the first 18.5k of earnings plus 20 or 25% of profits. This will allow you a much larger contribution limit than an IRA. We have had a solo 401k for my wife's sole proprietorship for over a decade with Fidelity and they have made it easy and free.


If you have money to save beyond what you can stash in a solo k or IRA, put the money in taxable brokerage account.

Good to know. Well it was an LLC but I let that lapse and need to re-apply. I file my taxes as a single entity Sole Proprietership/ LLC, which is the same in tax terms.

As far as income, it sometimes goes up to 2K per month, but it's not something stable since It's not 100% of my focus with my full-time job. Last year I claimed that I made just around 13,500.

I will look into that account with Fidelity or Vanguard and go do some research.

 

[nun]

I am a sole proprietor doing some contracting work and opened a solo401k with Vanguard last year. It's definitely the way to go for the self employed retirement savings account. If you can do a ROTH too then theta would be even better.

 

[travelover]

You can also invest all you want in an after tax account. If you invest in something like Berkshire that pays no dividends, you pay no taxes on gains until you sell, and then it is at the (currently) lower rate.

 

[littleb]

Here are some options available to self-employed people.

https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people

You can contact Fidelity and speak to one of their retirement specialists and they can explain the options available to you.

We are a small business and currently have a Simple Plan set up for us and our employees.

 

[euro]

Good to know. Well it was an LLC but I let that lapse and need to re-apply. I file my taxes as a single entity Sole Proprietership/ LLC, which is the same in tax terms.

As far as income, it sometimes goes up to 2K per month, but it's not something stable since It's not 100% of my focus with my full-time job. Last year I claimed that I made just around 13,500.

I will look into that account with Fidelity or Vanguard and go do some research.

Definitely do a solo401k then - you could have contributed the entire 13'500 lat year.

 

[Whisper66]

.......So with no options for a 401K and a Max of 5500 across all IRA's, where do you most keep your money for retirement to make it grow? Just investments in the market?

We put the excess money in taxable accounts and invested in the market. Basically just decide on an asset allocation that you are comfortable with (Bogglehead info) . Then start investing in a simple, low cost, diversified portfolio that you like. Below are some of the simple portfolios based on low cost index funds that get mentioned in this board. When you look closely, they say a lot of the same thing with just slightly different ways to go about the same thing.

Boggleheads Lazy Portfolios link
Scott Burns Couch Potato Portfolios, several choices, see link
Paul Merrimans Recommended Portfolios, see link

BTW - we have others on the board that invest in real estate rental properties rather than the stock market. I know nothing about those but if interested, you can get a lot of help here.

 

[Novaxterra]

All good info and great replies. Thank you for the information, this is exactly what I was looking for!

 

[Mdlerth]

Contributions and conversions

Even if you aren't eligible to contribute this year to a Roth IRA, it doesn't necessarily follow that you are ineligible to do a Roth conversion from existing IRA funds, does it?

Suppose you contributed your $5500 to an IRA and took the tax deduction, but then converted it to a Roth and un-took the tax deduction, does it "erase" the IRA contribution? Consequently, could you then contribute another $5500 to the IRA? And convert again?

I do not know the answer, but I'm certain somebody here does.

 

[Whisper66]

Suppose you contributed your $5500 to an IRA and took the tax deduction, but then converted it to a Roth and un-took the tax deduction, does it "erase" the IRA contribution? Consequently, could you then contribute another $5500 to the IRA? And convert again?.....

What Mdierth is describing is a Back Door Roth Conversion (Boggleheads link). It is typically considered when a person's income exceeds the limits for allowing a direct Roth Contribution. (IRS Tax Rules here). It is my understanding that the initial traditional IRA contribution of $5500 as described by Mdierth does not get undone by the later conversion of that money to a Roth IRA. So one couldn't do this multiple times in one year. Be interesting if anyone has found differently.

OP - I am not an expert on this topic, only answering from my experiences and reading. You may want to ask these questions to your tax advisor or your financial institution if you need clarity.

 

[mmartin22153]

Greetings

Hi Novaxterra,

I'm also a contractor in Northern Virginia! DH and I have similar salaries to yours; luckily we both have a 401k available through our employers and max them out. We make too much to deduct additional IRA contributions so we continue to transfer extra money to taxable investment accounts with an eye on growth (mostly low-fee index funds but also some holdings in individual companies, an ETF, a REIT, and a P2P lending account)... yes we pay extra taxes on it (although the occasional declared losses help with that sometimes)...

These other folks seem to know more about factoring in the additional small business... but, happy investing!

NoVaDaydreamer

 

[jmp470]

My advice, get a financial advisor, someone who is a licensed broker. There are numerous angles you can work, several were mentioned here, that could minimize taxes and maximize money in the market.

The money you spend can be made up quickly and in various ways, depending on the broker.

 

[Hermit]

A caution about putting all your retirement money in tax deferred accounts. That's what I did. When I hit 70.5, I will always be in at least the 25% tax bracket and later the 28%. If you put a portion of your savings in taxable accounts, you will be much better able to take advantage of tax situations.

 

[Hermit]

My advice, get a financial advisor, someone who is a licensed broker. There are numerous angles you can work, several were mentioned here, that could minimize taxes and maximize money in the market.

The money you spend can be made up quickly and in various ways, depending on the broker.

If you do a bit of searching on this forum, I think you will find that a lot of member's experience has been that financial brokers are best at moving a lot of money to their own pockets. There are a few who would agree with you, but not many. The usual advice would be to go to a fee only financial adviser and pay to help set up your retirement and savings plans. Most here will recommend that you do a little research, as Novaxterra is doing, and they can do pretty good and not share a large portion of their savings income with a broker.

 

[evilanne]

Based on your salary and additional income, a traditional IRA wouldn't provide you any tax advantage based on your income if you are single. see Publication 590-A Contributions to Individual Retirement Arrangements (IRAs) https://www.irs.gov/pub/irs-prior/p590a--2015.pdf
For you side business see Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) https://www.irs.gov/pub/irs-pdf/p560.pdf You may want to ask your current employer if they could set up a plan for their employees since employer plans allow employees to contribute at a higher rate and I believe you would still be limited based on income in your side business. I think employers can set it up with minimal cost impact but the IRS publications will give you a better idea of what is involved and whether or not you need to get professional advice.