Author Topic: 401k question from a Newbie  (Read 9119 times)

hypatia

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401k question from a Newbie
« on: March 15, 2015, 01:58:22 PM »
I just opened an LC account account and transferred $2k and bought $1k in notes. Now that I've looked at how much more complicated my taxes will be next year, I wish that I'd made my investment in an IRA instead.
Does anyone know if it's possible to convert an existing account into an IRA account? 
Or, would I have to liquidate my investment first, which would mean that it's not worth it?

I see that LC uses an outside firm to manage "self directed" IRAs.  It looks like there's a $100 annual fee which seems pretty high to me (at least for my small time dabbling). It looks like I should to fully commit to P2P, to make that flat fee worth it.

Thanks, for sharing your experience with a newb.

bobeubanks

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Re: 401k question from a Newbie
« Reply #1 on: March 15, 2015, 02:28:11 PM »
If you aren't trading on folio, the additional work needed for taxes is about 2 minutes.

Fred93

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Re: 401k question from a Newbie
« Reply #2 on: March 15, 2015, 03:08:02 PM »
Tax isn't really complicated.  You report some interest and some capital losses (from defaulted loans).

rawraw

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Re: 401k question from a Newbie
« Reply #3 on: March 15, 2015, 06:43:55 PM »
Yea, the taxes aren't bad.  It's the sales on Folio which are a pain, but you can just mail the detailed listing to the IRS with the tax return or with a certain schedule if you e-file

storm

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Re: 401k question from a Newbie
« Reply #4 on: March 15, 2015, 07:16:04 PM »
In the early years, LC provided little to no information about taxes, but now LC spells it out and adds it up for you.  If you want an IRA anyway, I'm pretty sure you'll have to create a new account with a different e-mail address and mail a check to the IRA custodian (a third-party that manages the IRA).  The $100 fee is waived if you invest $10k within a year of opening the account.

Kombinator

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Re: 401k question from a Newbie
« Reply #5 on: March 16, 2015, 10:25:17 AM »
Can you open a 401K on LC, I was under the impression that they just did IRA accounts...?

thezfunk

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Re: 401k question from a Newbie
« Reply #6 on: March 16, 2015, 01:27:11 PM »
In the early years, LC provided little to no information about taxes, but now LC spells it out and adds it up for you.  If you want an IRA anyway, I'm pretty sure you'll have to create a new account with a different e-mail address and mail a check to the IRA custodian (a third-party that manages the IRA).  The $100 fee is waived if you invest $10k within a year of opening the account.

I thought they waived the fee if you had 5k in the first year and a total of 10k by your second year.  At least, that's how it worked with me.

brycemason

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Re: 401k question from a Newbie
« Reply #7 on: March 16, 2015, 04:49:54 PM »
There are other reasons to put it in an IRA. If you generate capital losses over 3k per year, and do not have any gains to offset the excess, you're banking losses for the future. It's not tax efficient.

bobeubanks

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Re: 401k question from a Newbie
« Reply #8 on: March 16, 2015, 05:50:53 PM »
There are other reasons to put it in an IRA. If you generate capital losses over 3k per year, and do not have any gains to offset the excess, you're banking losses for the future. It's not tax efficient.

While I agree than an IRA is better for most people for LC account, I disagree with the above specific reasoning: Losses in a taxable account are more tax efficient than losses in a non-taxable account.

Fred

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Re: 401k question from a Newbie
« Reply #9 on: March 16, 2015, 11:45:09 PM »
Can you open a 401K on LC, I was under the impression that they just did IRA accounts...?

https://www.lendingclub.com/sdIRA/registerSDIRA.action
Quote
Open your IRA with a 401(k) Rollover, IRA Transfer or ROTH Conversion. Traditional, Roth, SEP and Simple IRA accounts are all available at Lending Club.

brycemason

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Re: 401k question from a Newbie
« Reply #10 on: March 17, 2015, 09:28:59 AM »
There are other reasons to put it in an IRA. If you generate capital losses over 3k per year, and do not have any gains to offset the excess, you're banking losses for the future. It's not tax efficient.

While I agree than an IRA is better for most people for LC account, I disagree with the above specific reasoning: Losses in a taxable account are more tax efficient than losses in a non-taxable account.

I'd like to understand why you think that. If I have $20k interest earned and $6k capital losses, I pay $20*0.37 tax (CA + Fed) = $7.4k. I can only write off $3k of loss, reducing my tax to $6.3k. Thus, just under 50% of my $14k account gain is eaten by taxes, unless I can somehow write off the dangling $3k. If you have other capital gains, that's a great way to offset them. But otherwise, p2p lending generating capital losses year after year, much of your gains are tied up in carry forward losses until you can realize them.

On the other hand, in an IRA, your account balance rises by $14k and in the example you'd pay your marginal tax rate later on the increase, not 50%.

bobeubanks

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Re: 401k question from a Newbie
« Reply #11 on: March 17, 2015, 11:03:14 AM »
I'd like to understand why you think that. If I have $20k interest earned and $6k capital losses, I pay $20*0.37 tax (CA + Fed) = $7.4k. I can only write off $3k of loss, reducing my tax to $6.3k. Thus, just under 50% of my $14k account gain is eaten by taxes, unless I can somehow write off the dangling $3k. If you have other capital gains, that's a great way to offset them. But otherwise, p2p lending generating capital losses year after year, much of your gains are tied up in carry forward losses until you can realize them.

On the other hand, in an IRA, your account balance rises by $14k and in the example you'd pay your marginal tax rate later on the increase, not 50%.

I agree with that (mostly*), but that is not at all what you wrote. You wrote:

There are other reasons to put it in an IRA. If you generate capital losses over 3k per year, and do not have any gains to offset the excess, you're banking losses for the future. It's not tax efficient.

The tax efficiency of an IRA derives from delayed (or in the case of Roth - complete lack of) taxation of interest. But above you only were writing about capital losses. The inability to write off losses in an IRA makes an IRA LESS tax efficient for capital losses than a taxable account. In (an admittedly contrived) example where you are quite unlucky and receive no or little interest and loss all or most of your capital, you would have been better off in a taxable account.

*while you acknowledge that you eventually get to use the banked losses, you still ignore that in your comparison of 50% to 37%. In reality you, assuming your marginal rate doesn't change (and ignoring the potential of those losses offsetting long term capital gains instead of short term gains or income), you eventually pay the same rate and have only actually lost out on opportunity cost. Indeed, if your marginal rate goes up, you could even be better off being in a taxable account.

brycemason

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Re: 401k question from a Newbie
« Reply #12 on: March 17, 2015, 11:15:32 AM »
By tax efficiency, I mostly mean the following. The asset class is all jacked up because the gains are taxed as interest and the losses are taxed as capital. They don't cancel each other out, but in an IRA it doesn't matter. You're right that if you eventually use the losses up, you come out equal, but my counterargument is that the unfortunate nature of this asset class is that you're always going to be generating losses--it's just in its nature. So if you're in a taxable account you better find a good way to generate productive capital gains over the long run if you want any sort of sizable account and tax efficiency. That, or just participate in this asset class in an IRA where types of gains and losses don't have tax consequences.

bobeubanks

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Re: 401k question from a Newbie
« Reply #13 on: March 17, 2015, 01:05:45 PM »
That I agree with. And a Roth is much preferable if you are able to use one.

thezfunk

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Re: 401k question from a Newbie
« Reply #14 on: March 17, 2015, 04:05:57 PM »
So, with what both of you just said which is better for what I am think, taxable or nontaxable...?

I was intrigued with Anil's post about buying distressed notes.  So, if i was to employ a strategy, apart for my normal 'P2P picks is awesome' strategy, where I am buying every distressed note I can find under $2, which would be better for me, taxable or untaxable?