Where to put my savings money?
January 11, 2017 7:04 AM   Subscribe

I currently have: -- Ally Online Savings Account -- Betterment Individual Account -- Simple IRA (from work)

I'm in a position where I have enough money in my Ally account for one year of living expenses. I'm contributing the max amount to the Simple IRA. I've just been siphoning off extra cash from my debit account to my Betterment Individual Account.

I don't know anything about Traditional IRA's, Roth IRA's, or other savings methods. What advice could you give to continue saving money in the best possible way? I'm 24, don't have any near plans of buying a house soon, so I guess just looking for a way to make the most of this extra cash from my paycheck. I'm sure there are lots of varying things people can tell me, so I would love to just educate myself. Thanks.
posted by Junocular to Work & Money (11 answers total) 12 users marked this as a favorite
The /r/personalfinance FAQ covers the basics pretty well.
posted by Candleman at 7:23 AM on January 11, 2017 [2 favorites]

Two books I found useful were Investing for Dummies by Eric Tyson and Saving for Retirement (without living like a pauper or winning the lottery) by Gail MarksJarvis. I see there's also an Investing in Your 20s and 30s For Dummies, also by Eric Tyson, but I haven't specifically read that one.
posted by cruelfood at 7:36 AM on January 11, 2017

If you're interested in investing, Bogleheads is recommended quite often.
posted by xingcat at 7:39 AM on January 11, 2017 [1 favorite]

Your best bet is probably to open up a Roth IRA and begin contributing extra funds there. With a Roth you invest after-tax money, and never pay taxes on any of the earnings ever again. It's a retirement account so it's designed to make it easiest to access the money after you turn 65, but you can withdraw your contributions at any time without paying a penalty (though of course you should try not to). Once the account has been opened five years you can also withdraw the earnings under certain situations like medical emergencies or buying your first home.

The standard advice for the order in which to to save extra money is this:

1. Build up an emergency fund
2. If your company offers a matching program, contribute to your company plan (in your case, the Simple IRA) enough to get the full match
3. Fully fund your HSA (if applicable)
4. Fully fund your Roth IRA
5. Fully fund your company retirement plan (Simple IRA)
6. Invest in a taxable account (like betterment)
posted by exutima at 8:21 AM on January 11, 2017 [4 favorites]

Your best bet is probably to open up a Roth IRA and begin contributing extra funds there.

Really, not necessarily. A person who has saved as much as OP already has at OP's age is probably earning quite a high salary and hence paying commensurate taxes. There is no difference in return for a regular or a Roth IRA unless the investor pays a different tax rate at the time of withdrawal than he did at the time of contribution. While there's always an element of uncertainty in trying to predict future tax rates, if OP is in a high tax bracket now, the odds are decent under the present circumstances that OP will be in a lower bracket at the time of retirement and would benefit from having OP's income taxed then, rather than now. So OP should defer paying taxes on that part of his income by contributing the maximum to the SIMPLE IRA first. (Additionally, if OP is in a high tax bracket, OP is likely to be ineligible to contribute directly to a Roth.) The one advantage of the Roth, availability of contributions for withdrawal, is not overwhelming if you have a good income.

The main advice I would give to you, OP, is not to default to some rando startup for your investments, which it sounds like you may have. Why are you at Betterment (and paying fees for the privilege) rather than Vanguard for your taxable investments? If you can't clearly articulate the reasons, you need to rethink. Almost the most important thing you can do to protect your assets while investing is not pay unnecessary fees on them. A forum like Bogleheads will lay out the differences.
posted by praemunire at 9:34 AM on January 11, 2017 [3 favorites]

Add a data point, I've been using betterment and i like it so far. Maybe i just got lucky though.
posted by pyro979 at 10:15 AM on January 11, 2017 [1 favorite]

Just about every broker or investment service is designed to make you like it. When dealing with the average retail investor, who isn't very well-informed and lacks a standard of comparison, their success lies in sales, not necessarily in returns. A person needs to be very cautious. Betterment at least claims to do tax-harvesting, which is tough for an individual investor to do on his/her own, but much of what "advisors" provide is mediocre advice for significant fees.
posted by praemunire at 1:09 PM on January 11, 2017

There is no difference in return for a regular or a Roth IRA unless the investor pays a different tax rate at the time of withdrawal than he did at the time of contribution.

This is not right. The advantage of the Roth is that the capital appreciation in the account is not taxed at withdrawal. With a regular IRA, you pay tax on the full amount of the withdrawal. So if your account grows a lot over time (which is the hope), this aspect of the Roth can be very valuable.
posted by Mid at 3:05 PM on January 11, 2017

This thread from last week has a lot of good advice.
posted by Mid at 3:25 PM on January 11, 2017

I believe praemunire was correct, if considering an initially equivalent amount of earned income. Let's say you earn $100...

In a regular IRA, that goes into the account pre tax. Let's say you get 100% returns before you withdraw. You withdraw $200 and pay income tax on that. $100 * 2 * (1 - tax rate)

In the Roth IRA, you pay tax first, then put your money in. $100 * (1 - tax rate) goes in. You earn your 100% on it and withdraw it all tax free. $100 * (1 - tax rate) * 2

So if your tax rate is the same in both cases (when depositing and when withdrawing), you end up with the exact same amount based on an initially equivalent amount earned.
posted by whatnotever at 10:03 PM on January 11, 2017

That makes sense, I agree.
posted by Mid at 7:00 AM on January 12, 2017

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