Low Cost Index Funds vs. Active Management?

[MadisonvilleVol]

This might be a stupid question, but all the investing I've done has been through employer provided 401K's and now I'm going to be self-employed and going through a Roth IRA....

With the VSMAX Small Cap Index I'm seeing the minimum investment is $3k, but that's just to get in, right? Once I'm in, I don't have to come up with $3K every time I add to the fund, I can add $500/month or whatever, right?

If you are less than 50, the maximum amount per year that you can contribute to an IRA (Roth or traditional) is 5,500 (6,500 if you are older than that). You could contribute $0 one year and the max of 5,500 the next if you so wish.

 

[1972 Grad]

This might be a stupid question, but all the investing I've done has been through employer provided 401K's and now I'm going to be self-employed and going through a Roth IRA....

With the VSMAX Small Cap Index I'm seeing the minimum investment is $3k, but that's just to get in, right? Once I'm in, I don't have to come up with $3K every time I add to the fund, I can add $500/month or whatever, right?

No question is dumb if you don't know the answer. The minimum initial investment for VSMAX is $3,000. The minimum additional investment is $1.00. The fee charged is .18% of total invested.

The Admiral Shares version is NAESX, and it has a minimum initial of $10,000 with $1 additional. The fee for it is .06%. This is my opinion, and others may disagree, but I wouldn't put it all in a Small Cap fund. It is more risky than a Total Stock Market fund or S&P 500 fund. You could put part in each, but it's your decision.

 

[DancingOutlaw]

This might be a stupid question, but all the investing I've done has been through employer provided 401K's and now I'm going to be self-employed and going through a Roth IRA....

With the VSMAX Small Cap Index I'm seeing the minimum investment is $3k, but that's just to get in, right? Once I'm in, I don't have to come up with $3K every time I add to the fund, I can add $500/month or whatever, right?

Are you setting up a business or just becoming a contractor? If it’s an actual sole proprietorship look at SEP IRA’s. You are not going to be able build much of a tax advantaged nest egg at $5500 a year.

 

[n_huffhines]

Are you setting up a business or just becoming a contractor? If it’s an actual sole proprietorship look at SEP IRA’s. You are not going to be able build much of a tax advantaged nest egg at $5500 a year.

It's an LLC, but yeah, it's just contract work.

 

[n_huffhines]

No question is dumb if you don't know the answer. The minimum initial investment for VSMAX is $3,000. The minimum additional investment is $1.00. The fee charged is .18% of total invested.

The Admiral Shares version is NAESX, and it has a minimum initial of $10,000 with $1 additional. The fee for it is .06%. This is my opinion, and others may disagree, but I wouldn't put it all in a Small Cap fund. It is more risky than a Total Stock Market fund or S&P 500 fund. You could put part in each, but it's your decision.

This is helpful.

 

[n_huffhines]

If you are less than 50, the maximum amount per year that you can contribute to an IRA (Roth or traditional) is 5,500 (6,500 if you are older than that). You could contribute $0 one year and the max of 5,500 the next if you so wish.

Didn't know that. So what this essentially means for me is only $5,500 is tax deferred, and anything I invest on top of that will be subject to 2018 taxes?

 

[1972 Grad]

Didn't know that. So what this essentially means for me is only $5,500 is tax deferred, and anything I invest on top of that will be subject to 2018 taxes?

Anything you invest on top of that would have to be in a separate, non IRA account. I think that a SEP-IRA has a limit of 25% of profits of the business for the owner with a $54 or 55,000 investment limit per year. It seems to me that you have to provide the SEP-IRA for employees also (and make contributions), but I could be wrong. I am not a SEP-IRA expert.

 

[MadisonvilleVol]

Didn't know that. So what this essentially means for me is only $5,500 is tax deferred, and anything I invest on top of that will be subject to 2018 taxes?

Roth’s aren’t tax deferred. They are funded with after tax dollars but provides tax free growth and distributions. Traditional IRA’s allows a tax deduction for the tax year the contribution is made; however, when you begin taking distributions, you pay tax on the withdrawals.

If you expect to be in a higher tax bracket when you retire versus where you are right now, the Roth is generally the way to go. Pay taxes now in lower bracket on a Roth vs paying taxes when you begin taking withdrawals with a Traditional.

Just a few things to keep in mind: If you make to much annually, you might not qualify for a Roth. Think it’s 118,000 if you are single and 185,000 if you are married. Also, with a Traditional, you have to begin taking distributions at 70.5 years old. Roth does not require you to take distributions if you don’t need them.

 

[TheColdVolTruth]

Didn't know that. So what this essentially means for me is only $5,500 is tax deferred, and anything I invest on top of that will be subject to 2018 taxes?

Have you thought about a self 401k? This would allow your company to match your contribution rate up to around 18k and maximize your total contribution to 23.5k.

https://www.irs.gov/retirement-plans/one-participant-401k-plans

 

[Thunder Good-Oil]

Roth’s aren’t tax deferred. They are funded with after tax dollars but provides tax free growth and distributions. Traditional IRA’s allows a tax deduction for the tax year the contribution is made; however, when you begin taking distributions, you pay tax on the gains.

You probably just have a typo... with the Traditional IRA, you pay taxes on all of the withdrawals, not just the gains.

 

[MadisonvilleVol]

You probably just have a typo... with the Traditional IRA, you pay taxes on all of the withdrawals, not just the gains.

👍. Good catch. Corrected now. Thank you.