Am I overcontributing to retirement accounts?
nons...@mynonsense.net
$5-10k/ month. So I have maxed out my 401k, Traditional IRA. Now my
question is should I open a SEP account and invest $10k/ year? This
would bring my total contribution to retirements accounts around $30k/
year.
Since I am very frugal, that is more than enough for me to live off. I
am 30 by the way. How does one expenses change at 60 ? What do I do if
I find out I have pot loads of money in my retirement accounts that I
can not spend before I die? Are there better places I should put my
money instead of a SEP?
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PeterL
> Thanks to a side business and being extremely frugal , I save around
> $5-10k/ month. So I have maxed out my 401k, Traditional IRA. Now my
> question is should I open a SEP account and invest $10k/ year? This
> would bring my total contribution to retirements accounts around $30k/
> year.
>
> Since I am very frugal, that is more than enough for me to live off. I
> am 30 by the way. How does one expenses change at 60 ? What do I do if
> I find out I have pot loads of money in my retirement accounts that I
> can not spend before I die? Are there better places I should put my
> money instead of a SEP?
>
There are so many unknown factors when you try to predict what would
happen in 30 yrs. You may get married and have kids. And you will
then have more expenses such as saving for the kids' college fund.
And you may want to leave some money for them and maybe your
grandkids. How does ones expenses change at 60? Let's say 30 years
ago no one would've predicted that gasoline would be $4 a gallon. So
how would anyone know what your expenses will be in 30 yrs?
I think in general it's much much better to have too much money than
not enough money.
On the other hand I am devising a way such that I can take my money
with me when I die. Stay tuned.
joetaxpayer
nons...@mynonsense.net wrote:
> Thanks to a side business and being extremely frugal , I save around
> $5-10k/ month. So I have maxed out my 401k, Traditional IRA. Now my
> question is should I open a SEP account and invest $10k/ year? This
> would bring my total contribution to retirements accounts around $30k/
> year.
>
> Since I am very frugal, that is more than enough for me to live off. I
> am 30 by the way. How does one expenses change at 60 ? What do I do if
> I find out I have pot loads of money in my retirement accounts that I
> can not spend before I die? Are there better places I should put my
> money instead of a SEP?
The SEP IRA has its own limit 20% of gross (IRS says 25% of
compensation, which works out to that) income.
There are too few details for a clear answer. You save 60-120K/yr, so
30K pretax is not out of line, you could go higher if your side business
does well. Are there better places to put the money? Well, I don't know
how you're invested at all. 401(k), IRA, SEP, are all shells, wrappers
defining tax status and a few rules, but you don't talk about what the
investments are in. At 30, you should be somewhat aggressive, and seek
to minimize expenses. A .1% S&P index is going to likely outperform a
better diversified set of high expense funds. Of course, you should seek
low cost as well as diversification, I am just making a point.
Are you single, kids, house? Ok to think about 60, but if you get
married at 35 and have 3 kids, your life will change. At 60, when the
last one graduates college, you will feel you hit the lottery.
As a general goal, aiming to replace your income at retirement works
like this: In today's dollars, look at your net, after taxes and
savings. In your case that may be just 50 or 60% of your gross. Subtract
the replacement rate for social security. For high earners, that may be
15%-20%. So let's say you need to replace 40%. If you subscribe to the
4% rule, that 4% is the safe withdrawal rate for retirement funds, you
need to have about 10X your needs, or 4X your inflation adjusted gross
income. Your actual numbers may vary, as I can only guess your current
percentages. For those who live on 80% of their gross, the number goes
much higher of course.
John A. Weeks III
<884486e8-22e3-49b6...@f63g2000hsf.googlegroups.com>,
nons...@mynonsense.net wrote:
> Thanks to a side business and being extremely frugal , I save around
> $5-10k/ month. So I have maxed out my 401k, Traditional IRA. Now my
> question is should I open a SEP account and invest $10k/ year? This
> would bring my total contribution to retirements accounts around $30k/
> year.
The SEP is one of the biggest gifts you will ever get from Uncle
Sam. I'd max it out. Even if you are putting in too much this
year, you have no idea what next year might bring you. You might
get sick and never be able to work again, or your industry might
tank and you end up make 1/5 of what you made this year. The old
saying is to make hay while the sun shines.
-john-
--
======================================================================
John A. Weeks III 612-720-2854 jo...@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
kastnna
making. High incomes, deductions, 401k plans, and individual
retirement accounts don't often "play well" together.
How much are you contributing to the 401k? Is the 401k from your
employer or your side business? Is the 401k safe harbor? Do any of
your contributions ever get "given back" to you at year's end?
How about an IRA? Are you taking a deduction for the IRA?
Any Roths in the picture?
I assume you mean the SEP is for the side business and the 401k is
from your main employer. Is this correct? Do you have any employees in
your side business? If so, are they immediate family?
How much of that $120k+ annually comes from each job? Source is
important when determining contributions.
Without the answers to these questions (and the others posed here) we
are not going to be much help. Good luck and we look forward to
hearing back from you.
rick++
There's a certain amount of security and freedom in
knowing you can live off your savings for a month, year,
decaded, or the rest of your life. You have more of an
opportunity to do things you like rather than only make money.
2) You might save in both taxable and tax-deferred accounts.
Tax laws have changed a lot in the past and will change in the
future. By having accounts/assets with different tax-exposure you
may do better when tax laws change. This is called tax
diversification.
People who make six figure income or more have been forced into
this already because the retirement-savings benefits peter out at
around $100K income and you still need to save more than that.
3) Life throws curves. You may acquire/lose a spouse. You or
soemone in your family may require very expensive medical
attention. Etc. Etc. Etc. Enjoy positive times while they last.
4) You can start helping the less fortunate. Brokerages like
Fidelity help with charitable trusts which make your contributions
go further now and hereafter.
Ron Peterson
> Since I am very frugal, that is more than enough for me to live off. I
> am 30 by the way. How does one expenses change at 60 ? What do I do if
> I find out I have pot loads of money in my retirement accounts that I
> can not spend before I die? Are there better places I should put my
> money instead of a SEP?
A regular stock broker account is a good idea because you will have
more investment options. In addition, capital gains and dividends get
taxed at a lower rate. Brokers can lend money to you based on your
portfolio's value reducing your need to have an emergency fund.
--
Ron
anoop
> Since I am very frugal, that is more than enough for me to live off. I
> am 30 by the way. How does one expenses change at 60 ? What do I do if
> I find out I have pot loads of money in my retirement accounts that I
> can not spend before I die? Are there better places I should put my
> money instead of a SEP?
Not sure about SEP, but if it works like 401(k) and IRAs, it
would be protected in case if you ever need to file for bankruptcy.
That is huge plus.
If, at age 40, you find you have millions accumulated in
retirement accounts, you can always stop contributing then.
For now, keep stuffing away as much as you can. :-)
Anoop
dapperdobbs
> Thanks to a side business and being extremely frugal , I save around
> $5-10k/ month. So I have maxed out my 401k, Traditional IRA. Now my
> question is should I open a SEP account and invest $10k/ year? This
> would bring my total contribution to retirements accounts around $30k/
> year.
>
> Since I am very frugal, that is more than enough for me to live off. I
> am 30 by the way. How does one expenses change at 60 ? What do I do if
> I find out I have pot loads of money in my retirement accounts that I
> can not spend before I die? Are there better places I should put my
> money instead of a SEP?
>
Intelligent questions, and very relevant to anyone with 30 years+ of
savings before them. A lot does depend on specifics, as others have
mentioned.
Generally, immediate tax deductions for contributions keep more
capital available for investment, but the retirement accounts in 150k+
income bracket situations should also be diligently invested in order
to take full advantage of the tax deferrals involved. At a 6%-8%
average annualized return, the tax deferrals are significant. I
believe Louis Ruykhauser (sp?) pointed out that starting to invest
early is a very significant factor in determining total returns.
As you allude, alternative uses of capital may indeed be very
significant. An estate planner might suggest taking advantage of the
exclusion amount (I think I got that designation right), and give
college grad children a couple of 100k, when they most need it, either
as a down payment on their first house, to buy their first car, or to
invest at their lower tax rate, which would require estate funds
available outside restricted retirement accounts. Capital to start a
new business, same problem. Funding trusts, same problem. An early
retirement might cause some frustration.
However, if the bulk of savings will lie outside retirement accounts,
then it would seem perfectly OK to use tax-deferred accounts as
economically warranted (there is no mandate that you contribute every
year, and contributions in later years may be less beneficial). The
two equations comparing the expected returns aren't complicated as
long as you are willing to hold assumptions projected out 30 years.
Depending on how good you are with math ... the simplest comparison is
the rate of return without taxes (retirement accounts) less the taxes
paid on withdrawals, compared to the rate of return (on funds outside
retirement accounts) after applicable taxes In the situation you
describe, a spreadsheet showing allocations and compoundings, and tax
effects, on all available funds would perhaps clarify alternatives,
under different assumptions. If tax rates increase, for example, then
retirement accounts gain an advantage, especially in early years.
nons...@mynonsense.net
> 3) Life throws curves. You may acquire/lose a spouse. You or
> soemone in your family may require very expensive medical
> attention. Etc. Etc. Etc. Enjoy positive times while they last.
In these cases, would my having so much money tied up in retirement
account be a good or bad thing? How liquid is that money for
emergencies? I know you can borrow against it .
nons...@mynonsense.net
> How much are you contributing to the 401k? Is the 401k from your
> employer or your side business? Is the 401k safe harbor? Do any of
> your contributions ever get "given back" to you at year's end?
I have the 401 k maxed out from my employer, plus they match a certain
amount ( ~4k/year ).
I don't believe any contributions are given back at year end.
> How about an IRA? Are you taking a deduction for the IRA?
> Any Roths in the picture?
I just have a traditional IRA since I am now ineligible for ROTH due
to my income above 120k.
> I assume you mean the SEP is for the side business and the 401k is
> from your main employer. Is this correct?
That is right. The business is just all me, no employees.
> How much of that $120k+ annually comes from each job? Source is
> important when determining contributions.
Around 90k from job, 40k from side business and around 5k from a
rental property.
nons...@mynonsense.net
> You might
> get sick and never be able to work again, or your industry might
> tank and you end up make 1/5 of what you made this year. The old
> saying is to make hay while the sun shines.
In these situations you describe, wouldn't I be better off having the
money in something more liquid? I assume SEP has early withdrawal
penalties if I need to take money out of it before retirement age?
John A. Weeks III
<857b4279-7a2f-440a...@p25g2000hsf.googlegroups.com>,
nons...@mynonsense.net wrote:
> On Aug 7, 4:55 pm, "John A. Weeks III" <j...@johnweeks.com> wrote:
>
> > You might
> > get sick and never be able to work again, or your industry might
> > tank and you end up make 1/5 of what you made this year. The old
> > saying is to make hay while the sun shines.
>
> In these situations you describe, wouldn't I be better off having the
> money in something more liquid? I assume SEP has early withdrawal
> penalties if I need to take money out of it before retirement age?
I was assuming that a person with such a good income had an
overall plan that included stuff like short and long term
disability. To answer the specific question above, the reason
to use the SEP is to get the huge tax break. I'd far rather
get the tax break now, and possibly have to pay taxes on an
early withdrawl later on. I'd assume that if I was forced to
tap into retirement money, I'd be in a much lower tax bracket,
so I'd still come out far ahead.
-john-
--
======================================================================
John A. Weeks III 612-720-2854 jo...@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
--------------------------------------
HW "Skip" Weldon
>In these situations you describe, wouldn't I be better off having the
>money in something more liquid? I assume SEP has early withdrawal
>penalties if I need to take money out of it before retirement age?
By and large liquidity needs (for emergencies, future big ticket
purchases, college ed, home updates, etc.) should be saved in other
vehicles. In other words, saving for retirement is but a part of the
total savings effort.
-HW "Skip" Weldon
Columbia, SC
joetaxpayer
HW "Skip" Weldon wrote:
> On Fri, 8 Aug 2008 04:15:47 -0500, nons...@mynonsense.net wrote:
>
>
>
>>In these situations you describe, wouldn't I be better off having the
>>money in something more liquid? I assume SEP has early withdrawal
>>penalties if I need to take money out of it before retirement age?
>
>
> By and large liquidity needs (for emergencies, future big ticket
> purchases, college ed, home updates, etc.) should be saved in other
> vehicles. In other words, saving for retirement is but a part of the
> total savings effort.
Agreed. He wrote that he saves $5-10K/month. 'Only' $30K or so of that
is going to make it into retirement accounts. Sounds like he's still
putting away enough for those other needs, whatever they are.
Joe