The Investment Thread (stocks, bonds, real estate, retirement, just not gold)

[Momus]

This year:

YTD best performance... surprise surprise.... worst performance last year...
Emerging market 10.48%
International 9.76%

YTD Worst performance: damn US stocks
Small cap value 2.91%
Total Stock admiral 3.27%

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[confettiflyer]

This year:

YTD best performance... surprise surprise.... worst performance last year...
Emerging market 10.48%
International 9.76%

YTD Worst performance: damn US stocks
Small cap value 2.91%
Total Stock admiral 3.27%

Woohoo. I guess my loading up on int'l stocks at the end of last year paid off:

December 27, 2014:

Anyone else feeling bullish for international stocks for 2015? I smell bargain with prices flat or down for 2014 (my int'l funds are anywhere between 0 to minus 8%).

Debating shifting some money there, thoughts?

January 5, 2015:

Bye bye Greece.

I have a $5k order into my Euro developed market fund that'll execute @ end of day (shaved off excess in my S&P/domestic value funds to rebalance). I don't know how I feel right about now.

 

[WVUPharm2007]

Really? Where? Why is it so cheap? Actually why did the value go down so much so quickly? Makes me a bit suspicious. Maybe the battery pack isn't as good as it's made out to be? Means in 3 more years it'll be worth a couple thousand by then? I'd be worried about the maintenance and parts for a car like that though the deal sounds too good to be true. There might be a catch.

There is one at the dealership down the street from me asking $16000, 22k miles. You could talk them down to $15k, I'm sure. The reason for the drop is two fold. Gas got cheaper and the remodeled Volt will be available for $24k or so after federal rebate. Plus, the Tesla Model 3 and Chevy Bolt will be out soon, giving all electric vehicles to the people for $25-$30k or so after federal rebate.

---------

After thinking about it...I think I'll just keep my old Taurus.

And get the Tesla 3 when it comes out.

 

[SClENCE]

$3500 since February 2015. I'm just now getting into Vanguard.

The market has been getting hammered this week!

 

[pharm B]

The market has been getting hammered this week!

Yeesh. I had a day where all of my stocks had red numbers in the "today's gains" column.

 

[BenJammin]

Let the correction begin.

 

[BMBiology]

Let the correction begin.

You got in at the top

 

[BenJammin]

Yeah I know. I'll take my losses and start buying again once the market bottoms out.

 

[Gombrich12]

Dollar cost average in if you are afraid because staying out of the market for long periods of time is a bad idea.

 

[confettiflyer]

Timing market bottoms and surges are a fools errand, dollar cost average...but tilt during periods exuberance and fear if you so must.

 

[SClENCE]

Timing market bottoms and surges are a fools errand, dollar cost average...but tilt during periods exuberance and fear if you so must.

Follow the big money when timing bottoms!

 

[Muse600]

so I met a pharmacist the other day, whose wife is an accountant, and he told me that once you turn 65, you don't have to pay taxes on 401k withdrawals

any idea what is he talking about?

this is why he is doing a 401k and not a roth 401k

 

[confettiflyer]

so I met a pharmacist the other day, whose wife is an accountant, and he told me that once you turn 65, you don't have to pay taxes on 401k withdrawals

any idea what is he talking about?

this is why he is doing a 401k and not a roth 401k

Uhm. Hahahahhaa.

 

[BMBiology]

so I met a pharmacist the other day, whose wife is an accountant, and he told me that once you turn 65, you don't have to pay taxes on 401k withdrawals

any idea what is he talking about?

this is why he is doing a 401k and not a roth 401k

Most people will but in theory it is possible not to pay any tax on the withdrawal if you have tax deduction like a mortgage.

 

[BMBiology]

Even if you don't have a mortgage, you can take the standard tax deduction. That is almost 13 k a year for couples.

 

[Muse600]

Uhm. Hahahahhaa.

that's what I was thinking...made me 2nd guess myself...

roth 401k + roth IRA all the way!!

 

[pezdispenser]

Even if you don't have a mortgage, you can take the standard tax deduction. That is almost 13 k a year for couples.

That might be what the accountant meant. You actually get a slightly higher standard deduction over 65 of $15,100 for a couple. Plus 2 x $4,000 personal exemptions brings the total to $23,100 tax free.

You can also get the 0% tax rate on long-term capital gains and qualified dividends (this does NOT apply to 401k or IRAs) if you are in the 10% or 15% tax brackets, which goes up to $74,900 for MFJ.

So if you arrange everything correctly, a couple could actually take $98k tax free without even counting a Roth.

 

[BMBiology]

That might be what the accountant meant. You actually get a slightly higher standard deduction over 65 of $15,100 for a couple. Plus 2 x $4,000 personal exemptions brings the total to $23,100 tax free.

You can also get the 0% tax rate on long-term capital gains and qualified dividends (this does NOT apply to 401k or IRAs) if you are in the 10% or 15% tax brackets, which goes up to $74,900 for MFJ.

So if you arrange everything correctly, a couple could actually take $98k tax free without even counting a Roth.

Very informative! That is my plan. Start to cash out my 401 k at 59.5. Perhaps I don't need to touch my social security until I am 70.

The big question is my health. I am not going to qualify for Medicare until I am 65 so I need to be healthy.

 

[Muse600]

brilliant! so basically, if you don't cash out a whole lot ($9,225 for single/$18,450 married) - you are in that 10% tax bracket, but if you claim the standard deduction and personal exemption, then you just pay taxes on...zero.

I see how it's possible, but I highly doubt that's what he meant and I'll be impressed if I see a 59.5 year old retired pharmacist living on (the inflated amount relatively speaking of...) $9,225/year

I also have 401k from the first 3 years of employment - so maybe I'll cash out that maximum amount to keep myself within the 10% tax bracket, then claim standard deduction and exemptions...anything baller life beyond that will be the roth 401k

 

[SClENCE]

I still think that you should put everything in the traditional 401k even if you are maxing out contributions every year.

 

[pezdispenser]

Well the 401k has some tax benefits as well, as long as you keep your withdrawals to a reasonable level, so I think you should still make use of it. But the higher your annual withdrawals and balance get, the less tax benefit you will receive.

For example, when you are working and contributing to a 401k, you save yourself from paying 28% or 25% tax on your contributions, and that extra money saved is also growing and compounding in your investments. Then when you take withdrawals, you can make use of:

$23,100 standard deduction and personal exemptions = tax free
then AFTER that:
$18,450 = 10% tax bracket
$18,451-$74,900 = 15% tax bracket

So pause here, and let's say you withdraw $98,000 from your 401k, you will pay $10,312.50 in taxes which is 10.5% of $98k. That doesn't sound too bad, considering that you originally saved 28% or 25% tax when making your contributions.

However, you should also take into account taxation of your Social Security benefits. When your AGI + 1/2 of your SS benefits exceeds just $44k when married, then 85% of your SS benefit will be taxed. So say each spouse receives $30k SS, then they will have to add $51k to their taxable income! I would stack this first at the bottom of the tax brackets, so I see it as the SS using up all of your standard deduction, personal exemptions, all of the 10% tax bracket and some of the 15%. Now your 401k withdrawals sit in the 15% and 25% tax brackets. Let's just say the effective tax rate on the 401k withdrawals is around 20%, which is now not looking so great compared to the 25-28% tax rate you saved on the contributions.

Furthermore, if you max out your 401k every year, you will accumulate a very large balance in there. Consequently you will have to take very large annual withdrawals, some of which will sit in the 25% and 28% tax brackets to push up the effective tax rate and erode your tax benefits even more.

 

[fewaopi]

Well the 401k has some tax benefits as well, as long as you keep your withdrawals to a reasonable level, so I think you should still make use of it. But the higher your annual withdrawals and balance get, the less tax benefit you will receive.

For example, when you are working and contributing to a 401k, you save yourself from paying 28% or 25% tax on your contributions, and that extra money saved is also growing and compounding in your investments. Then when you take withdrawals, you can make use of:

$23,100 standard deduction and personal exemptions = tax free
then AFTER that:
$18,450 = 10% tax bracket
$18,451-$74,900 = 15% tax bracket

So pause here, and let's say you withdraw $98,000 from your 401k, you will pay $10,312.50 in taxes which is 10.5% of $98k. That doesn't sound too bad, considering that you originally saved 28% or 25% tax when making your contributions.

However, you should also take into account taxation of your Social Security benefits. When your AGI + 1/2 of your SS benefits exceeds just $44k when married, then 85% of your SS benefit will be taxed. So say each spouse receives $30k SS, then they will have to add $51k to their taxable income! I would stack this first at the bottom of the tax brackets, so I see it as the SS using up all of your standard deduction, personal exemptions, all of the 10% tax bracket and some of the 15%. Now your 401k withdrawals sit in the 15% and 25% tax brackets. Let's just say the effective tax rate on the 401k withdrawals is around 20%, which is now not looking so great compared to the 25-28% tax rate you saved on the contributions.

Furthermore, if you max out your 401k every year, you will accumulate a very large balance in there. Consequently you will have to take very large annual withdrawals, some of which will sit in the 25% and 28% tax brackets to push up the effective tax rate and erode your tax benefits even more.

i'm not all familiar with taxes but i thought the way taxes work is that for every dollar above the 10% bracket you get taxed 15%, something like that? are there good resources on learning about taxes? i only have a basic knowledge.

so example: 18450 taxed at 10%. 18451, the first 18450 taxed at 10%, then the $1 taxed at 15%, no?

 

[BMBiology]

Very informative! That is my plan. Start to cash out my 401 k at 59.5. Perhaps I don't need to touch my social security until I am 70.

The big question is my health. I am not going to qualify for Medicare until I am 65 so I need to be healthy.

It seems like you can start to cash out your 401k at age 55 without paying the 10% penalty if you are no longer working

 

[SClENCE]

If you are 27 when you start working, make 120k a year, and want to retire at age 65 and live to age 90, you should contribute to the roth 401k until you are age 40 (contributing up to the employer match until student loans are paid off and then increase it to the max contribution) and at age 30 switch over to max annual contribution to traditional 401k until you retire. This will leave you with 1.8m in your traditional 401k meaning you can withdraw 72k a year for 25 years combined with 30k social security a year making your taxable income 102k in retirement (the same as when you were working assuming taxes remain the same). In addition you will have a roth 401k worth 0.5+ million, making your tax rate the same as when you were working but your total annual income 122k+ assuming you draw 20k a year from the roth (though you could obviously let it grow longer or withdraw it all at once).

This assume a 6% rate of return, assumes that you will be in retirement for 25 years, and also assumes tax rates remain the same.

Is my line of thinking correct? Realistically it may be better to just contribute to the traditional 401k from the start considering that rates of return may be lower than 6%, you may not be able to make the max contribution every year, and your cost of living in retirement will be lower anyways so 102k/year may not even be necessary thus not maxing contribution every year (though obviously contributing up to employer match every year).

 

[Momus]

Stocks need to come down 5%-10% at least... Have ~$25k excess left over money to invest.... damn it. Maybe, I will just keep saving up this excess to buy a cheap rental property in nv/az if stocks going up up and away >_>;

 

[BMBiology]

Stocks need to come down 5%-10% at least... Have ~$25k excess left over money to invest.... damn it. Maybe, I will just keep saving up this excess to buy a cheap rental property in nv/az if stocks going up up and away >_>;

Stop buying index funds then. There are some "cheap" individual stocks

 

[pezdispenser]

i'm not all familiar with taxes but i thought the way taxes work is that for every dollar above the 10% bracket you get taxed 15%, something like that? are there good resources on learning about taxes? i only have a basic knowledge.

so example: 18450 taxed at 10%. 18451, the first 18450 taxed at 10%, then the $1 taxed at 15%, no?

That's correct. That's how I calculated the tax on the $98,000:

$98,000 gross income
-$23,100 standard deduction and 2 x personal exemptions
======
$74,900 taxable income
-$18,450 taxed at 10% = $1,845 tax
======
$56,450 left taxed at 15% = $8,467.50 tax
============
total tax on the right column is: $10,312.50

Some other websites that explain tax brackets:

http://blog.taxact.com/how-tax-brackets-work/

http://www.learnvest.com/knowledge-center/tax-brackets-explained/

http://www.fool.com/personal-financ...rackets-really-work-and-how-to-make-them.aspx

 

[pezdispenser]

i'm not all familiar with taxes but i thought the way taxes work is that for every dollar above the 10% bracket you get taxed 15%, something like that? are there good resources on learning about taxes? i only have a basic knowledge.

so example: 18450 taxed at 10%. 18451, the first 18450 taxed at 10%, then the $1 taxed at 15%, no?

That's correct. That's how I calculated the tax on the $98,000:

$98,000 gross income
-$23,100 standard deduction and 2 x personal exemptions
======
$74,900 taxable income
-$18,450 taxed at 10% = $1,845 tax
======
$56,450 left taxed at 15% = $8,467.50 tax
============
total tax on the right column is: $10,312.50

Some other websites that explain tax brackets:

http://blog.taxact.com/how-tax-brackets-work/

http://www.learnvest.com/knowledge-center/tax-brackets-explained/

http://www.fool.com/personal-financ...rackets-really-work-and-how-to-make-them.aspx

 

[Momus]

Stop buying index funds then. There are some "cheap" individual stocks

No reason to change something that works for 200+ years.

 

[BMBiology]

No reason to change something that works for 200+ years.

Don't you also believe past performance does not indicate future performance?

 

[pspharmd]

I am almost 100% in stocks. It has been a good ride so far but I know you should also own some bonds too.

Good plan if you have the stomach to 'ride a roller coaster', esp. this year. I'm 100% equities as well.

 

[SClENCE]

Let me explain my understanding of the backdoor Roth IRA.

Say I make 120k a year and contribute 18k to a traditional 401k plan, lowering my effective taxable income to 102k.

I can then turn around and put 5.5k of post tax income (part of which could be my tax return for my 18k contribution to the 401k) into a non-deductible IRA and roll it over into my Roth IRA and pay no additional tax on the money.

So I can take full advantage of the tax breaks of the traditional 401k plan and still contribute to a Roth IRA. In addition, I can withdraw contributions to the Roth IRA without penalty or tax at any time (assuming rollovers are considered a contribution).

Is my understanding correct?

If this is the case I personally think it would be better to contribute to a traditional 401k and throw the tax return into a backdoor Roth IRA as opposed to utilizing a Roth 401k at all. Not because there is anything wrong with the Roth 401k, but because I think the traditional 401k offers the better overall tax advantage and the backdoor Roth IRA is simply the best way of reinvesting the tax return while also offering "tax diversification" (and penalty free withdraws of contributions in the event of a crisis situation). I would probably allocate my most "high risk" investments or those with the greatest potential for growth to the Roth IRA given the tax free withdraws in retirement.

Thoughts?

 

[BenJammin]

Let me explain my understanding of the backdoor Roth IRA.

Say I make 120k a year and contribute 18k to a traditional 401k plan, lowering my effective taxable income to 102k.

I can then turn around and put 5.5k of post tax income (part of which could be my tax return for my 18k contribution to the 401k) into a non-deductible IRA and roll it over into my Roth IRA and pay no additional tax on the money.

So I can take full advantage of the tax breaks of the traditional 401k plan and still contribute to a Roth IRA. In addition, I can withdraw contributions to the Roth IRA without penalty or tax at any time (assuming rollovers are considered a contribution).

Is my understanding correct?

If this is the case I personally think it would be better to contribute to a traditional 401k and throw the tax return into a backdoor Roth IRA as opposed to utilizing a Roth 401k at all. Not because there is anything wrong with the Roth 401k, but because I think the traditional 401k offers the better overall tax advantage and the backdoor Roth IRA is simply the best way of reinvesting the tax return while also offering "tax diversification" (and penalty free withdraws of contributions in the event of a crisis situation). I would probably allocate my most "high risk" investments or those with the greatest potential for growth to the Roth IRA given the tax free withdraws in retirement.

Thoughts?

Incorrect. What you just described is a normal roth IRA contribution. As to the bolded statement, if you are even having to contemplate the possibility of using a backdoor roth IRA then the tax advantage of a traditional IRA would be ZERO to you since you can't deduct those contributions. The whole purpose of a traditional IRA is to deduct your contributions so you can pay taxes on them after withdrawing funds. Why would you choose to pay taxes twice on that money?

 

[SClENCE]

Incorrect. What you just described is a normal roth IRA contribution. As to the bolded statement, if you are even having to contemplate the possibility of using a backdoor roth IRA then the tax advantage of a traditional IRA would be ZERO to you since you can't deduct those contributions. The whole purpose of a traditional IRA is to deduct your contributions so you can pay taxes on them after withdrawing funds. Why would you choose to pay taxes twice on that money?

How would I be paying tax twice? I would be contributing the max to a traditional 401k and an additional 5.5k to a Roth IRA each year in this example.

 

[BenJammin]

How would I be paying tax twice? I would be contributing the max to a traditional 401k and an additional 5.5k to a Roth IRA each year in this example.

That comment was in reference to a traditional IRA. If you are having to think about doing a backdoor roth IRA then that tells me everything I need to know about your current income. It's high enough that you cannot deduct your contributions to a traditional IRA. So you paid taxes on the money you put into that IRA (employer gives you money after taxes or they make you pay the state/federal taxes....either way, you pay taxes and the $5500 comes after you pay) and you will pay taxes again on the money you withdraw.

 

[SClENCE]

I'll be honest you lost me lol.

What do you mean "you will pay taxes again on the money you withdraw"? I understand that any money added to a Roth is post tax but what you you mean by "withdraw"? Are you saying that it gets taxed again in the conversion?

 

[BenJammin]

I'll be honest you lost me lol.

What do you mean "you will pay taxes again on the money you withdraw"? I understand that any money added to a Roth is post tax but what you you mean by "withdraw"? Are you saying that it gets taxed again in the conversion?

Traditional. Traditional IRA. You already paid taxes on the money you put into the IRA and you will pay taxes again on the money you withdraw. Withdraw = pulling out money in retirement. If you do a traditional IRA, you will pay taxes twice.

 

[Ackj]

Traditional. Traditional IRA. You already paid taxes on the money you put into the IRA and you will pay taxes again on the money you withdraw. Withdraw = pulling out money in retirement. If you do a traditional IRA, you will pay taxes twice.

He's not going to keep it in a traditional though, he's going to convert it to a Roth. That's the "backdoor" part of it. You can't put the money directly into Roth because of income limits, but you can put the money into a traditional, pay the taxes, then do the conversion to Roth. Since it's a Roth, it's post tax, and he will not pay the taxes again upon withdrawal.

 

[pezdispenser]

Let me explain my understanding of the backdoor Roth IRA.

Say I make 120k a year and contribute 18k to a traditional 401k plan, lowering my effective taxable income to 102k.

I can then turn around and put 5.5k of post tax income (part of which could be my tax return for my 18k contribution to the 401k) into a non-deductible IRA and roll it over into my Roth IRA and pay no additional tax on the money.

So I can take full advantage of the tax breaks of the traditional 401k plan and still contribute to a Roth IRA. In addition, I can withdraw contributions to the Roth IRA without penalty or tax at any time (assuming rollovers are considered a contribution).

Is my understanding correct?

If this is the case I personally think it would be better to contribute to a traditional 401k and throw the tax return into a backdoor Roth IRA as opposed to utilizing a Roth 401k at all. Not because there is anything wrong with the Roth 401k, but because I think the traditional 401k offers the better overall tax advantage and the backdoor Roth IRA is simply the best way of reinvesting the tax return while also offering "tax diversification" (and penalty free withdraws of contributions in the event of a crisis situation). I would probably allocate my most "high risk" investments or those with the greatest potential for growth to the Roth IRA given the tax free withdraws in retirement.

Thoughts?

This is basically correct. However, one minor correction is that making 401k contributions does not increase your tax return, even though they are often called 'tax-deductible'. Your employer already deducts it before calculating how much tax to withhold on your paychecks, so no additional tax will be refunded to you on your tax return.

Personally, I don't even wait until April of the year after to do my backdoor Roth. I do it in January for the current year.

 

[pezdispenser]

Incorrect. What you just described is a normal roth IRA contribution. As to the bolded statement, if you are even having to contemplate the possibility of using a backdoor roth IRA then the tax advantage of a traditional IRA would be ZERO to you since you can't deduct those contributions. The whole purpose of a traditional IRA is to deduct your contributions so you can pay taxes on them after withdrawing funds. Why would you choose to pay taxes twice on that money?

You are missing the part about converting the non-deducted traditional IRA into a Roth IRA. After that, you will not have to pay any more taxes on the money or the growth.

 

[BMBiology]

Airline stocks took a hit today! A buying opportunity?

http://www.cnbc.com/id/102696302

 

[Muse600]

hmmm...I am entertaining the idea of individual stocks again...my "3 fund lazy portfolio" has been good, but 2% good (same as my checking account w' credit union)...and pretty much stuck there for a month. Pretty much the vanguard international fund doing okay...american blah...treasuries blah...

I will watch

 

[pezdispenser]

hmmm...I am entertaining the idea of individual stocks again...my "3 fund lazy portfolio" has been good, but 2% good (same as my checking account w' credit union)...and pretty much stuck there for a month. Pretty much the vanguard international fund doing okay...american blah...treasuries blah...

I will watch

What percentage did you put in bonds? 33%? Maybe just reduce that to 0-10%.

 

[Ackj]

What percentage did you put in bonds? 33%? Maybe just reduce that to 0-10%.

I think that's the general recommendation for "3 fund lazy;" 1/3 bonds, 1/3 international, 1/3 TSM. I suppose you can tweak it as desired, but based on the low %YTD, it certainly seems like he's got a lot of bonds.

 

[BMBiology]

hmmm...I am entertaining the idea of individual stocks again...my "3 fund lazy portfolio" has been good, but 2% good (same as my checking account w' credit union)...and pretty much stuck there for a month. Pretty much the vanguard international fund doing okay...american blah...treasuries blah...

I will watch

I am building a 10-20 stock portfolio. Strong companies that I like. I guess in a way I am indexing

 

[confettiflyer]

I am building a 10-20 stock portfolio. Strong companies that I like. I guess in a way I am indexing

are you planning on actively tax loss harvesting?

 

[BMBiology]

are you planning on actively tax loss harvesting?

It is about risk taking and your risk tolerance, right? I am up more than 10% during the last 6 months.

 

[confettiflyer]

It is about risk taking and your risk tolerance, right? I am up more than 10% during the last 6 months.

...uhm...that doesn't answer my question...?

 

[BMBiology]

...uhm...that doesn't answer my question...?

No, I didn't answer the question the way you wanted...

 

[confettiflyer]

No, I didn't answer the question the way you wanted...

I don't think you understood my question. Are you planning to actively tax loss harvest among your 10-20 stocks or is this just a passive buy & hold strategy with no harvest?