Tuesday, May 11, 2010

Where To Put The Money

Now with monetized Add On!

Another investing/ 401(k) post.

The question before us is, where do you stash the extra cash? Basic rule of thumb: Fund the 401(k), fund the Roth IRA, then put money into investment accounts. And here's a simple-minded but necessary tutorial about the best places for each of these three categories:

1. Put your most tax-inefficient funds in 401(k)s, 403bs, traditional IRAs and similar retirement accounts. When these are full…

2. Put your next most tax-inefficient funds in your Roth(s). When your Roths are full…

3. Put what's left into your taxable account.

4. ...[K]eep only tax-efficient funds in taxable accounts..

This is pretty basic, straight-forward stuff, but lots of people don't pay much attention and so louse up their investment mix. They stick index funds (tax efficient) into 401(k)s and actively managed funds (high turnover, low tax efficiency) into investment accounts.

Last point: We've had a bunch of people say they missed today's and yesterday's meetings, so to insure future attendance, we offer these:

Upcoming 401(k) Enrollment Meetings

Wed., May 12th -- Starz/Film Roman -- 2:30 p.m. -- Rm. 2037

Tues., May 18th -- Disney TVA (Sonora) -- 2 p.m. -- Rm. 1173

Tues., May 18th -- Disney Toons (Sonora) -- 3 p.m. -- Rm 2025

Thurs., May 20th -- Walt Disney Animation Studios (Southside building) 10 a.m. -- Rm 1300.

Add On: CBS has a useful article about stupid things people do with their 401(k)s:

... 5. Misusing Target-Date Funds

About a third of 401(k) participants invest in target-date funds (at some companies, these funds are the default option), but many don’t know how to use them. These accounts allocate assets based on the year you plan to retire and are meant to provide one-stop investing. Vanguard’s Target Retirement 2030 Fund (VTHRX), for instance, divides contributions among domestic stocks and bonds and international stocks in a ratio designed for someone retiring in 21 years (now 67 percent U.S. stocks, 16 percent bonds, 17 percent international stocks). But some employees invest in multiple target-date funds with different dates, defeating the purpose.

“I wouldn’t say it’s disastrous, but it just doesn’t make any sense,” says Seattle financial planner David Lamp ...


Anonymous said...

Thank you for posting this. I'm a 34-year-old VFX artist who rarely has access to a 401(k), because not all VFX studios offer a 401(k). I max out my Roth IRA every year I am eligible, but the Roth alone might not be enough for my retirement.

I'm thinking about taxable investing to supplement my retirement savings.

Anonymous said...

Can't you have more than one Roth? Or a Roth and a regular IRA? It's been a while so I don't recall for sure.

Good that you're working at it and paying attention to retirement now. Time is your friend.

Steve Hulett said...

I max out my Roth IRA every year I am eligible, but the Roth alone might not be enough for my retirement.

My advice: Fund the Roth, then start INVESTMENT accounts using index fund that have minimal taxes.

Fidelity Spartan Index Funds.
Vanguard Index Funds (start with Total Stock Market).

Use non-taxable bonds (muni funds) for the bond part of your taxable investments.

The main point here is to start building a retirement stash while you're young. I didn't get started until in my 40s (a mistake), but I was poor for long stretches so what the hell.

Good luck.

Anonymous said...

you can only put away a max 5000 bucks a year for any ira account.

i work in vfx and jump around alot. What sucks is that at the places that do offer 401k you have to be employed there for 6 months. So everytime I start at a new place its like starting over.

I have to say that when I worked at a facility under the guild it was nice to be able to have a portable 401k if I jumped to another guild shop. Only problem is there are so few.

Anonymous said...

Can't you have more than one Roth? Or a Roth and a regular IRA? It's been a while so I don't recall for sure.

I can keep Roth and traditional IRAs at multiple institutions, but I cannot contribute more than $5000 total to them each year. For example, if I had a Traditional IRA at a credit union and a Roth IRA at Vanguard, I could contribute $3000 to one and $2000 to another to reach that $5000 limit. However, I could not contribute $5000 to each.

Married couples can open a Roth IRA for the spouse and shelter an extra $5000 a year in the spousal Roth IRA. That way, a married couple can save $10,000/year in Roth IRAs.

SEP-IRAs are an extra option for freelancers. Artists who earn 1099 income can open a SEP-IRA and store up to 20% of pretax income in the SEP-IRA.

I have a Roth IRA for myself and for my spouse. I max these out each year I qualify for Roth IRA contributions, and I contribute 20% of my 1099 income to my SEP-IRA whenever I earn freelance income.

I still wish more VFX studios offered 401(k)s. The contribution limit for an employee's 401(k) is $16,500/year.

I'm lucky enough to be working at a VFX studio with a 401(k) option right now, but I can't count on having access to that 401(k) forever. I move from project to project, and my next gig might be at a studio that does not have a 401(k).

I'm skittish about extra paperwork and choosing the right funds for a taxable account, but I need to seriously start thinking about taxable investing for the years I do not have access to a 401(k).

Anonymous said...

To the commenter above, another caveat I found is that if the vfx company offers a match you have to stay there for 4 years to be fully vested. I was at a vfx company that let me go after almost 2 years and lost almost 75% of the match!

When I worked under a guild facility I was vested in the individual account plan after 450 hours of work.

450 hours and 5 years. big money. big difference.

Steve Hulett said...

I'm skittish about extra paperwork and choosing the right funds for a taxable account

A few more pieces of advice:

1) Use whatever 401(k) Plan you have access to.

2) You leave the company, roll all your money OUT of the 401(k) Plan into an IRA Rollover account set up at bank, brokerage or mutual fund family (my vote is Vanguard, but I'm a low-cost kind of guy.)

3) NEVER leave money in a company 401(k) Plan that you have left. You end up with a jumble of paper reports and different administrators.

WHY do these things? Because 401(k) admin costs are higher than costs at a mutual fund like Vanguard.

Because if you have all your money tucked into an IRA rollover, it's all in one place and you're not limited to the investment choices of the 401(k) Plan. You can invest in whatever you choose. (This assumes that you WANT to have more choices ...)

Anonymous said...

Thanks, Steve. I appreciate this information.

I have a newbie question about taxable investing. Right now I have Vanguard's Total Stock Market (VTSMX), All-World ex-US (VFWIX) and Inflation Protected Securities (VIPSX) in my Roth IRA. I could purchase shares of one of these two equity index funds outside of the Roth and rebalance the funds within the Roth.

However, I was wondering if the Vanguard Tax-Managed Balanced Fund (VTMFX) might be a better buy-and-hold choice for taxable accounts. It's half stocks and half municipal bonds. The mindlessness of it appeals to me, since I could set aside a fixed sum every week into the fund without worrying about rebalancing my taxable account.

Steve Hulett said...

Vanguard's Tax-Managed Balanced is a pretty good choice, and it's expenses are minimal.

'Twere me, however, I would go with 70% Total Stock Market, 30% Total International Stock Index in the equities portion of taxable.

For the bond part, I would use Vanguard Limited Term Tax Exempt, with perhaps a dollop of Intermediate Tax Exempt.

With the Balanced Tax Managed fund, which I admit is one-stop shopping and low cost, you have longer term tax exempt bonds, no international exposure, and you're locked into the fund for a number of years.

All that being said, it's still a solid choice.

Anonymous said...

One reason to NOT roll your 401k, from an old employer, to an IRA is when you earn too much to contribute to a Roth IRA.

2010 onwards allows high earners to contribute after tax money to a Traditional IRA then 'convert' it to a Roth IRA. Its a loop hole that allows high earners to now contribute to a Roth = cool.

But if you have a Rollover IRA they will include that pretax money in the calculation and you will end up paying taxes on the conversion = not cool

By keeping 401k money in a 401k plan it keeps this money out of the calculation.

I have just opted to take my rollover IRA and roll it back into the Guild 401k plan so I can do this.

This is not for everyone and I agree with Steve's advice if you dont like this type of complexity.


Site Meter