Self Funded 401K Versus Stock Market/ Index Fund

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Self Funded 401K Versus Stock Market/ Index Fund

Post by chasebrooklyn1985 »

I'm new to FI, don't have a lot of money yet, but it is growing a lot faster now that I'm so much more frugal.

Considering that I'm already pretty late to the game of FI, I'm in my late 30's, I'm trying to decide if it's worth it for me to start a self-funded 401K plan or just start putting my savings in to the stock market via index funds. I am self employed and operate my business through a LLC.

Besides the deferred tax, are there any advantages to the 401K? I'm worried that if I put it all in a 401K that I will miss a future investment opportunity, should one arise. And what if I want to start drawing on it before I turn 59? I don't want to lose money.

Any suggestions are helpful. Thanks.

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Re: Self Funded 401K Versus Stock Market/ Index Fund

Post by jacob »

This is a noob question and so you have lots of important stuff to learn before you do anything. Better spend a year (or at least until tax day 2020 minus a few weeks) learning before doing anything rash. IOW, it's better to do the right thing than to do things right. Currently we and possibly you(?) don't have enough information to know what the right thing is. It all depends on your somewhat detailed plans.

The first thing to realize is that solo 401k, SEP IRAs, IRAs... and whether they be of the Roth or the traditional variety is not the opposite of "index funds. The former is the tax structure. The latter is the investment. Two different things! Not apples and oranges different; more like apples and plywood different. One is for eating, the other is for building boxes to hold the produce.

For example, you can open a solo 401k at Vanguard and join to the total stock market cult by putting 100% VTSAX into your 401k.

Picking the right tax structure is in my opinion way more important that your investment strategy!!

Some things for you to research in order to acquire a basic foundation to make an informed choice:
What is the difference between a Roth IRA and an IRA? (A Roth {X} and an {X}?)
When can one start making withdrawals from an IRA?
What's the difference between an IRA, a SEP IRA, and a Solo 401(k)?
What's rule 72(t)?
What's a Roth conversion ladder?
What's a backdoor Roth? (Only relevant if you have a six-fig+ income)
What's the difference between a taxable account and a tax-deferred one?
What's the marginal taxrate and how do you expect yours to change between now and the rest of your life?
How does social security work and what's your expected payout?

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