What long-term, general, investing strategies should I consider if my company doesn't offer a 401(k)?
I'm 27 years old, and I have a 2.5 year emergency fund and I am making good money with raises each year. My company doesn't have a 401(k), so I've been maxing out a Roth IRA on my own into a mutual fund for the past five years. I own a two family rental property that I've completely renovated and paid off and it is now profitable every month. I'm looking for another outlet in which to invest $15,000-$20,000 a year. I don't like real estate renting. Instead of buying another property, should I open a self 401(k) and max that out? What long-term, general, investing strategies should I consider based on my situation?
Solo 401(k) plans are only available to business owners with a spouse and single business owners with no employees plans – like private practice doctors, CPAs and small family businesses. You mentioned you work for a company, so this definition might not match your employment situation. If so, you’re unfortunately ineligible for the solo 401(k) plan.
Separate from the Roth IRA, you may consider investing a portion of the sheltered funds into a traditional IRA - this will be dependant on your current and projected future tax brackets. A CPA can help determine what the right mix is between Roth & traditional IRAs. After maxing out the IRA side of the savings, you should consider saving in a brokerage account. Depending on your appetite for risk and for growth, you have several options available. If you’re interested in significant growth on your money, it might make sense for you to start investing your savings with a robo-advisor so you can develop a structured plan for investing, that way you can sit back and stay on track for your long-term investment goals.
Congratulations on your fantastic financial position at age 27! I like the self-employed 401(k) for your situation. You can put up to $19,000 as a contribution in 2019 plus make a profit-sharing contribution to yourself based on your net business income. The total can be up to $56,000 for 2019.
Maxing out your ROTH IRA is a great start! You aren’t able to open a 401(k) on your own, unless you have self-employment income, but it sounds like you potentially could. You mention you own a rental property. Do you manage that through an LLC you’ve created? If so, there are some options, like a SEP IRA that may be an option for you. If you don’t have a company created for your rental property and no self-employment income, a taxable account is your best option. I would encourage you to make sure your account is well diversified based on when it’s your goal to retire. Typically, ETFs and mutual funds have the lowest fees for those who are choosing to do it themselves, but you’ll need to invest in a variety of them in order to be properly diversified. Please feel free to reach out if you have any questions about how to do so.
Unfortunately, you can't open a Solo 401(k) unless you have self-employment income. If you're already maxing out your Roth IRA, have an emergency fund in place, and looking to invest additional funds every year you could open a taxable brokerage account. A brokerage account won't have any tax benefits associated with it, like retirement accounts do. However, you will be able to access the funds prior to 591/2 without paying a penalty.
Depending upon how your cash flow works, you could automatically transfer a set amount of cash to the taxable account every month to be invested. This strategy is called dollar cost averaging. It helps keep emotion out of the equation when it comes to buying into the market. Also, you'll buy more shares when prices are low and fewer shares when prices are high.
As with any investment, be sure to diversify. Whether you're using mutual funds, index, funds or ETF's. You should consider ETF's for their low cost but also for their tax efficiency. Mutual funds can "kick out" capital gains without investors knowing which produces a taxable event in a brokerage account. ETF's allow you to control when you pay taxes on capital gains.
Congratulations on your great financial shape!
To create your own 401k plan, you'd need to have self-employment income. It looks like you are an employee, so you wouldn't be able to create your own 401k.
I'd recommend that you consider investing in a taxable brokerage account. The preferencial tax rates given to long-term capital gains and qualified dividends make this a viable option. Also, you'd have access to your funds before the typical retirement age (although you may have capital gains if you sold an appreciated security). Make sure you keep asset LOCATION in mind (as well as asset ALLOCATION) if you open a taxable brokerage account. Position tax efficient assets (such as low-cost index funds) in your brokerage account. Your IRA's should hold investments such as REIT's, bonds, BDC's, etc. that generate ordinary income (if held in a brokerage account).
Keep up the good work!