Mutual Funds, Roth IRA, Savings Bonds, TSP, and Annuities... What else can I do?

You haven't really talked about what you plan on doing with all the money yet. For retirement alone, you may be on the right track, especially if you are planning on retiring early (at only 24, 65+ is an eternity away). But you might want to build up some substantial non-retirement savings before you tie any money up in an annuity (even a low-cost one like we've discussed here before). Have you considered saving for a house? An account for starting to build up savings for future kids college?

If you're maxing out the TSP *and* a Roth, you're reasonably on your way to saving for retirement and might consider modifying that plan when your income goes up (ie. you won't be able to do the Roth anymore).

But while there may be some reasonable arguments for annuities, I'd review other goals and build up some significant taxable savings/investments before looking at the annuities. If you're concerned about ongoing taxation, a low-turnover tax-efficient index or even a fund which is just more careful about realizing gains, can do quite a bit better in the long run than an annuity which has higher expenses *and* will have all the gains taxed as income rather than cap-gains when they finally do come out.

If you already had very substantial taxable investments, and owned a house, and had a large emergency fund, and money put away or savings building for your next car *and* for some other things (again, future kid expenses, etc),

*then* would I say it's time to look at the annuities.

There may be a place for them in some portfolios, but I'd say that it's relatively uncommon.

[note re: terminology -- we are, I hope, talking about variable deferred annuities. Bear in mind that there are both variable and fixed annuities and there are deferred and immediate annuities. And I assume we are also talking about them without all the expensive riders that are often available and which push expenses up enormously.]

First of all, I want to commend you on your situation--you are earning excellent money for a 24 year old and have an solid financial plan so far, unlike most young people. I wouldn't renew those savings bonds when they're mature, however, there are better places to put your money. Instead of an annuity, why don't you research some of the index funds at Vanguard or Fidelity? They also have some retirement funds. The loads are much less than an annuity would have. I'm sure someone else on here can point you in the right direction in regards to these funds. SandyBeth

Taxable accounts Savings or money market accounts I-bonds (if you are holding bonds to maturity, have you considered I- bonds instead?)

529 accounts for kids education Real estate Life insurance

I would consider all of these (in any order) before an annuity. Annuities are not bad, if used properly. Consider investing in a taxable account (no limit to a taxable account either), then buying an immediate annuity when you need the income.

In a taxable account you could do any of the following (some of these already suggested):

1) hold an index fund (total market index) which has low turnover and low yield. 2) hold a tax efficient managed fund 3) hold tax efficient muni bonds 4) hold dividend paying stocks to take advantage of lower tax rates on dividends 5) Use a balanced fund until you have enough saved up for a house

The principle of "tax diverisification" says the same thing as asset diversificiation - dont put all investments in the same tax vehicle, because tax laws could change in the future and you become overloaded with a disadvantaged investment.

In you case an annuity is TOO similar to a IRA/401K - it defers earnings to be taxed at regular income rates in retirement. You can pretty much achieve the same object by investing in stock index fund - which accrues most of its taxes only when sold. But its taxed at capital gains rates which is currently less than regular income tax rates. The advatange of annuity is you sell and buy a different investment without getting a tax hit. There is a change stocks could enter a long-time slump like 1930-1945 and 1966-1982 and not go anywhere (but you wouldnt have gains to tax then).

It's not straight income, but the modified adjusted gross income. In particular, that still allows keeping the reduciton in AGI for 401(k) contributions.

Here's some useful information:

So contributions to the 401(k) can help make you able to contribute to a Roth if you're up against the limit.

Brian

His contributions to the Federal Thrift Savings Plan ("TSP") for this computation work just like a 401k.

If his nominal pay is $90k, his AGI may be substantially lower than that after accounting for the TSP (and maybe some other things). The 2007 and 2008 max contributions to the TSP are $15,500 and I don't think there's a percentage limit (ie. it's not limited to 15% of your pay or such - which for our $90k earner would bring it down to $13.5k and likely lower his agi, barring anything else, to $76.5k)

That's a huge difference. Self-employed folks who manage to put a lot into a SEP-IRA may also get their MAGI significantly lowered thereby, too (that 25% of comp is often a nice chunk, along with that $45k (07) limit).

Congratulations on your good work so far! Do you own your own home? If not, begin to think about getting one as soon as you can. In the future you might also consider buying a vacation home or cottage, or even rental property. The returns from long-term holdings of real estate can be large. Another suggestion: Investigate dividend reinvestment plans (DRIPs) in individual stocks. These have many good features. Of course, all this assumes that you will continue regular contributions to your Roth IRA and company retirement plan. Do not put all your eggs in one basket! If I were you, I would forget about annuities. Good luck.

My main concern is the OP's income may be rising rapidly. I'm thinking s/he may be a freshly minted MD and his/her income may rise quite rapidly in the next few years. Meaning s/he may not be able to max out the Roth that much longer. Thus s/he should continue maxing out the Roth in particular.

Of course clarifying it is MAGI we're talking about here and how TSP and/or 401(k) contributions (and student loan interest and more) lower this is fine. I just would not want my main point on Roths to get lost.

Not even Vanguard can beat the TSP's amazing low fees. All of the funds charge a measly *three* basis points. That's lower than even the four-and-a-half basis points Vanguard charges on institutional shares of it's total stock market index fund (VITNX). And you don't have to meet the $100 million minimum. ;-) I concur that the Roth might not be smart given that the original poster's income might restrict future contributions. Instead I would recommend funding the TSP account to the IRS elective deferral limit. You can build a very nice portfolio using the TSP funds, especially the G Fund which has a duration like a money market fund but a yield like a long term bond fund. And the share price never declines. Sweet!

Finally, consider using the flexible savings account to pay for certain health care or dependent care expenses using pre-tax money. You can learn more here:

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