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Author: JoeSchmoe Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Tax-free retirement investing Date: 6/12/1998 1:44 PM
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Here's our situation; hopefully someone can shed some light on our best course of action:

My fiance and I are 21 and 22 years old respectively, so we have a long term horizon. Our joint income is ~$115,000. We currently both invest 10% in our company's employee stock purchase program and 10% to 401K. We have planned to save 30%/yr., so this leaves us 10% or ~$11,000 more to put somewhere.

I would like some sort of tax-deductible (but high growth) vehicle for obvious reasons; do we qualify for either the Roth IRA or ordinary IRA? Apparently even then that will use only $4K of this $11K.. Any way to eek a little more tax-free investing out of that?

Any help is appreciated.. Trying to keep as much of this away from the government as I can :)

Sam
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3759 of 75335
Subject: Re: Tax-free retirement investing Date: 6/12/1998 3:11 PM
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Greetings, Sam, and welcome.

<<Here's our situation; hopefully someone can shed some light on our best course of action:

My fiance and I are 21 and 22 years old respectively, so we have a long term horizon. Our joint income is ~$115,000. We currently both invest 10% in our company's employee stock purchase program and 10% to 401K. We have planned to save 30%/yr., so this leaves us 10% or ~$11,000 more to put somewhere.

I would like some sort of tax-deductible (but high growth) vehicle for obvious reasons; do we qualify for either the Roth IRA or ordinary IRA? Apparently even then that will use only $4K of this $11K.. Any way to eek a little more tax-free investing out of that?

Any help is appreciated.. Trying to keep as much of this away from the government as I can :)>>

The contributions to an IRA for either of you will be nondeductible based on your income, but the growth will be tax deferred. If you use a Roth, the earnings will also be tax-free many years from now. Thus, the latter is the route to go for that $4K.

As to the remaining $7K, you have exhausted your tax deferred vehicles unless you want to use an after-tax annuity product of some sort. I do NOT recommend that approach. You can do better in the long run in most cases even after you take taxes into account.

I commend you on your approach to savings at your age. You are doing the right things early, and it will pay off bigtime for both of you come age 50 or so. You have maxed out on the tax-favored investments, and there is absolutely nothing the matter with using taxable investment accounts after that. That's especially true when the only thing left are mediocre to poor annuities.

Yeah, yeah, I know. For the purists out there perhaps there are one or two that are okay, but only if you hold them for 20 years or longer. Even then, I'll wager a sound Dow method will still beat them after taxes.

Regards....Pixy

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Author: havenot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3763 of 75335
Subject: Re: Tax-free retirement investing Date: 6/12/1998 6:32 PM
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Excellent planning, and congrats on the healthy income. At this rate, you will retire rich by 50 with relative ease. I would caution, however, that you are severly overweighting in your company stock, and would urge you to keep its weighting well below 20% of your holdings, trimming it back to 10% or less as you have opportunities to sell in the future and the rest of your portfolio grows.

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Author: JoeSchmoe Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3768 of 75335
Subject: Re: Tax-free retirement investing Date: 6/12/1998 10:53 PM
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<<The contributions to an IRA for either of you will be nondeductible based on your income, but the growth will be tax deferred. If you use a Roth, the earnings will also be tax-free many years from now. Thus, the latter is the route to go for that $4K. >>

Thank you for the advice; I read the section on the Roth IRA at http://www.invest-faq.com/articles/ret-plan-roth-ira.html and it mentions, "There are absolutely no limits on the number of IRA accounts that an individual may have, but the contribution limit applies to all accounts collectively."

What is the advantage to having multiple Roth IRAs accounts? Also, may my fiance and I share an account, or do we each need to open our own account? I assume we can do this through our brokerage (Charles Schwab)?

Thanks,

Sam

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Author: JoeSchmoe Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3769 of 75335
Subject: Re: Tax-free retirement investing Date: 6/12/1998 11:00 PM
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<<I would caution, however, that you are severly overweighting in your company stock, and would urge you to keep its weighting well below 20% of your holdings, trimming it back to 10% or less as you have opportunities to sell in the future and the rest of your portfolio grows.>>

This brings up a good point; we too have been concerned about our dependence on our company's stock.. The reason for putting 10% into this (the maximum allowed) is because we are able to buy the stock at 85% of market value and thus guarantee a return of 20% if we sell immediately. Our company (INTC) has historically provided good returns, but the recent travails in its price have worried us.

So, ideally I would like to hold this stock for 18 months before selling to decrease the capital gains tax that we pay. The question is, at taxtime how is it determined which shares of stock you are selling? We buy through the Employee Participation Program every 6 months, so is the capital gains tax calculated assuming you're selling the oldest shares or the newest?

Thanks,

Sam

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3772 of 75335
Subject: Re: Tax-free retirement investing Date: 6/13/1998 8:18 AM
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Sam,

<<What is the advantage to having multiple Roth IRAs accounts? Also, may my fiance and I share an account, or do we each need to open our own account? I assume we can do this through our brokerage (Charles Schwab)?>>

The key word in IRA is "individual." IRAs may be held in the name of one owner only, which means the two of you must open your own separate account. You may each have one account with a $2K contribution or 2000 accounts with a $1 contribution in each. However, multiple accounts are an administrative headache and will be more expensive to you as well. If both of you consolidate your IRA investments at one brokerage (still in your own accounts), you will experience less of a hassle IMHO.

Regards….Pixy



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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3773 of 75335
Subject: Re: Tax-free retirement investing Date: 6/13/1998 8:18 AM
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Sam,

<< The question is, at taxtime how is it determined which shares of stock you are selling? We buy through the Employee Participation Program every 6 months, so is the capital gains tax calculated assuming you're selling the oldest shares or the newest?>>

Seems to me that TMF Taxes answered this question recently in the Tax Strategies folder and has a FAQ on the subject as well. I don't have an answer off the top of my head, but if you can't find it in that area, I'll look it up for you.

Regards…Pixy


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Author: havenot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3802 of 75335
Subject: Re: Tax-free retirement investing Date: 6/15/1998 7:26 PM
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I think you've gottten to the point where a CPA really ought to help you out to ensure (or at least give you the best shot) that you are not runniing into trouble with the IRS-- don't trust the otherwise worthy message boards for this stuff. The IRS (if you trust them) can also send you the rules of the game. The basic deal is this: you can choose to average your cost basis, or to pick and choose to sell the positions with the highest cost basis first to put off your cap gains, but you have to be consistent for all of your positions for the year and keep great records.

But hey-- if you don't feel that great about the stock, why hold for 18 months? If they really will let you buy at a discount one day and sell the next (sounds unlikely-- read the fine print), then why not just book the no-brainer gain and re-invest the proceeds in stocks you really believe in?

I envy your position. Good luck.

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