Investing: Difference between revisions
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In general, you should save money in the following accounts in order: | In general, you should save money in the following accounts in order: | ||
# 401k, 403b, or thrift savings | # 401k, 403b, or thrift savings | ||
# Traditional or Roth IRA (up to IRS limit) | # Traditional or Roth IRA (up to IRS limit) | ||
# Investing account | # Investing account | ||
# High-yield Savings, Cash account, or CD | # High-yield Savings, Cash account, or CD | ||
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A 401(k) or 403(b) is an employer-sponsored retirement plan.<br> | A 401(k) or 403(b) is an employer-sponsored retirement plan.<br> | ||
That means, it is managed by a company cooperating with your employer.<br> | That means, it is managed by a company cooperating with your employer.<br> | ||
If you work for a for-profit company, you will have a 401k. | If you work for a for-profit company, you will have a 401k. | ||
If you work for a public school or non-profit company, you get a 403b.<br> | |||
If you work for the federal government, you will have a thrift savings plan.<br> | If you work for the federal government, you will have a thrift savings plan.<br> | ||
For the most part, 401k and 403b rules are identical. | For the most part, 401k and 403b rules are identical. | ||
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===Traditional IRA=== | ===Traditional IRA=== | ||
In a traditional IRA, you deposit pre-tax money. | In a traditional IRA, you deposit pre-tax money (see notes). | ||
Thus, your deposit counts as a tax-deduction. | Thus, your deposit counts as a tax-deduction. | ||
You pay taxes when you withdraw your money. | You pay taxes when you withdraw your money. | ||
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* You must start taking required minimum distributions (RMDs) at age 72 | * You must start taking required minimum distributions (RMDs) at age 72 | ||
* No more contributions after age 70.5 | * No more contributions after age 70.5 | ||
* While there are no income limits to contributing to a traditional IRA, there are income limits to deducting from your taxes | |||
** See [https://www.irs.gov/retirement-plans/ira-deduction-limits IRA Deduction Limits] | |||
** To avoid being double taxed on your Traditional IRA contributions, be sure to complete [https://www.irs.gov/forms-pubs/about-form-8606 IRS Form 8606] | |||
===Roth IRA=== | ===Roth IRA=== | ||
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===Backdoor Roth IRA=== | ===Backdoor Roth IRA=== | ||
If you are a high-earner and believe you will earn more money in retirement, | |||
you may want to do a backdoor Roth IRA to grow your retirement account tax-free rather than tax-deferred. | |||
===Mega Backdoor Roth | ;Basic Idea | ||
* Contribute to a traditional IRA | |||
* Convert the traditional IRA into a Roth IRA | |||
;Notes | |||
* To avoid tax complications, you should eliminate all other pre-tax IRAs beforehand by rolling them over to a 401k. Otherwise, you will be subject to the pro-rata rule. | |||
===Mega Backdoor Roth=== | |||
Requirements: Your 401k allows after-tax contributions and non-hardship withdrawals. | |||
;Basic Idea: | |||
* Max out after-tax contributions to your 401k | |||
* Rollover or withdraw the after-tax portion to a Roth IRA or Roth 401K | |||
==ETFs== | ==ETFs== | ||
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Exchange-traded funds. Typically these will have a fee called an expense ratio.<br> | Exchange-traded funds. Typically these will have a fee called an expense ratio.<br> | ||
The expense ratio is measured in basis points.<br> | The expense ratio is measured in basis points.<br> | ||
25 basis points is an annual fee of 0.25%.<br> | 25 basis points is an annual fee of 0.25%.<br> | ||