(Based on what I have seen financial savvy people doing and makes sense to me. Disclaimer: These are my opinions.)
- Should a person contribute to pre-tax 401K?
Only if the company has a matching policy, else wise, its money trapped till the person reaches retirement age. - Should a person contribute to post-tax 401K?
Only if the company has a matching policy, else wise, its money trapped till the person reaches retirement age. - What about pre-tax 401K vs post-tax 401K?
Post-tax 401K is better than pre-tax only if- The person decides to immediately convert to Roth IRA (since in Roth earnings will be tax-free while in post-tax, they are tax-deferred, this depends on whether the employee permits it or not.
- If the employer does not permit Roth conversion but still the person is either on a really low tax rate for that year (eg. not working for a full year or had added dependents to the family etc.) or expects the future tax rates to be much higher.
- What about traditional IRA?
Same as pre-tax 401K, contributions are tax-deductible (if the income is below certain limits which are relatively low), earnings are tax-deferred either ways.
The only case where this makes sense is to contribute and then immediately convert to Roth IRA where earnings will grow tax-free. This technique is popular enough to acquire a name of its own “Backdoor Roth IRA“. - What about Indexed Universal Life Insurance?
The solution of guaranteed no-money-loss in a single year sounds really promising but its stupid to be told that I have to pay interest to borrow my own money and will be charged a premium for someone else to make money off of the money, not to ignore the fact that this insurers itself can be at the brink of bankruptcy. - What about tax efficiency?
Long-term stock gains and qualified dividends receive favorable tax treatment, that is, lower tax rates.
Bonds, interest from bonds, short-term stocks, interest from bank accounts(yeah that pesky tenth of a penny) are treated as regular income, so, these things should be better held in either tax-deferred account or tax-free (retirement) accounts.
International stocks should be held in taxable (normal) account since they are taxed by foreign countries and one can receive a foreign tax credit by holding them in a taxable account. All other stocks should be held first in taxable and then left over in tax-free and then tax-deferred account.
Do note that stocks held in a taxable account will be taxed at a lower rate than in tax-deferred account where they are taxed as normal income upon retirement.
More details on Bogleheads. - What about tax loss harvesting?
Complicated topic, I will write a blog post some other day. - What would be a basic allocation?
Go for Bogleheads three fund portfolio.
Invest in three things- Total US stock market (VTI or VTSAX)
- Total world stock market excluding US (VEU or VXUS or VFWIX)
- Total bond market (BND) ~ %age allocation should be almost the person’s age (conservative rule – reduce this %age to be more aggressive)
Split between (1) and (2) should be roughly 80:20 or 70:30.
- What about rebalancing?
As the person invests more, s/he should put more money in a manner to ensure that the above allocation ratio is maintained. - Should the person go all in or slowly move money into the market (Dollar cost averaging)?
Dollar cost averaging outperformsone-timee all-in in only 33% of cases (Vanguard study) but I think it makes one feel psychologically safer, IMHO, first timers should go for DCA. - What about exotic stuff like commodities, precious metals and rare earth metals?
The only time people think about buying these is when everyone else is talking about them, these have already peaked in prices and its an even worse time to buy them – paraphrased from The only investment guide you will ever need.
- What about P2P lending?
Income from P2P lending is considered regular income and losses are not tax-deductible, therefore, from a financial perspective, it makes sense to invest only via Roth IRA. Apart from that, I believe its too much hassle in terms of time (see my previous post on Peer to Peer lending).