Help with structuring my income with 401K and IRA?

Question

Hi everyone,

I graduated from university about 9 months ago and had began working in the corporate world. I earn about $68K per year right now and I am single. My company do 401K with cash balance formula, which it matches $0.75 per dollar on my contributions of up to 8% of pay?

I heard about the benefits of compound interests and lower taxable income. I don't really exactly know how it works, but I have read some forums and most people suggested the self-direct IRA. I haven't started yet, but I plan to do tax lien and rental real estate investment for sometimes the end of this year.

There are few questions I have and hopefully someone with knowledge can provide me some suggestions:

1) Can I invest both  401K ($18,000) and IRA ($5,500) at the same time?

2) If so, I plan to do 401K and give that money to some adviser to manage it (I heard usually a small fee of 0.5% commission) and do self-directed IRA by myself with tax lien investment (I will change to tax deed investment during recession). Would this be a good idea?

3) How would my contribution limit ($18,000 + 5,500) be different if I were to earn $150,000 per year? How does that impact the taxable income?

4) Is there a better suggestion for me?

Thank you for all your recommendation in advance!

Let me know if you want me to provide more information.

George Blower · Answer

@Kin Lay

Regarding the following question, yes but the IRA contribution may not be fully deductible if you also contribute a 401k plan including a solo 401k plan. See the following:

https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan

1) Can I invest both 401K ($18,000) and IRA ($5,500) at the same time?

Frank C. · Answer

Many corporate 401Ks have a list of mutual funds to choose from.  You may be limited to those funds.  If an index fund (such as the S&P 500 index) is available, invest in that since it will have a much lower fee than all actively managed funds.  Most money managers charge around 3% and up, I believe.  Remember that 80% of money managers and mutual funds managers underperform the S&P 500 index fund over the long term.

Contribute to the Roth IRA every year.  It is the best vehicle unless the crooks in DC decide to plunder our Roth assets later on.  When/if your income exceeds the Roth IRA limits, look into the backdoor Roth IRA. http://whitecoatinvestor.com/backdoor-roth-ira-tut...

At some point it would be good to have a CPA help with your taxes.  They can often save you far more than their fee costs.

You should be able to open an IRA or Roth IRA or any type of account with Fidelity or Scottrade or any discount broker.  You do not want to pay more than $7 per trade for sure.

I do not know much about tax liens, but real estate investing is a smart move.  Starting young is your best asset whether in real estate or in the stock market.  Good job to be thinking about your future while most young folks waste their time on instagram.

Dmitriy Fomichenko · Answer

Kin, self-directed Solo 401k plan is not for everyone. You can set one up if you have legitimate self-employment activity or small business without full time employees. The fact that you are employed has no affect on your ability to qualify, you can be employed (full time or part time) and have a side business, which is what qualifies you.

Yes, you can have money manager manage your 401k and you can use your SD IRA to invest in tax liens, rentals and other alternative investments.

Kin Lay · Answer

@Dmitriy Fomichenko Thanks for correcting me, I should use the word "contribute" instead of "invest."

I want to diversify my investment. I want both money manager and investment in tax lien or rental property. I done some research and it seems that if you are employee, you cannot open a self-direct 401K account (I am working on confirming that). Otherwise, I would prefer to use that for tax lien.

Anyway, my plan is have money manager manages my 401K account while I manage the SD IRA account myself with tax lien and rental real estate investment.

Let me know if I am confusing you.

Dmitriy Fomichenko · Answer

Kin, you don't invest into an IRA or 401k. You contribute to those retirement plan. Once you make a contributions you then can invest those funds tax-deferred into various investments offered by the custodian.

Why do you want to open SD IRA if you think that money manager is the best approach for you? In a self-directed IRA the one who makes investment decision is your self.

Kin Lay · Answer

@Lance Lvovsky Thank you for your response. I actually studied Accounting with an MS degree, but not in tax focus. I do my own tax because I don't want to pay a fee to CPA.

I missed the Roth IRA deadline, I guess I can only do it next year.

Do you know what is the best (cheapest) self directed Roth IRA company out there where I can open an account? Currently, fidelity is managing my 401K.

I think money manager is the best way I can go with because I am not very good with this finance investing stuff.

Lance Lvovsky · Answer

@Kin Lay Below are answers to your questions. I recommend you chat with a CPA who can advise you how to best "shift" your income in order to maximize your earnings potential while minimizing your tax liabilities.

1. Yes, you can invest in both a 401K and the IRA at the same time. Deductions to an IRA get phased-out depending on your AGI (Adjusted Gross Income).

2. I am not so sure giving a money manager is the best approach for your 401k. I try to steer clients into the direction of investing in such a way where fees are reduced. Generally, that means index funds and/or ETFs that track a certain index. I think there is a place for investment advisors, but I generally do not recommend clients (especially younger people) give their money to an investment advisor until they have accumulated substantial wealth.

3. The 401k limit is $18,000 regardless of your earnings. There is a catch-up contribution ($6,000) available to those over the age of 50. As for the IRA, as I mentioned above, depending on your AGI, you might not get a tax deduction if investing in a Traditional IRA.

4. Yes, there certainly are. For one, consider a Roth IRA as it sounds like your income will only go up. Next, I would discuss with a CPA who can provide tailored advice unique to your situation.

Help with structuring my income with 401K and IRA?

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