Help me retire
December 7, 2020 6:17 AM   Subscribe

I'm in my mid-30s and am not currently contributing to retirement (although I have some contributions from past jobs.) How do I get started now that I've started a new career?

I've gone through a career change in the past few years and now work at a small organization where I am currently classified as an independent contractor (1099). I've worked there for 1.5 years. As of Jan 1, the organization will be restructured and I'll be classified as a W2 employee.

I don't currently have a retirement solution set up, and my employer does not offer one (nor will they offer one when we switch over.) I have money that I have set aside this year that I'd like to put into some kind of retirement vehicle. Looking for help with three questions:

1) Which vehicles am I eligible for, and which would be the best choice?
2) Does that answer change given the information that I will soon become a W2 employee? If I were to start a SEP IRA now, for example, would I be able to roll the SEP into something different next year?
3) What kind of professional would I get in touch with if I wanted an official answer? I emailed the CPA that my in-laws use, but he was very unhelpful. I'm really new to doing this on my own and need my hand held a bit.
posted by soonertbone to Work & Money (7 answers total) 7 users marked this as a favorite
Best answer: I think this can be less complicated that it sounds. If you're going to be a W2 employee soon, I wouldn't bother with setting up a self-employment IRA. If you don't already have a Roth IRA, open one of those (go to or and search for "open IRA"). You can put in $5,500 right now and then another $5,500 after the new year.

If you currently have less than $11,000 waiting to put somewhere, that should start you off nicely. But the other thing to remember is that any savings can be retirement savings if you don't touch them till retirement. Tax advantaged accounts are great, but what's important is the saving part. I (independent contractor, occasional part time employee) max out my Roth IRA every year, but I also put the same amount in a set of regular old generic mutual funds, so I'm actually saving twice that much.

If your work ever offers you a way to save, it might be worth it (especially if there's matching), but honestly, when they introduced a non-matched 401(k) at my last job, my existing Roth IRA + mutual funds plan ended up calculating out as a better situation, even according to the guy selling the 401(k)s.
posted by gideonfrog at 7:09 AM on December 7, 2020 [5 favorites]

Best answer: I came in to give the same caveat about 401k that gideonfrog mentioned. When you read financial advice online, it will often suggest you contribute first to a 401k to take advantage of company matching. This is great advice if you have company matching! But if, like you and also like me, you don't have matching then for me like gideonfrog after sitting down and carefully examining the options and, really importantly, expenses, I determined that allocating funds to a personal qualified plan calculated out as a better use of money. This is because there were more options to invest in and they had significantly lower expenses charged against them.

The recommendation for Vanguard or Fidelity is spot on by the way - they have some extremely low expense ratio funds available for you to invest in. With Vanguard at least (and I believe Fidelity as well) certain of their funds have no commission per trade. The less you pay in fees and commissions, the more of your money works for you.

In terms of personal qualified plans, know the differences between the two types of IRA:

Traditional IRA - The funds up to the limit that you contribute now are not taxed now, but you pay taxes on contributions + gains when you withdraw them post-retirement. This is an advantage if you think you are paying more in taxes now than you will be in future. Many people have generally felt they will have a lower tax rate post-retirement so the tax paid per dollar will be less in future than it would be now. (Mere opinion here, but I think taxes are unrealistically low now and we are borrowing against the future with a big bill for climate change and infrastructure that will eventually come due, so I am not sure I will pay a lower rate later). With a traditional IRA, there is a penalty if you withdraw before retirement.

Roth IRA - You pay taxes now, but when you make withdrawals later there is no tax on your contributions only on your gains in some circumstances, and in other circumstances not even on gains. This is good if you expect your tax owed on the earnings will be less now than it would be at the time you withdraw. Another advantage to Roth is that with a Roth, you can withdraw your contributions (but not earnings) at any time with no penalty because you have already paid the taxes on that money. So I think of a Roth as being less restricted and more flexible, giving me more financial security because I could use it if I needed to for a serious life-sustaining emergency.

For answers about the tax implications of accounts, you want a CPA. For insight as to what are the most advantageous options for you, you want a fee-based financial planner (as opposed to one paid by commission on the investments they manage for you). A fee based financial planner can help you figure out what types of accounts to open, how much to allocate to them, help you identify what an appropriate risk profile would be (in terms of say equities - high risk/high reward - and bonds - lower risk/lower reward).

For beginner investors (*), I strongly suggest researching ETFs/Exchange Traded Funds. These have some built in diversification that immunizes you a bit to the rise and fall of one particular stock. You can then further diversify by having funds that track, say the S&P 500, mid-cap stocks, international stocks, bonds, utilities, dividend stocks, etc. For me with Vanguard, I buy mostly Vanguard ETFs and they are commission free to buy with very very low expense ratios so I keep most of my money.

(*) Not sure if you are one, you may be an experienced investor who just hasn't waded into retirement products as yet. But I still wanted to throw this out there in case helpful. Because for me once I got started with my IRAs, the next big question was okay what the heck do I buy so that I can hope for decent returns and hoping to avoid being totally crushed by market downturns, while not paying out the ass in fees.
posted by MustangMamaVE at 7:30 AM on December 7, 2020 [1 favorite]

I don't know jack-diddly about the tax implications and you should speak to a CPA about that bit, but I am going to whole-heartedly encourage you to set up some kind of IRA that you contribute to regularly. I got an IRA when I was 30 and even when I was in kind of shaky financial straits, I still tried to regularly contribute at least 10 bucks a month to it. If I had a job that gave me a 401K, but then I left that job, I would just roll the whole thing over into the IRA. Within 20 years, despite chipping in only 10 dollars a month sometimes, I'd ended up with something in the 5 figures.

I'm also going to second the recommendation to use Vanguard - because even though I ended up with something in the 5 figures with that other IRA, it could have been more. I set my IRA up with my own bank, and because I didn't read the fine print, I'd missed the note that my bank only does the kind of stock-market-investing thing when you have something in the SIX figures. So my "IRA" was just a sort of hyperdrive savings account that was giving me pretty terrible interest. Vanguard, however, will let you do the stock-market-investing thing with less money to start - and even better, you can specifically ask for something called a "targeted retirement date IRA", where you tell them about what year you want to retire, and they will take care of deciding what the right mix of stocks and bonds and all that stuff you can have in your account should be, and they will keep adjusting that as time passes. You can still have a say if you want, but if you are kind of an idiot like me they can do it all for you.

...And, well, I rolled my IRA over to Vanguard in April, and since then they've made me about 3 grand, so I'm pretty happy with 'em....
posted by EmpressCallipygos at 7:43 AM on December 7, 2020 [1 favorite]

I came in to give the same caveat about 401k that gideonfrog mentioned. When you read financial advice online, it will often suggest you contribute first to a 401k to take advantage of company matching.

A 401k contribution (the money you put in) is a direct dollar-for-dollar decrease in income from your taxable income, and the max is like $18,000 vs the $5500 direct income decrease of a regular IRA. So even if you don't get a company match, a 401k is better than an IRA due to the hugely different contribution amounts [obviously as long as the management fees are reasonable]. Now if you can only contribute $5500 to your 401k, then they are more similar, but you should really contribute to both, especially since you are behind on your contributions for retirement.

And you should contribute to a regular IRA and regular 401k (not Roth versions) if your current income is not that high (less than $150k) because the tax benefits that you get back immediately are way more helpful than being concerned about your future tax rates.
posted by The_Vegetables at 8:10 AM on December 7, 2020

Best answer: I agree that you are probably looking for a traditional IRA or Roth IRA. A good option is the Vanguard Target Retirement funds since they are a reasonably comprehensive solution with low expense ratios.
posted by oceano at 8:17 AM on December 7, 2020

It's a great point that if you are able to make contributions in excess of the IRA caps, then 401k has higher limits so you can continue to take advantage of deduction for contributions in excess of what IRA would allow - the two are not mutually exclusive! When deciding which to prioritize, I suggest carefully comparing the actual investment options and fees. For example, some of the options through my 401k have expense fees as high as 0.8% with most around 0.5% whereas I have Vanguard funds with expense ratios of 0.03% which are significantly better performing as well.
posted by MustangMamaVE at 8:37 AM on December 7, 2020 [1 favorite]

I think you're getting reasonable financial advice above, so I'm going to focus on the psychological side. Frankly, the tradeoffs of tax rates and investment choices are important, but not as much as doing what it takes to start making contributions. I recommend people think about what's holding them back from saving. Most of the time the lowest-friction way is to use an employer 401(k), but you don't have that. So I would head over to right now. Literally stop reading and set up a Traditional IRA with automatic contributions to the Target Date 2050 fund. Once you are in a position where you're making regular contributions ("paying yourself first") then you can start to think about optimizing. By far the biggest mistake people make is never starting contributions at all, and the second biggest is cashing out when they change jobs. If you avoid those and get to a point where you're living below your means, you'll be better off than almost everyone out there. Then all you have to do is avoid withdrawing the money. Knowing yourself is really helpful here. Think about what scenarios would cause you to not contribute or to withdraw what you have contributed. Good luck!
posted by wnissen at 11:13 AM on December 7, 2020 [1 favorite]

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