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jonts26

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Financial Management
« on: December 16, 2014, 11:08:15 pm »
+3

I recently graduated and got a nice paying job. And, unless I pick up that cocaine addiction I've been thinking about, I have more money than my standard of living requires. As such, I think it's time to start doing financial things with my money, like adults do. Thing is, I have absolutely no idea where to even start. It's not anything I've ever learned. I figure, I'll push hard to finish off my student loans, but the ones left aren't super high interest, so it's not quite so urgent to do it ASAP. Anyway, I'm sure some people here know of such matters.
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jonts26

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Re: Financial Management
« Reply #1 on: December 16, 2014, 11:10:09 pm »
+2

If you have so much extra money you should give it to me. herp derp.

(just getting that out of the way)
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rrenaud

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Re: Financial Management
« Reply #2 on: December 16, 2014, 11:22:14 pm »
+5

You are young (presumably?).  Pick the 80/20 allocation here.

http://www.bogleheads.org/blog/the-three-fund-portfolio/

Then move on with your life, and spend time doing fun things, like playing Dominion or brewing beer, rather than worrying about the stock market.

Periodically (once per 6 months, say, or incrementally as your bank account gets too big) rebalance your portfolio to make sure you stay at those 80/20 ratios.

gg


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jonts26

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Re: Financial Management
« Reply #3 on: December 16, 2014, 11:46:10 pm »
0

Yeah, I'm not looking to win big on the market or anything. I just want my money to be doing ... something. That link looks good. I'll check into it.
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Elestan

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Re: Financial Management
« Reply #4 on: December 16, 2014, 11:56:15 pm »
+7

You didn't say what country you are in, and the answers will differ somewhat. These answers assume that you are a single American in your 20s with no dependents and a good job.  You've probably done some of these already, but I list them just in case.

1)  Establish a savings account, checking account, and no-annual-fee credit card.  The interest rates on these don't actually matter that much, because you shouldn't keep that much money in the accounts, nor should you ever carry a balance on the credit card, so find accounts that give convenient low/no fee ATM access.  Don't use your bank's investment services or advice; they usually suck.
2)  Arrange to have your paycheck auto-deposited into your bank account.
3)  Arrange to have all of your bills (utility, rent, insurance, etc) auto-debited from your bank account or (better) charged to your credit card.  Have the credit card automatically paid in full from the bank account each month.
4)  If your employer offers 401k/403b (retirement fund) matching, make sure you're taking full advantage of it.
5)  Add up all of your expenses for a month, including loan payments.  Accumulate 6x this amount in your bank accounts.  This is your emergency fund.  It also ensures that you don't need to worry about the day-to-day timing of paying bills, and should be enough to avoid any minimum balance fees on your accounts.

Got all that done?  Good, you're already way ahead of most people.  By routing your payments through your credit card, you start to build up a good credit rating.  And with your bills automatically paid, you don't have to stress about accidentally missing a payment and screwing it up.  Do review your bills every month to make sure the numbers seem correct.  Make them send you paper copies of the bills if you need the reminder.

Now, on to stage 2:

6)  Get some kind of financial software, and spend the time to learn how to use it.  Download your bank statements into it every month.
7)  Pay off all your debts (other than a mortgage), from highest interest rate to lowest rate.
8)  Make a guess when you'll need to buy your next car, and how much it will cost.  Start saving enough each month that you won't need a loan to buy it.

Okay, if you've finished all of the above, /now/ it's time to start investing.

9)  Go to a discount broker like Schwab, Fidelity, or Vanguard.  Open a Roth IRA.  Set it up in your finance software.  Divert as much money as you can to it, up to the legal limit (around $5-6k/year, unless you're making more than about $110k/year).  Invest that money in index ETFs and mutual funds with no loads and low fees.

10)  Still got money left?  Go back to your employer's 401k/403b.  Increase your contribution as much as you can, up to the maximum (around $17k/year).

11)  Not out of cash yet?  You must be in the software business.  Okay, now we go back to your broker and open up a taxable investment account.  Transfer your remaining excess money (after doing all the previous steps) into it.  Now you should get a book on investing, and practice using this money.

Finally, remember the monthly expenses you calculated in step #5?  Multiply that number by 500.  That's your endgoal.  When your savings reach that level, you can retire, and live off your investment returns forever.  When you do, throw a party, and invite everyone from f.DS.

  Good luck!
« Last Edit: January 02, 2015, 11:24:18 am by Elestan »
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Seprix

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Re: Financial Management
« Reply #5 on: December 17, 2014, 12:23:57 am »
0

Invest in your retirement. Like, dump $50-$100 bucks into an IRA/401k every single week or whenever you get paid without exception. Every dollar you don't spend after you take care of utilities and spending you need should be regulated to savings in case of emergencies, a new car, etc.
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Re: Financial Management
« Reply #6 on: December 17, 2014, 12:32:53 am »
0

Quote
8 )  Make a guess when you'll need to buy your next car.  Start saving enough each month that you won't need a loan to buy it.

I screwed this up years ago by deciding my vehicle based on desire, not necessity. And I still love that decision. (Even if I'm 30k x 10yr behind where I could be.)
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Titandrake

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Re: Financial Management
« Reply #7 on: December 17, 2014, 12:36:32 am »
+2

(Disclaimer: I am still in school, and am probably younger than you. So don't take this with a grain of salt. Take it with, like, the entire salt shaker. I don't know.)

From my understanding, when it comes to stocks, there are 3 roads

1. Do it yourself. Research lots of companies, try to make the right decisions and buy undervalued stocks. If you spend enough time on it and have the right intuitions, you might beat the average, but there's a good chance you won't.
2. Give your money to somebody else who does option 1. There are lots of people who do this, and this changes the problem from "research the stock market" to "research what firms/mutual funds perform better than average while not looking like they do TOO well"
3. Go with an index fund, which basically buys the same amount of stock from every company, and is thus guaranteed to perform the same as the average.

Doing option 1 or option 2 is both time-consuming and riskier. There are a lot of stories of people who do 1 well. There are a lot of funds that advertise that they do 2 well. There are a lot more unpublished stories of people who do 1 poorly, and a lot of mutual funds don't beat the average anyways.

Option 3 (which is basically rrenaud's link) is lowest maintenance and safest while still performing decently. With that option, you don't have to worry about what happens if the stocks you bought/your trusted fund bought drop suddenly, because you're spread out over the entire market and are getting the average anyways.

Selective stock picking lets you perform better, but it also lets you perform weaker, and IMO it's not worth the risk. Personally, I have an issue where I refresh/check on things incessantly. What's my Isotropish rating? Do I have new email? Are there new posts to this subreddit? Then I think about what would happen if I added "checking my stocks" to that, with the addition that it's actual money that's going into it and I go nope. Nope. Noooooope.
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qmech

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Re: Financial Management
« Reply #8 on: December 17, 2014, 04:09:57 am »
0

11)  Not out of cash yet?  You must be in the software business.  Okay, now we go back to your broker and open up a taxable investment account.  Transfer your remaining excess money (after doing all the previous steps) into it.  Now you should get a book on investing, and practice using this money.

This is a good answer, except for this part.  For private investors, index funds are essentially the whole story.  Stock picking is fine for a hobby, but you shouldn't have any expectation of beating the market.

As an alternative to corporate bonds, I have had good experiences with peer to peer lending directly to businesses, but I don't think that this is allowed yet by US regulators.
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Kuildeous

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Re: Financial Management
« Reply #9 on: December 17, 2014, 08:27:21 am »
0

I second the notion to not carry any credit card balance. It was liberating as hell when I kicked the credit card balance to the curb. I no longer had to shop around for the card with the lowest rate because I was never going to pay it. Just in case, we do have four credit cards, and we have that one with the lowest rate that we know we would use if we get into an emergency. The other cards are just to accumulate points. We pay them off every month while taking advantage of their incentive programs.

And don't get a card with an annual fee. You are indirectly providing them revenue each time you use it; there's no need to give them more money out of your own pocket. In theory, the incentives they offer can offset these fees, but I haven't found any that's worth it. Those incentives might be more geared toward people who spend more money than I do.

Putting money aside into an IRA and 401k is great advice. The pension is all but dead in America (assuming that's where you are). I'm in one of those rare companies where I have a pension fund, and that was actually dropped for new hires last year. If I have to leave this job, I do not expect to find a job with a pension. You simply have to do at least enough for company match. That's part of your benefit package, and you are wasting it if you don't put in the minimum requirement. But do more than that. Annual max in 2014 is $17,500. In 2015, it's $18k. If you have the means to max it out, though, make sure you don't reach that cap too early. I made that mistake one year. I hit my max in mid-December. This meant that my end-of-December paycheck had 0 contribution to the 401k. Guess what that means for the employer match? No match. I can imagine the HR person's response after I inquired about my missing match. "Oh gee, I hit my max, and I don't get any more from my employer. Must be a rough problem to have." Yeah, well, like I said, it's part of my benefit package, so of course I want that money. I check my contributions about every quarter to make sure that pay raises/bonuses do not push me over my max at the end of the year.

Being in your 20s puts you in a great position for retirement. This was something I heard a lot in my 20s. I ignored it. Don't be as dumb as me (actually, the fact you're asking for advice means you already are not). I've been working jobs with 401k contributions since 1998, but it wasn't until 4 years ago that I was able to go beyond the minimum contribution. It's a nice feeling, and I'm pretty happy seeing my current balance. I still have at least 20 more years until I retire, so I'll squirrel away as much as I can. If I had only started this 20 years ago, I marvel at how much I would have. The American dream of retiring at 55 would be much more realistic for me.

I do need to consider adding more to my Roth IRA, though. I'm not quite hitting my savings max.
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Elestan

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Re: Financial Management
« Reply #10 on: December 17, 2014, 09:58:49 am »
+1

11)  Not out of cash yet?  You must be in the software business.  Okay, now we go back to your broker and open up a taxable investment account.  Transfer your remaining excess money (after doing all the previous steps) into it.  Now you should get a book on investing, and practice using this money.

This is a good answer, except for this part.  For private investors, index funds are essentially the whole story.  Stock picking is fine for a hobby, but you shouldn't have any expectation of beating the market.
Remember that this step assumes that the person is already completely maxing out their IRA and 401k with ETFs and mutual funds, so this leftover money is where they would do their "hobby" investing.  With that said, putting all or most of it into index ETFs and mutual funds as well would be a fine, low-effort default, and most of my money is allocated that way.  But I occasionally pick a stock to buy after doing appropriate research.
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theory

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Re: Financial Management
« Reply #11 on: December 17, 2014, 10:37:40 am »
+4

RA, Roth IRA, 401k, and Roth 401k are just special labels you slap on investment accounts that have various tax / employer advantages.  You should fully take advantage of them before investing in "unlabeled" accounts.

Regardless of the label on your money, though, you should always make sure it's in an index fund for two reasons:

1) Stock picking is a frustrating and ultimately money-losing endeavor.  Paying others to stock pick for you is even worse.  No one ever beats the market in the long run.  So you may as well just go with the index fund, because in addition to stability you get ....
2) Very low expense ratios.  The average expense ratio for mutual funds is 1.5%.  Vanguard Admiral Shares (requires min. balance of $10k) is 0.05%.  Paying to invest in an actively managed mutual fund is a lot like trying to beat the Second Law of Thermodynamics.

Personally I keep my money in Vanguard (specifically their Total Stock Market funds).  You can also put your money in their Target Date Retirement funds, which have marginally higher expense ratios but do the work of balancing your bond/stock allocation.  Setting up an account takes about as much time as registering for f.ds.
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Witherweaver

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Re: Financial Management
« Reply #12 on: December 17, 2014, 11:15:27 am »
0

RA, Roth IRA, 401k, and Roth 401k are just special labels you slap on investment accounts that have various tax / employer advantages.  You should fully take advantage of them before investing in "unlabeled" accounts.

Regardless of the label on your money, though, you should always make sure it's in an index fund for two reasons:

1) Stock picking is a frustrating and ultimately money-losing endeavor.  Paying others to stock pick for you is even worse.  No one ever beats the market in the long run.  So you may as well just go with the index fund, because in addition to stability you get ....
2) Very low expense ratios.  The average expense ratio for mutual funds is 1.5%.  Vanguard Admiral Shares (requires min. balance of $10k) is 0.05%.  Paying to invest in an actively managed mutual fund is a lot like trying to beat the Second Law of Thermodynamics.

Personally I keep my money in Vanguard (specifically their Total Stock Market funds).  You can also put your money in their Target Date Retirement funds, which have marginally higher expense ratios but do the work of balancing your bond/stock allocation.  Setting up an account takes about as much time as registering for f.ds.

So what if you want to start with less than $10K?
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theory

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Re: Financial Management
« Reply #13 on: December 17, 2014, 11:54:18 am »
0

So Admiral Shares is like an upgrade that is applied when you get to 10K on certain funds.  The underlying fund is the same, it's just you pay less fees when you get to 10K. 

So this is the Total Stock Market Fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT, with 0.17% expense ratio (goes to 0.05% when you hit 10k) and a $3k minimum

This is the Target Retirement 2055 Fund (for people around age 22-26): https://personal.vanguard.com/us/funds/snapshot?FundId=1487&FundIntExt=INT, with 0.18% expense ratio (no Admiral Shares bonus), but only a $1k minimum
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Re: Financial Management
« Reply #14 on: December 17, 2014, 12:22:19 pm »
0

I've been doing a Dave Ramsey course in school, which has been helping a lot.  Basically, he gives seven steps (and a whole lot more advice) to financial peace.  With all of the extra money, he says to give it away to things like charities or something (not to jonts).
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Polk5440

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Re: Financial Management
« Reply #15 on: December 17, 2014, 12:32:22 pm »
+1

Good advice (esp. index funds), but I want to bring up some more things to think about:

One thing to consider if you feel that you have more money than you expected, is to ask seriously: "Is this permanent?" What do you expect your lifetime income path to look like? Most people start out in low paying jobs, build experience, and get maximum income (and tax rates) for a decade or so when they are middle-aged. If this is you, great. The advice above in the thread is good. However, if you are in one of the areas where it is likely you can have significant income drops rather than increases in middle age (professional sports player, working for a start-up in a "hot" field, etc.) you should save much more.

Also, not mentioned above, but you should take seriously, is whether your expense levels will remain at their current low levels in the sort or medium term. If you are a single guy living alone in an apartment just starting out, your first job can seem like you have more money than you know what to do with. HOWEVER, if you are planning on having a family at some point, you should save extra now in anticipation of those future expenses. They will come quickly. Especially if you want children. You will have a larger living space than you currently do, probably more cars, more day-to-day expenses, more long-term planning, more health insurance, and will buy life insurance.

Also, if you value giving to to church or charity, begin regular patterns of giving now while it is easy to do so.

In summary: Think about what your lifetime income and consumption path will look like in order to effectively create that future today. And do not get suckered into investing in individual stocks. It is not your field of expertise. Index funds all the way.
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Witherweaver

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Re: Financial Management
« Reply #16 on: December 17, 2014, 01:00:07 pm »
0

So Admiral Shares is like an upgrade that is applied when you get to 10K on certain funds.  The underlying fund is the same, it's just you pay less fees when you get to 10K. 

So this is the Total Stock Market Fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT, with 0.17% expense ratio (goes to 0.05% when you hit 10k) and a $3k minimum

This is the Target Retirement 2055 Fund (for people around age 22-26): https://personal.vanguard.com/us/funds/snapshot?FundId=1487&FundIntExt=INT, with 0.18% expense ratio (no Admiral Shares bonus), but only a $1k minimum

Ah, I see, thanks.
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jonts26

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Re: Financial Management
« Reply #17 on: December 17, 2014, 04:48:03 pm »
0

Hello, Vanguard? I'll take one IRA please. And make it extra rothy.
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GendoIkari

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Re: Financial Management
« Reply #18 on: December 17, 2014, 06:32:08 pm »
0

To repeat what I've seen after skimming the thread; Roth IRA is the way to go. If you can afford it, put the maximum allowed in every year. If your job allows it; make your 401K Roth as well (but I don't think that's commonly an option). Definitely pay off debts asap; even with low interest, any interest you are paying is just being thrown away.
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Re: Financial Management
« Reply #19 on: December 17, 2014, 06:56:50 pm »
0

Could somebody explain the advantage of the "Roth" part of a Roth IRA to somebody not familiar with the US system?  As I understand it it means you get tax relief on withdrawals rather than contributions, which is the opposite of what you want if you expect to earn less in retirement than when working.
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Elestan

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Re: Financial Management
« Reply #20 on: December 17, 2014, 07:25:40 pm »
+2

Could somebody explain the advantage of the "Roth" part of a Roth IRA to somebody not familiar with the US system?  As I understand it it means you get tax relief on withdrawals rather than contributions, which is the opposite of what you want if you expect to earn less in retirement than when working.
Correct, but for someone just starting a lucrative career, they will probably earn more from their investment returns in retirement than they are making right now.  Also, they're good if you expect taxes to rise before you retire (which I do, given the size of the U.S. debt).

Roth has a few other advantages as well; you can take some money out of it without penalty in an emergency, and you're never forced to withdraw the money (normal IRAs have mandatory withdrawals to force you to start paying taxes on it).

Choosing Roth vs. Non-Roth depends on the particulars of one's circumstances and the assumptions you want to make about your future income, taxes, and inflation.  I've slowly reduced my Roth percentage over time, down to about half at this point.
« Last Edit: December 17, 2014, 07:27:18 pm by Elestan »
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GendoIkari

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Re: Financial Management
« Reply #21 on: December 17, 2014, 08:01:20 pm »
0

Could somebody explain the advantage of the "Roth" part of a Roth IRA to somebody not familiar with the US system?  As I understand it it means you get tax relief on withdrawals rather than contributions, which is the opposite of what you want if you expect to earn less in retirement than when working.

The tax relief you get isn't based on how much you are earning at the time you get the tax relief, which is what it sounds like you are thinking. The tax relief you get is based on the amount of money in the roth account.  For a simple example:

You put $1000 in a traditional (non-Roth) account. If you are normally taxed at 10%, then you pay $100 less tax than you would have otherwise this year. Then in 40 years, you retire. The account has now grown to $3000. If tax rates haven't changed, then you have to pay $300 when you take the money out. You saved $100 earlier, so your net tax you paid was $200.

Now, you put that same $1000 in a Roth account. You are normally taxed at 10%, so you paid that $100 as part of your normal income tax, or however you earned the $1000 in the first place. You don't pay (or get) anything as a result of actually putting the money in the account. In 40 years, the account has grown to $3000. Because it's Roth, you pay no tax at all, and the full $3000 is yours. The total tax you paid was $0 (yes, you paid $100, but that would have been paid anyway, if you hadn't opened any account).

That's if tax rates don't change. If tax rates had gone up in those 40 years, then the Roth would have saved even more money. If they had gone down, the Roth would have saved less, or possibly even costed money.

Another situation where Roth isn't the best... You have exactly $1000 that you can afford to invest this year. So you can either put $1000 in a Roth... or, because of the tax savings, you can afford to put $1100 in a non-Roth, because you'll get $100 back. So the instant tax savings may enable you to invest more in the first place. But if you can afford to put in the maximum allowed amount either way, then Roth will be better almost all the time.
« Last Edit: December 17, 2014, 08:23:09 pm by GendoIkari »
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theory

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Re: Financial Management
« Reply #22 on: December 17, 2014, 08:51:30 pm »
+1

Roth IRA has another advantage insofar as its contribution limits are more relaxed (and nonexistent if you take advantage of the Backdoor Roth maneuver), whereas traditional deductible IRA's have much stricter contribution limits.
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Re: Financial Management
« Reply #23 on: December 18, 2014, 10:31:09 am »
+2

Could somebody explain the advantage of the "Roth" part of a Roth IRA to somebody not familiar with the US system?  As I understand it it means you get tax relief on withdrawals rather than contributions, which is the opposite of what you want if you expect to earn less in retirement than when working.

So, it's like a Hagar IRA, but you get some advantages.  With Roth, you get a little more energy, usually in the form of wild, upfront antics.  Many feel this helps performance and believe to see significant Jumps.  On the other hand, they are exposed to some crashes as well, often performing in a very volatile manner.  Some believe Roth leads to conflict within its constituents.  Hagar IRAs are less volatile, often performing at a steady and more demurely successful manner. 

People often debate which one is better, but ultimately it comes down to a matter of preference. Do you like wild excitement with big highs and big lows, unpredictable but able to strike gold?  Or do you like solid and predictable performance? 

One thing, though, you cannot combine them, because they do not work together at all.
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GendoIkari

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Re: Financial Management
« Reply #24 on: December 18, 2014, 11:23:19 am »
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Roth IRA has another advantage insofar as its contribution limits are more relaxed (and nonexistent if you take advantage of the Backdoor Roth maneuver), whereas traditional deductible IRA's have much stricter contribution limits.

I'm confused; isn't the limit on donating to an IRA exactly the same no matter which kind? I know that there's no limit to rolling over a traditional to a Roth; but you can only put $5000 a year into an IRA, whether that money is put into Roth or Traditional or a mix of both. At least that's what irs.gov says...
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