Investing 101

[Robochan]

I am currently enrolled in my works 401k plan for retirement but I would like to educate myself on what's going on and possibly actively trade some in a separate Roth 401k. I have began reading investopedia and reading here and there on many sites but I still feel lost on a lot of the terms. I feel like the easiest way for me to start grasping some of this is to talk to someone. Can I go to a financial adviser and just hire him to get me started and educate me or is someone here willing to help? Other options?

 

Thanks.

[2highpsi]

Define "active"

 

Day trading requires a margin account, which isn't allowed in a Roth.

 

Not to say you can't buy and sell stocks, you just can't "day trade" inside that particular account type.

[2highpsi]

Also, why a Roth?

 

Do you think your income at retirement will be higher than it is now? If not (most people retire on a smaller income than they live on in their working years) a Roth might not be the way to go anyways.

[Berto]

Also, why a Roth?

 

Do you think your income at retirement will be higher than it is now? If not (most people retire on a smaller income than they live on in their working years) a Roth might not be the way to go anyways.

 

The other reason for ROTH is if you feel taxes will be higher by the time you retire, not talking income based here, just generally higher. I believe it will, which is why I choose to do a 401k and Roth IRA.

[Robochan]

I'm 20, plan to "retire" at 55-60. Hope to double my income in the next 20 years. Active as in a few trades a year. Not day trading by any means. Thought the Roth would help as far as taxes go but again I am woefully ignorant to this and seek education.

[Berto]

What I've read and recommend is if your work has a 401k match, to contribute enough to get the maximum matching.

 

Then start investing in at Roth IRA, until its maxed out, $5500 /yr for a single person.

 

Then go back to the 401k.

 

Also, IMO, most employers have target retirement funds, by year. They are generally good but I started looking at fund performances and going with something a bit riskier. I still have some of the target date funds but its more for diversification.

 

 

Whatever happens. You're 20 and its excellent to get started now. Time is on your side, and you can't get it back. I started investing in retirement a few months out of college at 22, I'm 32 now and its really amazing to see the power of compound interest. Stay with it, the first few years you may be discouraged at what seems slow growth.

[Franchi]

/\/\

 

What he said. Just that you are thinking and considering your options now at your age, puts you FAR above the majority of people.

 

There is a TON of info on this subject, and obviously some people feel you should do it a certain method, and others another method. ( Traditional vs Roth, percentage invented, into what type of funds, ect ect )

 

But long as you take your time, educate yourself and learn and actually INVEST, even if not much at first, and consistently do it over time, it will have really good gains averaged.

[zeitgeist57]

Hit me up sometime at CC&C.

[Robochan]

I really appreciate the responces. I'm not so much looking for advice as just education on how it all works so I can't start to make a plan myself. When I start researching a term it seems to be explained by another term I don't fully understand. It repeats until I'm left confused with little knowledge gained. I'm not normally so slow to pick up things and feel like my online method of learning is the problem.

 

Clay I will definitely take you up on that!

[Berto]

Here is pretty good article forwarded to me. Would be a good starting point.

 

 

 

http://www.forbes.com/sites/kellyphillipserb/2016/01/05/100-things-you-absolutely-need-to-know-about-money-before-youre-35/

 

5. The most flexible retirement account is a Roth IRA. You can contribute up to $5,500 a year in after-tax earnings to a Roth IRA. (Those who are 50 or older can put in $6,500.) While the money grows tax free for retirement, you can always take back your initial contributions, at any time, for any reason, without paying taxes or penalties. So after putting just enough in your 401(k) to snag your full employer match, fund a Roth IRA next. (Note: the highest earners can’t contribute directly to a Roth IRA. For 2016, eligibility begins to phase out at $184,000 of modified adjusted gross income for married couples and at $117,000 for singles. However, there is a legal way to get around the income restriction—a backdoor Roth IRA—and this ploy works particularly well for young workers.)

[2highpsi]

The other reason for ROTH is if you feel taxes will be higher by the time you retire, not talking income based here, just generally higher. I believe it will, which is why I choose to do a 401k and Roth IRA.

 

 

You would then have to believe that the federal government is going to raise the tax rate on the average retired person.

 

 

IMO, if you are making enough money to comfortably max out your work 401k, you are probably in a higher tax bracket already. The immediate tax savings of investing extra in a traditional vs a Roth (lets say 28% of $5,500 which is $1540) could then be invested into a regular account (non retirement) and I assure you the addition of this would more than offset any potential future tax savings of the Roth.

 

 

It's pretty hard to explain via a forum post, but basically when you are talking about compounding interest on the additional today savings (not paying tax on the money invested today) even assuming a pretty lousy 6% ROI over a 20-30 year period, the tax rates would almost have to double on the 3rd bracket (currently $37,451 - $90,750 *will adjust with inflation) where you will more than likely fall during retirement.

 

 

So if you think the gov will make most retired people pay 40% federal tax instead of todays 25%... go for the Roth

 

 

 

edit:

 

I will add... Roths are great for people who currently DON'T pay federal taxes. But question has always been... well how can they fund it. Unless you are a teen, making minimal money being supported by your parents. In which case it is a GREAT tool.

[HotCarl]

I'm no expert by any means but one thing to keep in mind is that these are LONG term investments that will experience some volatility over time. The advice I was always given was to ride it out. From your original post It sounds like you might want to change your investment occasionally throughout the year to avoid any losses but that would be contrary to most advice a professional will give you.

 

Also, max out your 401k contribution, especially if your employer will match. I never understood people who didn't do this, you're literally leaving FREE money on the table. If you're living with your parents or don't have any dependents contribute as much as you can afford. That's one thing I wish I would've done sooner.

 

Someone correct me if i'm wrong but I thought you couldn't contribute to a 401k until age 21?

[ItzaME]

Hmm, I was speaking to the shop guys at the internship I'm at and he was explaining 401k to me. Seems like everyone has positive stuff to say about it. Might look more into it.

[o0n8]

Someone correct me if i'm wrong but I thought you couldn't contribute to a 401k until age 21?

 

The employer can exclude people under 21 and/or less than 12 months of service.

 

https://www.irs.gov/Retirement-Plans/IRC-401%28k%29-Plans-Operating-a-401%28k%29-Plan

[Franchi]

You can start a IRA at any age pretty sure.

 

A 401k may have certain exclusions like above though.

[SteveNartan]

In for updates.

[Berto]

You would then have to believe that the federal government is going to raise the tax rate on the average retired person.

 

 

IMO, if you are making enough money to comfortably max out your work 401k, you are probably in a higher tax bracket already. The immediate tax savings of investing extra in a traditional vs a Roth (lets say 28% of $5,500 which is $1540) could then be invested into a regular account (non retirement) and I assure you the addition of this would more than offset any potential future tax savings of the Roth.

 

 

It's pretty hard to explain via a forum post, but basically when you are talking about compounding interest on the additional today savings (not paying tax on the money invested today) even assuming a pretty lousy 6% ROI over a 20-30 year period, the tax rates would almost have to double on the 3rd bracket (currently $37,451 - $90,750 *will adjust with inflation) where you will more than likely fall during retirement.

 

 

So if you think the gov will make most retired people pay 40% federal tax instead of todays 25%... go for the Roth

 

 

 

edit:

 

I will add... Roths are great for people who currently DON'T pay federal taxes. But question has always been... well how can they fund it. Unless you are a teen, making minimal money being supported by your parents. In which case it is a GREAT tool.

 

I think I understand what you are saying but I don't believe its accurate.

 

Lets keep things simple. Assume an initial $5,500 investment (Post Tax), 6% ROR (compound), 28% tax rate, no annual contributions just the initial lump (again for simplicity), 30 yrs.

====================================

401k (taxed when you retrieve the money)

 

$5,500 * 1.28 (since 401k is pretax) = $7,040 initial investment.

 

6% ROR @ 30 years compounding = $40,434.18

 

Then you get taxed at 28% = $29,112.60

 

====================================

Roth IRA (taxed pre-investment, not taxed later)

 

$5,500 @ 6% ROR @ 30 years compounding = $31,589.

 

 

My math may not be right. Please correct me.

 

Plus then you have the added benefit of being able to use your initial investment if you got into an emergency and needed it. Do I think Retirees will get taxed at 40% by the time I retire I sure hope not. But one thing I am pretty certain of, is taxes will not go down.

[o0n8]

401k = No tax now, no tax on growth, tax on withdrawal

 

Roth Ira = Taxed now, no tax on growth, no tax on withdrawal

 

@ 59 1/2 or later