Wednesday, January 15, 2014

Self investing vs. 401K

Over at Reddit we're reading the following discussion: Self investing vs. 401K (self.investing) submitted 23 hours ago by Furry_Axe_Wound Disclaimer: I'm a newb…newb newb newb. In fact, I was driving into work today and thought, "hmm…I wonder if I should invest."  
My fiancé and I were thinking of buying a home. Currently our rent is $1100; a mortgage would be $1850. What if I continue to rent and instead invest $750 a month? Now, I know absolutely nothing about investing at this time. I do plan to educate myself as best I can. My work offers a 401K, but I don't buy in because there is no match on their part. What are the differences between buying into my work 401K and investing myself? Is it better to invest the $750 a month or have it taken out of my paycheck, pretax, and let them handle it?
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[–]EscortSportage 6 points 23 hours ago
well one, the 401k is going to offer some tax advantages so i think you should buy in, since there is no match (thats a bummer because usually thats the entire point of company 401ks) however you can do 5% just to put money away and like i said hedge against income tax.
protecting your assets is just as important as buying/building them
Two, i would invest personally as well to greater diversify yourself
You need to find out what your company offers for you to invest in 401k wise,
[–]Furry_Axe_Wound[S] 1 point 22 hours ago
Awesome. Thanks very much for this. I will opt into the 401k. It's easy to forget how much money I actually lose to taxes.
That seems like a fair starting place, then I will research how else I can diversify and protect my cash.
Thanks very much!
[–]EscortSportage 2 points 22 hours ago
investing is putting off the instant gratification now, for better(more) in the future time is money, just keep putting some here and there, but you want to learn as much as you can before you just starting buying twitter and weed stocks hoping for a miracle
[–]bang_ding_ow 8 points 23 hours ago
This is more of a /r/personalfinance question. Their advice is you should have an emergency fund set up for 3-6 months before anything else. I take advantage of my 401k (I have about 30 funds to choose from) and also invest some myself (mostly Vanguard funds).
Typically you'll have crappy/limited choices for 401k funds. If you invest yourself, you can choose to invest in anything you want (stocks, ETFs, mutual funds).
[–]Furry_Axe_Wound[S] 2 points 22 hours ago
Sorry for posting in the wrong sub! Thanks for the link over and the advice. I will probably opt into the 401K and start doing homework into what else I can do to diversify (perhaps Vanguard as you mentioned).
[–]mikoul 1 point 19 hours ago
Best Advice: Manage your money yourself to cut All the Middlemans BUT before Study Study & Study
> > p.s. In meantime (when you Study) you can put your saving in  "safe" ETF.
[–]RadiolarianChert 2 points 20 hours ago
You need to do some more math.
Interest paid on home mortgages is deductible. In the first years of a mortgage, almost all of the monthly payments are interest, so almost all of your payments are deductible. Depending on your tax bracket, that can cut the 'out of pocket' expense by 1/3.
OTOH, you'll be paying property tax and you'll be paying for your own maintenance.
On the other, other hand, your home will be increasing in value. Maybe. Depends on where you're going to be buying. In my neighborhood, homes have increased by 20% (per year) over the last few years. That's extremely unusual. Zillow should give you a reasonable guess for your target home.
About your 401k, remember that a Roth is another alternative. For younger folks, a Roth is almost always the right choice. It gets a little more complicated if there are matching funds from your employer.
Put this stuff into a spread sheet and see what you get.
Or, use one of the free on line calculators. This one is a very good one,
Enter your various assets in the bottom left corner. Put in some thing for a house, a 401k, a Roth, a taxable brokerage account. Click on the 'Advanced Settings' tab to enter different interest rates.
[–]Furry_Axe_Wound[S] 1 point 20 hours ago
Great info, great tool, thanks for all this! In regards to the 401k, you mentioned the Roth. I'm assuming that there's a standard 401k and a Roth 401k offered by my company? If so, does the Roth work in this way: the deposited amount comes from my paycheck, not taxed as income, but is taxed going into the Roth 401k. The advantage being that it is withdrawn tax free?
[–]RadiolarianChert 2 points 19 hours ago
You're welcome.
Some people hate that tool because it hammers home just home far they are from their goals. And some people love it because it makes it really clear where they are and what they need to do in order to win the game ;-)
Roth accounts are very cool. There are Roth IRAs and Roth 401k's.
Roth is the name of the guy who sponsored the tax changes in congress.
Roth accounts are funded with money that you've already paid taxes on, they grow tax free BUT unlike regular IRAs and 401k's, there are no taxes on distributions from a Roth.
That last thing is the big advantage.
Roth vs regular depends a lot on your age.
You can use that on line calculator to compare the results of putting your money into regular vs Roth IRA and 401k investments.
[–]TIL_you_are_a_fag 1 point 17 hours ago
thanks for the link
[–]rahjah 1 point 22 hours ago
When you say investing it yourself, are you asking about a taxable or tax-advantaged account? If you are not going to be contributing to your 401k, I highly recommend you look into opening an Individual Retirement Account (IRA). It's a retirement account that you would have complete control over (not connected to your employer).
[–]Furry_Axe_Wound[S] 2 points 22 hours ago*
Firstly, thanks very much! It seems that even though my company doesn't match, I am missing an opportunity to save on some income tax by deferring the 401k. I plan to opt in.
When I posted the question, uh, an hour ago, I knew nothing then, and know a bit more now! My original thought was in regards to "investing" money in the short term by renting to use profits later in a down payment on a house. Now it appears to me that that thought process is better suited to Trading, whereas Investing is for the long term (retirement). Am I right in this?
Back to what you mentioned, an IRA. I was reading in another post about a Roth IRA, and that it could be converted into a brokerage IRA at anytime, but I don't know what that means. Does that sound like something I should be interested in? Does it make sense to have both an IRA and a 401k? And finally!, is a 401k through work the only way to invest money before the government takes its income taxes?
Thanks very much!
Edit: forgot two to's

[–]rahjah 1 point 19 hours ago*
Now it appears to me that that thought process is better suited to Trading, whereas Investing is for the long term (retirement). Am I right in this?
Not exactly. It really comes down to what your timeline is. I'm confident with investing my retirement savings in equities because I don't need it until many years down the road. Even if there is a recession, I will be able to "ride it out" and things are bound to recover eventually. If you have a set timeline for your house purchase (i.e. 5-10 years) this is much riskier because there is a chance you may actually have less money than you started with if the market crashes. I'm not experienced enough to give you tips for funding a house, but you should be looking at more conservative saving/investing methods (maybe short-term bonds?).
I was reading in another post about a Roth IRA, and that it could be converted into a brokerage IRA at anytime
I'm not sure exactly what you are referring to. There are two types of IRAs, Roth and Traditional - both are types of brokerage accounts. u/aBoglehead made a great post covering basic IRA information here:
Does it make sense to have both an IRA and a 401k?
Yup! IRAs have an annual contribution limit of $5500. 401ks have an independent limit of $17500, so this would allow you to save beyond the IRA limit. Without knowing your full situation, I would recommend trying to max-out your IRA first and then put any leftover retirement savings into the 401k.
Final note: If opening a new account, look for a brokerage that charges low fees for their funds. Vanguard, Fidelity, Schwab, etc are the usual ones recommended here.
Edit: If you want a good book about overall investing, I highly recommend reading "The Bogleheads' Guide to Investing" by Larimore, et al.

[–]Furry_Axe_Wound[S] 1 point 18 hours ago
Awesome. Thanks so much. Really, I can't say enough about how cool it is that people (you) offer up info like this to strangers. Your time and knowledge is appreciated!
[–]ditchdiggerz 1 point 17 hours ago
You should opt into the 401k with the knowledge that you won't touch that money until you are 65.
Secondly, that home is too much. Find a place with mortgage+insurance+taxes for $1500 or less.
[–]samolang 1 point 16 hours ago
Go to Advanced Settings->Other and you can enter different potential expected returns from your investments.
[–]Pdoubleoty 1 point 3 hours ago
Just curious to how big of a house you are getting for an 1850$ a month mortgage payment. Maybe consider a smaller house (1000-1200$ a month) and still invest 600-700$ a month.
[–]Furry_Axe_Wound[S] 1 point 1 hour ago
Unfortunately, I live in a ridiculously high cost of living area. A 2 bedroom 1 bath 1,000 sqft can go for $280,000 - $300,000. I don't have a 20% down payment, so I get tagged with mortgage insurance (extra $100 a month) plus taxes and homeowners insurance puts me around $1850 for anything I look at. Unless I go fixer upper in a gentrifying area hoping for a profitable resell. The lack of big down payment is what's really driving my price up, which is what led me to thinking about how I could expedite the savings process.
[–]sweatbander 0 points 21 hours ago
If you can save an extra 9k/year by renting, then that sounds like a win. Fund your 401k up to the employer match and then max out your Roths(if eligible) and then come back and continue funding your 401k up to the max.
Do a lot more reading and practice before you become a retail investor.


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