Requesting financial advice from the wise

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PandaBear

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Say, my wife and I are doing ok financially, no debt other than mortgage on a 30 year fix rate that's decent, and we are 31, no kids yet but planning 1-2 eventually.

We are expecting our income when retired to be much higher than currently as we plan to invest carefully, but still wants to take advantage of the company contribution in the 401k by maxing up to the amount our employers contributes.

Would it make sense to put in more money in the 401k or Roth IRA? Or would it be wise to pay off more of the mortgage first? or invest on your own (children education fund, etc)?

Let's hear some ideas.
 
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If you can honestly and accurately project that your income will be higher when you're retired, then you'd want to put the money in a Roth (as it's taxed today). Plus, with the way things are going, tax rates in the future could be................HIGH.

I wouldn't necessarily pay off your mortgage, especially when there's all these new programs coming down the pike to help homeowners. And especially if you're upside down in the loan. And even more especially if you're paying a lot of interest (more deduction for your taxes).
 
I would do the Roth IRA 1st, and maybe google Roth IRA.

I know that you will hate to read this, oh well, I hope that you and your wife have seperate bank accounts.

The reason I say this is because back in the early 1980's my godmother went and took $17,000 out of her joint bank account that she had with my uncle and bought a car without even consulting him.

This obviously caused some problems, and she does not have that car today.
 
So I assume you don't get access to a roth 401k?

Then... it's a question of what tax rates you think you'll be at now vs. in retirement. I have kids, and was a student, and have home interest, student loan interest... etc that makes my tax burden smaller now than it will be in retirement. So a roth 401k or roth IRA is a better option for me, because my current tax rate is likely lower than it will be when I'm retired.

But, with dual income now, no kids you could be paying a high rate now compared to when you retire, in that case a normal 401k or IRA would be a better bet.

The only other real issues I would consider is that it's psychologically easier to contribute to a 401k, since it happens automatically without you knowing about it. On the other hand you get more control over your investments (or at least more options) in an IRA.

If I were you, I'd either go all 401k, or just enough for the match and an IRA on the side.
 
Just a snippet of advice (but not the whole picture):

At least invest in the 401K to the extend that your employer matches so you maximize your income.

Roth IRA is nice because it does not lock up the money until old age, but you can take out as much as you put in without penalty or taxes (already taxed before you put it in). So if over 5 years you put $30,000 in a Roth, then it is worth say $40,000, you can pull $30,000 out with absolutely no penalty. Handy in case you get into financial difficulty and need some quick cash. The rest or what ever is in the Roth, upon retirement age is never taxed when you take it out. And Roth as I understand, does not force you to start withdrawing a certain amount upon reaching a certain age, whereas traditional IRA does (I think 70 yrs old) or you get in trouble of some sort.
 
Should those ideas be consistent with your philosophy that no income be excluded in a tax shelter?

I'm referring to this comment...

"When the budget is balanced and our national debt paid off, I have no problem with tax cut for the rich, because they were paying higher taxes. But now we have such a huge deficit, and no one (rich, poor, middle class) should get a break, especially the stupid idea called flat tax so the rich can pay a disproportion less percentage of their income in tax than the poor. "
 
I couldn't tell from your post...do you have at least 3 mo's if not a good 6 mo's of living expenses banked in case something happens? If not, that would be a very high priority to me.
cool.gif


In other words, your "rainy day account."
 
Both of you can open an IRA and you can take advantage of a 401K too.

One plus with maxing out your 401K is often the employer will match @ least part of the contributions.

As previously posted, being completely out of debt is a good idea along with having some cash in a Emergency Fund - Money Market, etc., that will tide you over for about 6 months.

The IRS web site has some good info on it.
 
We already maxed out our employer matches in 401k, and since I don't trust investment in stocks in mid/long term I'd keep it at that.

No Roth 401k for us here, and I do have a good 2 years of living expense saved up. Current tax rate is 18% federal, probably lower when we have kids in the future.


Originally Posted By: digitalSniperX1
Should those ideas be consistent with your philosophy that no income be excluded in a tax shelter?

I'm referring to this comment...

"When the budget is balanced and our national debt paid off, I have no problem with tax cut for the rich, because they were paying higher taxes. But now we have such a huge deficit, and no one (rich, poor, middle class) should get a break, especially the stupid idea called flat tax so the rich can pay a disproportion less percentage of their income in tax than the poor. "


I'm asking for a financial advise, and have been paying all the taxes I should be according to the current law. What I have no problem is to pay more taxes if I'm making additional income. What I want to see is the risk/reward of paying off interest vs. additional investment (may not have to be Roth or traditional IRA since the return vs risk is not that good in stock market, I'm not a believer in investment just for the sake of paying no taxes).
 
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PandaBear: Based on what you told us, do the following IMO:

1. First priority: take full advantage of your employer match in your 401k. That's a guaranteed 100% return on your money.

2. Next I would use money beyond that to invest in Roth IRAs if you think you'll be in a higher tax bracket at retirement. Max out your contributions if you can.

3. If you still have money to invest, max out your 401k.

4. Last priority would be an early mortgage payoff. Mortgage interest is tax deductible and you are locked in at a good rate. The best return you could hope to get is your interest rate percentage.

5. An education fund is a great idea but I think your retirement investing should take priority. You can always get a college loan but no one will give you a retirement loan.
 
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4. Last priority would be an early mortgage payoff. Mortgage interest is tax deductible and you are locked in at a good rate. The best return you could hope to get is your interest rate percentage.


I don't necessarily agree with this. While it makes sense in terms of the interest costs, the typical size of the loan dominates the red ink column in most family/couple's wallet.

Getting on the hind end of the amortization curve lowers your debt line too much to worry about the low interest rate.

Roth IRA ..before they close the door on them. You know your 401k money is going to be wrapped around the economy of everyone else (the vast majority) who will also be having the deferred bills come due.

But what do I know? I'm a conspiracy theorist and find economic fads everywhere. You'll have less yield with a Roth ..but my spider sense tingles when I think of the tax liabilities by the time you're taking out sheltered income and offering it to the vultures.
 
lol, well both savings accounts have tax advantage that could be used to pay down debt now.

But do not fear, in the case of your tax deferred 401k, you'll find solace in a future rate of taxation increase justified by the "enhanced gains earned through tax deferment". In the Roth's case, a newly devised tax consistent with the theories as to why capital gains taxes are justified will be rationalized.

So even if tax shelters for the wealthy (defined today as a couple earning more than 250k), are inconsistent with your opinions on national debt and required taxation, you'll have your chance to pay your "fair share" in the future.
 
Point taken on the mortgage payoff. The small return that you get is at least guaranteed. Also, the piece of mind that you get paying off debt is important to many people.
 
Originally Posted By: PandaBear
We already maxed out our employer matches in 401k...... and I do have a good 2 years of living expense saved up.


And you're asking for advise? Looks like you should be giving it! Good for you BTW.

Joel
 
x2 on oil_spaz's advice with the note that an extra payment on your mortgage a year cuts YEARS off a 30 year mortgage and saves you TENS of thousands in interest.

So if you are early in your mortgage toss a extra payment each year, but don't sacrifice other other investments in trying to pay down the mortgage super quickly.
 
Originally Posted By: oil_spaz
PandaBear: Based on what you told us, do the following IMO:

1. First priority: take full advantage of your employer match in your 401k. That's a guaranteed 100% return on your money.

2. Next I would use money beyond that to invest in Roth IRAs if you think you'll be in a higher tax bracket at retirement. Max out your contributions if you can.

3. If you still have money to invest, max out your 401k.

4. Last priority would be an early mortgage payoff. Mortgage interest is tax deductible and you are locked in at a good rate. The best return you could hope to get is your interest rate percentage.

5. An education fund is a great idea but I think your retirement investing should take priority. You can always get a college loan but no one will give you a retirement loan.


+1, but I would add "if the fees are reasonable" to 3. If they're not consider tax efficient investments in a cash account.

I'd also recommend you books by Swedroe, Ferrari, and Bernstein.
 
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