401K and Tax Question

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401K and Tax Question

Post by CategoryOneGames.com »

Do you contribute to a 401k or Roth each year? Do you use a financial planner (like Edward Jones) or do it yourself? These are things I'm trying to figure out before year-end. I want to continue to use the Healthcare.gov tax care credit and I'm worried that I might be over their qualification amount this year. I'm thinking of opening a 401K to dump money into so that my income offsets and I'm not sure if this will work in this scenario.


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401K and Tax Question

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Re: 401K and Tax Question

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CategoryOneGames.com wrote:Do you contribute to a 401k or Roth each year? Do you use a financial planner (like Edward Jones) or do it yourself? These are things I'm trying to figure out before year-end. I want to continue to use the Healthcare.gov tax care credit and I'm worried that I might be over their qualification amount this year. I'm thinking of opening a 401K to dump money into so that my income offsets and I'm not sure if this will work in this scenario.
One thing I will tell you is when it comes to specifics about income and the tax credits you really want to talk to an accountant. Because the accountant will tell you if you make those deductions into the 401k if it will even be allowed and how it will affect deductions that you'll get. So that's definitely not a financial planner question. I would recommend that you talk to your accountant.

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Re: 401K and Tax Question

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CategoryOneGames.com wrote:
December 14th, 2020, 11:43 pm
Do you contribute to a 401k or Roth each year? Do you use a financial planner (like Edward Jones) or do it yourself? These are things I'm trying to figure out before year-end. I want to continue to use the Healthcare.gov tax care credit and I'm worried that I might be over their qualification amount this year. I'm thinking of opening a 401K to dump money into so that my income offsets and I'm not sure if this will work in this scenario.
Agree with Scott on the talk to your accountant re: details on how it'll affect your taxes/healthcare subsidy/how much you can contribute, but if you know you're above the subsidy cliff and just want to dump a bunch in, I'll also more directly answer your questions.

Yes.

DIY.

Solo 401k through eTrade.

(I also have various accounts with Fidelity, Schwab, and Vanguard, for various purposes, but I liked eTrade's solo 401k option the best regarding things like loans if necessary so specifically opened an account with them for that even though I keep my other retirement accounts, after tax brokerage accounts, etc. with other brokerages.)

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Re: 401K and Tax Question

Post by shawnd1984 »

This book I can't recommend enough. It's very digestible with some basic financial wellbeing suggestions.

https://www.amazon.com/Will-Teach-You-R ... 4547766047

I just do a Roth through Vanguard (thanks to this book). The biggest trick the devil ever pulled was convincing people that wealth advisors were especially talented at managing investments compared to an index fund (i'm assuming you're not a billionaire).
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Re: 401K and Tax Question

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It sounds to me like you are eligible for the tax credit but only if your income is below a certain threshold amount. I don't think you need to consult an accountant or tax advisor to answer your question, but you will need to read about the tax credit carefully. Specifically, you should look at the tax credit to confirm the type of income that it is checking against for purposes of qualification - does the qualification amount look at gross income, adjusted gross income, or taxable income? Does it specifically address income that is allocated to qualified retirement accounts (i.e., IRAs and 401(k)s)? Money steered into a Roth account is post-tax, meaning you would be taxed on it as part of your taxable income, but money steered into a 401(k) is pre-tax, and thus may not be considered taxable income (but may be considered part of gross income, I forget).

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Re: 401K and Tax Question

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Yeah, I mean, it will lower his AGI and help his subsidies (assuming he's still not over the cliff even with that, and assuming non-Roth, like you say). You just always have to start with a "consult with a professional" disclaimer. ;)

My recommendation for one book is this:
https://smile.amazon.com/Simple-Path-We ... 1533667926

Which was originally a series of blog posts you can just read free here:
https://jlcollinsnh.com/stock-series/

Disclaimer: I'm not a fan of Ramit, the author of IWTYTBR, Shawn's recommendation, for a number of reasons. And I am friends with the author of my recommendation. But that aside, I still think the content is better. The best place for someone who's like "I want to invest money, and I don't know how to do that or where to start" to start. They are in the "frequently bought together" part of each other's pages on Amazon, so clearly a lot of similarities in audience. And reading IWTYTBR is better than nothing. Definitely financially educate yourself.

Also thanks for the reminder Scott (C). Probably would have remembered before the EOY, but better to take care of it now. Just dumped money into the solo 401k. Now need to do some Tax Loss Harvesting before EOY.

Protip: If you're a gamer, learn the game of money. Lots of fun rules, loopholes, strategic planning, DIY "deckbuilding" (portfolio) strategies, etc. If you use max/min principles you can win the game pretty easily. And then the only adage to learn is "when you've won the game, stop playing." That can be harder than it sounds. :)

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Re: 401K and Tax Question

Post by shawnd1984 »

arebelspy wrote:
December 15th, 2020, 1:51 pm


My recommendation for one book is this:
https://smile.amazon.com/Simple-Path-We ... 1533667926


Disclaimer: I'm not a fan of Ramit, the author of IWTYTBR, Shawn's recommendation, for a number of reasons. And I am friends with the author of my recommendation. But that aside, I still think the content is better. The best place for someone who's like "I want to invest money, and I don't know how to do that or where to start" to start. They are in the "frequently bought together" part of each other's pages on Amazon, so clearly a lot of similarities in audience. And reading IWTYTBR is better than nothing. Definitely financially educate yourself.
Hating on Ramit? I am not friends with him, so I forgive you :-D In all seriousness, I wasn't in dire need (his book is really tailored towards a mindset change as well, which I thankfully didn't need), but the book was an easy read for me.

I'll probably check out Simple Path though.
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Re: 401K and Tax Question

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arebelspy wrote:
December 15th, 2020, 1:51 pm
Protip: If you're a gamer, learn the game of money. Lots of fun rules, loopholes, strategic planning, DIY "deckbuilding" (portfolio) strategies, etc. If you use max/min principles you can win the game pretty easily. And then the only adage to learn is "when you've won the game, stop playing." That can be harder than it sounds. :)
I've always wanted to do this, but I'm completely clueless about it and don't know where to start. It just feels very daunting to start from scratch. I just got my first rewards credit card a couple years ago and started doing the multiple credit card thing a few months ago. I have a 403(b) through work but no clue if I'm investing in the right things. I just copied my friend's investments which seemed to be doing well for them. I do my taxes through TurboTax and take the standard deduction
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Re: 401K and Tax Question

Post by arebelspy »

shawnd1984 wrote:
December 15th, 2020, 2:36 pm
(his book is really tailored towards a mindset change as well, which I thankfully didn't need)
That's fantastic. Anyone like this (naturally frugal, especially) has a big leg up.

So many of our money scripts are nature/nurture well before we even deal with money ourselves, and we often by default have money mindsets that can be a hinderance.

In "Secrets of the Millionaire Mind" by T. Harv Eker, Eker lists seventeen ways in which the financial "blueprints" of the rich differ from those of the poor and the middle-class. According to him:
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1. Rich people believe: "I create my life." Poor people believe: "Life happens to me."
2. Rich people play the money game to win. Poor people play the money game to not lose.
3. Rich people are committed to being rich. Poor people want to be rich.
4. Rich people think big. Poor people think small.
5. Rich people focus on opportunities. Poor people focus on obstacles.
6. Rich people admire other rich and successful people. Poor people resent rich and successful people.
7. Rich people associate with positive, successful people. Poor people associate with negative or unsuccessful people.
8. Rich people are willing to promote themselves and their value. Poor people think negatively about selling and promotion.
9. Rich people are bigger than their problems. Poor people are smaller than their problems.
10. Rich people are excellent receivers. Poor people are poor receivers.
11. Rich people choose to get paid based on results. Poor people choose to get paid based on time.
12. Rich people think "both". Poor people think "either/or".
13. Rich people focus on their net worth. Poor people focus on their working income.
14. Rich people manage their money well. Poor people mismanage their money well.
15. Rich people have their money work hard for them. Poor people work hard for their money.
16. Rich people act in spite of fear. Poor people let fear stop them.
17. Rich people constantly learn and grow. Poor people think they already know.
There's definitely some things to quibble with (and loads of privilege in there), but it is still interesting to think about those, IMO. (At least early on in your money journey; I haven't reflected on them in years and years, but I did a fair amount a decade ago.)

Mindset is the most important step, and then taking action.
spideyguy0 wrote:
December 15th, 2020, 3:19 pm
arebelspy wrote:
December 15th, 2020, 1:51 pm
Protip: If you're a gamer, learn the game of money. Lots of fun rules, loopholes, strategic planning, DIY "deckbuilding" (portfolio) strategies, etc. If you use max/min principles you can win the game pretty easily. And then the only adage to learn is "when you've won the game, stop playing." That can be harder than it sounds. :)
I've always wanted to do this, but I'm completely clueless about it and don't know where to start. It just feels very daunting to start from scratch. I just got my first rewards credit card a couple years ago and started doing the multiple credit card thing a few months ago. I have a 403(b) through work but no clue if I'm investing in the right things. I just copied my friend's investments which seemed to be doing well for them. I do my taxes through TurboTax and take the standard deduction
For me it's very much about optimization. For the same reason I enjoy playing Dominion I enjoy the money game.

And compounding is just macroing super hard early.

I totally get being overwhelmed. Pick one area you want to learn about.

Taxes. Stock market investing. Real estate investing. Etc. Focus on that. As you learn about it, you'll tangentially learn about the other things (as they intertwine) a bit as well.

But, like, for the investing thing, your 403b. The key is choosing a provider with low costs, and then investing in broad index funds with low expense ratios. Unfortunately plan administrators are often incentivized by salesmen to choose plans within your organization's choices that are suboptimal for you, but great for them (fee/commission-wise). That series of blog posts I linked above will get you started on answering the questions regarding that part of it.

As far as credit cards, yeah, sign up for some, keep on bumping the limits every six months, sign up for more, etc. Try to get quite a few, it'll help your score, and a good credit score will make you quite a bit of money.

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Re: 401K and Tax Question

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Hey, I'm Casey, except I have a TSP instead of a 403b.
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Re: 401K and Tax Question

Post by arebelspy »

It warms my heart that you guys are thinking about this though and already contributing to said 403b/TSPs, even if you aren't sure what you're doing.

Investing in something inefficient with high expense ratios is less perfect, but it's still better than doing nothing at all. Better to start, and improve later, than let lack of knowledge paralyze you into not starting at all!

For you, Taco (though I understand you may not be in the military a whole lot longer), check out The Military Guide to Financial Independence and Retirement:
https://the-military-guide.com/
https://smile.amazon.com/gp/product/1570233195/

The author is a great guy, donates all the money from the book to military-related charities. Tons of good info/knowledge on the blog and in the book.

Also there are copies of said book in pretty much every military base library, I believe.

Even if you don't do a full 20 year thing, it'll have lots of good info for you specifically.

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Re: 401K and Tax Question

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arebelspy wrote:
December 15th, 2020, 3:28 pm

But, like, for the investing thing, your 403b. The key is choosing a provider with low costs, and then investing in broad index funds with low expense ratios. Unfortunately plan administrators are often incentivized by salesmen to choose plans within your organization's choices that are suboptimal for you, but great for them (fee/commission-wise). That series of blog posts I linked above will get you started on answering the questions regarding that part of it.
So this. Like, most of this is gibberish to me. When you say "choosing a provider," my office's 403(b) is set up through Fidelity. I assume they're the provider? If so, they're the only option we have.

Then, I do not know what the following terms mean:
-broad index fund
-expense ratio
-plan administrator
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Re: 401K and Tax Question

Post by Wokling »

spideyguy0 wrote:
December 15th, 2020, 3:41 pm
arebelspy wrote:
December 15th, 2020, 3:28 pm

But, like, for the investing thing, your 403b. The key is choosing a provider with low costs, and then investing in broad index funds with low expense ratios. Unfortunately plan administrators are often incentivized by salesmen to choose plans within your organization's choices that are suboptimal for you, but great for them (fee/commission-wise). That series of blog posts I linked above will get you started on answering the questions regarding that part of it.
So this. Like, most of this is gibberish to me. When you say "choosing a provider," my office's 403(b) is set up through Fidelity. I assume they're the provider? If so, they're the only option we have.

Then, I do not know what the following terms mean:
-broad index fund
-expense ratio
-plan administrator
An index fund is a type of investment. Rather than buying stocks in a company, you buy into a fund, which invests in a lot of stocks. Historically, the stock market goes up, so investing in an index fund with a broad set of holdings is more likely to match the performance of the stock market.

Certain investments require costs in addition to the actual value of the investment. For example, if you had a broker, they may charge you a fee to buy a stock. Managed accounts charge you for providing management services, though certain managed accounts (such as an index fund) cost less than others (such as hedge fund). Joe is advising you to pick investments with the highest performance per cost ratio. So, while index funds generally cost less and perform better than other investment options, if there was another investment option that cost more but performed even better, you should consider that as well.

Plan administrator refers to the administrator of your 403(b) plan. Generally, your employer is the sponsor of the plan (here we are talking about a 403(b) plan, but this is also the case for 401(k) plans). The sponsor will then pick a plan administrator to manage the plan, provide investment options, and otherwise deal with plan participants. The plan administrator is a plan fiduciary and subject to the most stringent fiduciary standards in US law (ERISA), so I somewhat object to Joe's characterization that they are "often incentivized ... to choose plans ... that are suboptimal".

Not sure what Joe means by provider.

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Re: 401K and Tax Question

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spideyguy0 wrote:
December 15th, 2020, 3:41 pm
Then, I do not know what the following terms mean:
-broad index fund
-expense ratio
-plan administrator
Buying individual stocks (like Tesla or Microsoft) is fun but extremely risky. That one company falls apart, there goes all your money. Even riskier is trying to time the market (buying and selling all the time, trying to guess what will go up or down and when). If anyone really wants to do this they should allocate separate money for it outside of their retirement fund, and think of it as a fun hobby / gambling.

A retirement fund will have risk in it, but not that kind of risk. People generally buy funds which are collections of many different stocks. One company's loss is often another company's gain, so you don't get hurt badly by one company falling apart (you also won't win the lottery by one company skyrocketing, though).

-Some funds are managed funds where some people who claim to know what they are doing carefully choose which stocks will be included in it. Owning these funds does incur a fee for the managers which is called an expense ratio, typically around 0.5% to 1%.
-Some funds are index funds where the stocks are chosen according to some set rule (like "500 biggest US companies" or "companies #1001 to #2000 on the list of biggest companies"). There is no active decision making involved, so the fee (expense ratio) is very close to zero.

An index fund is broad if it covers a very wide range of different types of companies (different industries, different sizes, different regions, etc). For example you could have an index fund of only large US tech companies, but that wouldn't be very broad, that would be a pretty narrow slice of the market. You're still putting all of your eggs in one basket, sorta. Like if Congress passes a law that hurts most big tech companies, that's going to hurt that index fund a lot.

After accounting for the difference in expenses, index funds beat managed funds. In any given year you could find some managed funds that beat the indexes, but the problem is that it's never the same ones consistently.

Owning index funds is not very exciting but they have the right level of risk for most people. In a given year they might go up or down. But you don't care where your retirement funds are 1 year from now. Your goal is to hold them for 30+ years, and they will go up over that period of time.

---

One other thing. People spend a lot of time thinking about (and arguing about) what funds to pick. But like a couch potato who frets over which running shoe to buy, some of these people miss the point. The most important thing you can do is put income into a retirement account. The more the better. That's the couch potato getting outside and going for a jog.
Choosing the right funds (choosing the right running shoe) is secondary to that.
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Re: 401K and Tax Question

Post by arebelspy »

spideyguy0 wrote:
December 15th, 2020, 3:41 pm
arebelspy wrote:
December 15th, 2020, 3:28 pm

But, like, for the investing thing, your 403b. The key is choosing a provider with low costs, and then investing in broad index funds with low expense ratios. Unfortunately plan administrators are often incentivized by salesmen to choose plans within your organization's choices that are suboptimal for you, but great for them (fee/commission-wise). That series of blog posts I linked above will get you started on answering the questions regarding that part of it.
So this. Like, most of this is gibberish to me. When you say "choosing a provider," my office's 403(b) is set up through Fidelity. I assume they're the provider? If so, they're the only option we have.

Then, I do not know what the following terms mean:
-broad index fund
-expense ratio
-plan administrator
Fidelity is your provider. That is good news for you! :) The administrator (whoever at your organization chose that company, manages it, etc... someone in HR likely) won't be relevant to you, so you can forget it.

An index is made up of a broad variety of stocks (or, rather, whatever whoever made the index wants it to track, but generally that). The S&P 500 is an index of those 500 stocks. Getting a total market index fund just buys shares in ALL the companies.

Expense ratio is what they charge you for you to own that investment. Different funds have different expense ratios.

See if FSKAX or FZROX are available to you.

Assuming you're far out from retirement, and that you can stomach market gyrations (by not looking at the value of your account all the time when the market drops, but just make you're regular contribution), you should be 100% stocks, rather than a more conservative stock/bond mix as you get closer to needing to withdraw the money. Take the high variance for the high returns for a good long part of your investing phase.

And don't be worried to ask when things are gibberish! If I need to clarify anything else in this post, ask! If something new comes up, ask! Being curious is the best way to learn. :-D

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Re: 401K and Tax Question

Post by spideyguy0 »

Wait, there’s a fund where I can own shares of ALL THE COMPANIES?
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Re: 401K and Tax Question

Post by spideyguy0 »

arebelspy wrote:
December 15th, 2020, 6:35 pm
See if FSKAX or FZROX are available to you.
I have FSKAX available. I don’t see FZROX.

Right now I’m evenly split between 10 different funds in 10 different industries (for instance, FBIOX and FSAVX are two of them). Would I be better off consolidating under one fund that pulled from all different industries?
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Re: 401K and Tax Question

Post by Hayes »

You're picking from different mutual funds - all of which are comprised of (possibly) hundreds individual equities. (See the image for FSKAX below.) What differentiates one mutual fund from another are their ratios/mixtures. The exact composition of a given mutual fund will change over time to ensure the fund's "goal" is met. By goal, I mean risk & investment strategy. FSKAX, as you can see, is big into IT and health care - no one can deny these are booming industries and there there isn't much "risk" that either will slow down in the near future. If you check back on it in a year or two it will look similar, but health care, for example, might make up more of the fund (who knows).

None of us can tell you what to do. None of us have a crystal ball. Conventional wisdom, however, is that younger people (i.e. us) can afford to be riskier. Because we don't necessarily have a ton of retirement savings (compared to someone who has 50 years of savings) if the market tanks and we lose money, it won't hurt as much (comparatively). Additionally, if the market tanks, we still have a significant amount of time for our investments to rebound and to keep working/earning/saving. Someone who has 50 years of savings already doesn't have that luxury. That's why, often times, older folks get more conservative w/ their investments as they get closer to retiring (read: stop collecting salary). (One could argue it's even more important to make your money work for you when you no longer have income from a job- but that is an entirely different discussion.)

The other thing is personal risk aversion. Some people never want to risk their money. They are happy putting it something that isn't going to gain a ton because they know it's not likely to lose significant value in any event. Most experts agree this is not the right tactic to make your money work for you - but ultimately you must do what sits well with you.

TLDR: what you're doing now is fine, but it's also somewhat similar to playing a MTG deck with 2x of every card instead of 4x of (almost) every card. If it was me, I'd put a significant amount of my account value into the FSKAX mutual fund; I know what cards I want 4x. Liar's dice mode: you're making the claim that these sectors of the market will go up (more than other sectors might) before you retire.

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(For comparison I am heavily invested in FCNTX - though I believe that fund isn't accepting new investors)
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Re: 401K and Tax Question

Post by arebelspy »

spideyguy0 wrote:
December 15th, 2020, 9:39 pm
arebelspy wrote:
December 15th, 2020, 6:35 pm
See if FSKAX or FZROX are available to you.
I have FSKAX available. I don’t see FZROX.

Right now I’m evenly split between 10 different funds in 10 different industries (for instance, FBIOX and FSAVX are two of them). Would I be better off consolidating under one fund that pulled from all different industries?
I personally would dump it in a broad index fund with low ER. FSKAX's 0.015% fits that profile for me.

https://fundresearch.fidelity.com/mutua ... /315911693

You're basically taking the total returns of the entire stock market by owning some of every publicly traded company. :yes:

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