Monday, March 5, 2012

Blog on a plane

So today has been a really productive day. Why yes, work was great – I had some productive meetings, and I’m now waiting in the airport to fly home (crossing state boundaries so quickly makes me feel a little bit super-human). Still, I finally (Finally!) understand what’s going on with my 401K. Through some ridiculous system where you need a PIN to log in online, but I never got one, my 401K & I have been at a stalemate. I got a nasty shock today as I read through some financial documents the Retirement Services company sent over – I got yelled at for saving 5K/year instead of 14K! Orly? I should get a gold star for saving for retirement at 22, just sayin’. Mostly I found those numbers pretty weird – got to the bottom of it pretty fast though. Apparently I’m on record as having 2 dependents! Luckily that is so false, I am enjoying the gold years of earning lots of money and not having significant financial obligations outside of rent.

At long last (using my 1-800 automated voice message navigation skillz) I was able to set myself up with a PIN and log in, to see my glorious $5,627.12. Apparently from the start of my retirement account (8/31/11), my rate of return has been 19.19%. I’ve put my money in a medium-risk account: 36% International Funds, 22% Large Cap Funds, 21% Mid Cap Funds, 15% Small Cap Funds, 3% Bond Funds, and 3% Specialty (Real Estate), which re-balances every month. I plan on going through the individual funds in-depth at a later time.

I think the first question when you’re deciding to invest in retirement, is which account to choose. There’s 401Ks (or 403b’s for those in non-profit), but you can choose Traditional vs. Roth, then there are IRAs (again traditional & Roth), not to mention you’ve got to decide on asset allocation once you choose a vehicle.

Generally, your first step should be to contribute however much money you need to get an employer match (if your company has one). This is a no-brainer: getting up to 3K in matching money if you put 3K in your 401K is a phenomenal return on your money – one that you are guaranteed never to beat, even if you invest in magical unicorn funds. Past that, you should max out your Roth – an account that will likely have more options than your company provides, and thus be a better option once you’ve reached the full match.

Of course, since your Roth contribution is capped at 5K (6K if you’re 50 or older), then you should move next to your 401K and contribute additionally there if you’re interested. As for the million-dollar question: Roth or traditional, the answer in most cases, and definitely in my case (and likely yours) is ROTH. With a Roth, you put in already taxed dollars and pay no taxes after that – not even on the interest you have earned. With a Traditional, you put in pre-tax dollars (so, you start with more), and then pay taxes on the money as you withdraw. If you believe that taxes will go up (either your own taxes as you move up income brackets, or the general tax rate, or both), then the Roth is a better bet. The crazy thing is that there’s actually an income cap for being able to open a Roth, but you can convert your Traditional to a Roth at any income level. Talk about a crazy loophole … or, the way I see it – a crazy law, with a decent work-around.

The other productive thing that happened today, is that I made a decision on which 529 plan to invest in, and how much money I want to put in there this year. 529s are college savings plans with tax benefits. (For instance, since I live in DC I can get up to a 4K deduction from my state income taxes) Most states have their own plan, with varying costs, and provide tax incentives for investing in your state’s plan (or potentially others). I plan to go to grad school for my master’s degree at some point, plus I intend to go to law school when I retire, so money I put towards a 529 will definitely be used. Pending an entire change of my personality and interests, if I don’t go for more school, I can pass it along to my kids (you can change to another beneficiary as long as they are ‘family’). The DC College Savings Plan disclosure booklet is 45 pages – I’ll be reading that before I report back on that front.

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