Jan 10, 2009

After Maxing Out an IRA, Where Should Retirement Savings Go?

This year, I'm going to be making at least $60k. Which is wonderful. I plan on saving as much of that money as I can. The question is where to save.

2009 is an interesting year to have the opportunity to put away a chunk of money. With the stock market down, it seems like a great time to start making consistent, monthly long-term investments in the stock market. But without a 401(k), where do I put all of my savings? It's surely a luxury to be able to ask this question, but one that I have to start thinking about nonetheless.

There's also the real possibility that even if I do an amazing job at work in 2009, my startup will not receive funding to go on in 2010. Thus, I have to plan for unemployment at some point, just in case. The good news is that if I do a good job and the company goes under, god forbid, i'll have a really solid network of references to help me find my next opportunity. So my only concern here is making sure I do an amazing job over the coming months. That's just about the only thing I need to do for this situation to turn out positively.

But the question remains, where do I put this savings? It's so hard to find answers to this question because most people say "max out your 401(k) first and then max out your Roth." Well, what if you don't have a 401(k)? Then where does your money go?

There are a lot of options. I'm not sure, from a tax perspective, which are the right options for me. And maybe the tax savings isn't something I should be concerned about? Savings, in general, is a good thing.

So... a few other factors play in to the equation. I'm pretty sure I want to go to grad school in a few years. I've decided I likely want to go for an MBA, hopefully at a fairly good school. I'm not sure when I'm going to do this exactly. But I know I need one to become a product manager, which is my goal right now. There is always a chance I won't end up going to grad school, but it's looking more and more likely as I advance my career and figure out my long-term goals.

There's the possiblity that I will move with my boyfriend to New York or wherever he goes to grad school (which is even more of a definite than my potential grad school experience) and have to find a new job. NY is a super expensive city, obviously, so having a solid emergency fund will be vital. I already have an emergency fund of $7k, but I'd like to grow it if I'm going to be moving to NY.

Assuming I can put away $10,000 for the year, where do I put it?

$5000 goes into the Roth IRA.

Then, where does the rest of it go???

Some options that I know of:

1. Mutual funds. No tax help there. Taxed going in and coming out.

2. An HSA. Which still has a limit of $2,900 a year. And my company would put in $1,200 a year. So that's only $1,700 more on top of the $5000 in the Roth.

3. An 529 education savings fund. The problem with that is if I don't go to grad school and/or have kids who go to college, I lose the money.

There are two types of 529 plans: prepaid and savings. Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation. Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college-age. [via wikipedia]

4. P2P lending. I'd like to try out lending club. My Prosper accounts are doing ok, only one default, and I've heard better things about Lending Club.

5. ETFs and individual stocks. I already put about $2,000 into a Sharebuilder account (that's down to $1500). But the coming year may be a good time to buy some good stocks at bargain prices. Unlike two years ago when I started investing.

6. Buy property. I don't really have enough money to do this, nor do my circumstances equate to this making sense. But I know there are tax benefits to owning property, which is why I'm including it in the options.

7. CDs. CD rates suck right now. But they're at least safe.

8. Bonds and other such lower risk investments. Prob doesn't make sense in my 20s.

That's about the only options I can think of right now? I don't think employed people can open a SIMPLE IRA or SepIRA... so I've run out of options. Or do you guys have a better suggestion for me?


RN said...

Maybe you could take the additional funds and invest in a business instead of traditional savings vehicles?

wellheeled said...

I hear you! I'm in the same situation, making around the same amount and sans 401K. In 2008, I basically maxed out Roth, and then everything else I saved in a taxable money market fund, i.e. emergency cash. If you don't have 6-12 months of living expenses, you might want to concentrate on that. I have around 12-15 months of living expenses right now, and I'm STILL not quite comfortable with it. I'd like to get it to 15-18 months.

Chris said...

Can't you save money in a non-deductible IRA after the Roth? You will not recieve the tax deduction, but will receive tax deferral.

her every cent counts said...

@Chris there is a $5,000 limit to both Roth and Traditional IRA contributions. So once I hit that limit, I can't contribute to either.

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