Author Topic: Where to invest $2-3K per month?  (Read 5676 times)

SaveME

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Where to invest $2-3K per month?
« on: February 27, 2017, 09:05:33 PM »
Topic Title: How should I invest my take home pay?

Life Situation: Singe, 37, Male, no dependents, living in Los Angeles (Culver City, CA)

Gross Salary/Deductions/Taxes:

Gross pay   $95,000/year
Taxes
Federal        $16,797
State           $5,823
FICA            $7,268
Total            $29,888
Income After Taxes  $65,112

Individual amounts of each Pre-tax deductions:
401K – Max $15.5k/year, no employer matching contribution.

Qualified Dividends & Long Term Capital Gains: IRA and Vanguard mutual fund dividends and capital gains are auto-reinvested

Current monthly expenses:
Rent    $1,150
Gas     $130
TV       $27
Alcohol & Bars  $50
Coffee Shops    $25
Fast Food          $50
Groceries          $200
Restaurants      $200
Internet            $35
Water & Power  $35
Personal care    $70
Misc.                 $35
Total expenses  $2,000

Assets:
Vanguard Funds  $67k
Traditional IRA     $130k
Checking              $8K
Car                       $10k
Total Assess    $215,000

Liabilities:  $0, excellent credit.

Specific Question(s): My liquid investments currently total about $67K in a Vanguard S&P 500 mutual fund. I have about $130K in a traditional IRA (active since 3/07). My after-tax take home pay per month is approx. $5,200. After monthly expenses, I have at most about $3,000-$3,200. How would you recommend investing that leftover money? A couple of choices I have so far are either adding to the $67K in the Vanguard S&P 500 mutual fund or contributing into my company’s 401K plan (no matching employer contribution), up to $15,500 in 2017. I love the idea of investing in a condo or SFH but LA is ridiculously expensive and I tend to switch jobs and cities in LA often.

While I anticipate my income to increase over time in my digital marketing career, this is where I’m at now, and hey I’m still in the top 1% of the world right?! I consider myself fortunate. I have a hard time grasping the idea of saving 25x my yearly expenses or 600K. I believe in treating my future self well and having some savings is better than none. I’m looking for some genuine advice in order to help change my current behavior for the better. Thanks in advance!
« Last Edit: February 28, 2017, 02:26:07 PM by SaveME »

MDM

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Re: How should I invest my take home pay?
« Reply #1 on: February 27, 2017, 09:19:53 PM »
Quick question: at that (M)AGI, the tIRA contribution is non-deductible.  Have you had a recent, significant, pay increase or...?

See http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits.

Mother Fussbudget

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Re: Where to invest $2-3K per month?
« Reply #2 on: February 28, 2017, 04:51:24 PM »
There's a sticky topic on investing....
Investment Order

SaveME

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Re: Where to invest $2-3K per month?
« Reply #3 on: February 28, 2017, 08:01:57 PM »
MDM, good catch on the tIRA being non-tax deductible, I remember seeing that notice when filing on TurboTax. I've updated the AGI figure.

SaveME

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Re: Where to invest $2-3K per month?
« Reply #4 on: February 28, 2017, 08:03:22 PM »
Mother Fussbudget -  appreciate you sharing the previous post, thank you.

MDM

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Re: Where to invest $2-3K per month?
« Reply #5 on: February 28, 2017, 08:08:54 PM »
MDM, good catch on the tIRA being non-tax deductible, I remember seeing that notice when filing on TurboTax. I've updated the AGI figure.

More importantly - have you recharacterized that IRA from traditional to Roth?

zolotiyeruki

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Re: Where to invest $2-3K per month?
« Reply #6 on: March 01, 2017, 10:27:33 AM »
I'd first focus on reducing MAGI (via 401k, HSA, anything else) to the point where you could then deduct IRA contributions, then max out the IRA.

After that, unless your spending in retirement will put you in the 25% tax bracket, I prefer taxable accounts over the Roth.  The reason being that if your retirement income is within the 15% tax bracket, Roth withdrawals and long-term capital gains are taxed the same on the federal level (i.e. 0%), and taxable accounts aren't penalized if you withdraw before 59.5 years.

You're doing an admirable job of living well below your means!

NoStacheOhio

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Re: Where to invest $2-3K per month?
« Reply #7 on: March 01, 2017, 10:31:49 AM »
The contribution limit for 2017 is $18,000, not $15,500, unless you have some wacky plan rules about how much you can contribute as a percentage of your salary?

But yeah, once you've maxed out tax-advantaged space, it's taxable investing.

SaveME

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Re: Where to invest $2-3K per month?
« Reply #8 on: March 01, 2017, 05:49:02 PM »
Quote
More importantly - have you recharacterized that IRA from traditional to Roth?

MDM - A few years ago I thought it would be a good idea to convert my tIRA to a Roth IRA. When tax time came around I had a huge bill so I recharacterized it back to a tIRA. Why do you ask? My thought is that I will be at a lower tax bracket when I retire so I would rather pay taxes then vs. now.

MDM

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Re: Where to invest $2-3K per month?
« Reply #9 on: March 01, 2017, 06:41:49 PM »
MDM, good catch on the tIRA being non-tax deductible, I remember seeing that notice when filing on TurboTax. I've updated the AGI figure.
More importantly - have you recharacterized that IRA from traditional to Roth?
MDM - A few years ago I thought it would be a good idea to convert my tIRA to a Roth IRA. When tax time came around I had a huge bill so I recharacterized it back to a tIRA. Why do you ask? My thought is that I will be at a lower tax bracket when I retire so I would rather pay taxes then vs. now.
Because if this is a non-deductible tIRA, you will still have to pay taxes on any earnings when you withdraw them.  Recharacterizing a non-deductible tIRA to a Roth keeps future earnings non-taxable when withdrawn.

SaveME

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Re: Where to invest $2-3K per month?
« Reply #10 on: March 03, 2017, 10:56:58 AM »
Hi zolotiyeruki,

Quote
I'd first focus on reducing MAGI (via 401k, HSA, anything else) to the point where you could then deduct IRA contributions, then max out the IRA.

After that, unless your spending in retirement will put you in the 25% tax bracket, I prefer taxable accounts over the Roth.  The reason being that if your retirement income is within the 15% tax bracket, Roth withdrawals and long-term capital gains are taxed the same on the federal level (i.e. 0%), and taxable accounts aren't penalized if you withdraw before 59.5 years.

You're doing an admirable job of living well below your means!

Besides $18,000 into a 401k, that still leaves my MAGI at $77,000 right? Any other suggestions, besides a health savings account, for bringing MAGI to $62,000 or less?

Also, if the MMM goal is to retire early, should we focus on building wealth in a non-retirement account where you can withdrawal money at any age?

Thank you for the support!

SaveME

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Re: Where to invest $2-3K per month?
« Reply #11 on: March 03, 2017, 11:06:25 AM »
Hi NoStacheOhio,

Quote
The contribution limit for 2017 is $18,000, not $15,500, unless you have some wacky plan rules about how much you can contribute as a percentage of your salary?

But yeah, once you've maxed out tax-advantaged space, it's taxable investing.

What's your take on building wealth in a non-retirement account vs. retirement in order to retire early, like MMM and YMOYL (your money or your life)? Seems like the sooner we can save 25x our yearly spending, the sooner we can retire.

Why wouldn't it make sense to put that $18,000 into a Vanguard index fund instead of a retirement account?

Thanks for your help!

SaveME

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Re: Where to invest $2-3K per month?
« Reply #12 on: March 03, 2017, 11:19:37 AM »
MDM,

Appreciate your follow ups here!

Quote
Because if this is a non-deductible tIRA, you will still have to pay taxes on any earnings when you withdraw them.  Recharacterizing a non-deductible tIRA to a Roth keeps future earnings non-taxable when withdrawn.

I will look into recharacterizing my non-deductible tIRA to a Roth IRA. Navigating the financial waters can be very confusing. If possible I want to prevent any avoidable disasters. Like a wise rapper once said, "Mo Money, Mo Problems!"

Thanks again.

zolotiyeruki

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Re: Where to invest $2-3K per month?
« Reply #13 on: March 03, 2017, 12:05:02 PM »
Hi zolotiyeruki,

Quote
I'd first focus on reducing MAGI (via 401k, HSA, anything else) to the point where you could then deduct IRA contributions, then max out the IRA.

After that, unless your spending in retirement will put you in the 25% tax bracket, I prefer taxable accounts over the Roth.  The reason being that if your retirement income is within the 15% tax bracket, Roth withdrawals and long-term capital gains are taxed the same on the federal level (i.e. 0%), and taxable accounts aren't penalized if you withdraw before 59.5 years.

You're doing an admirable job of living well below your means!
Besides $18,000 into a 401k, that still leaves my MAGI at $77,000 right? Any other suggestions, besides a health savings account, for bringing MAGI to $62,000 or less?

Also, if the MMM goal is to retire early, should we focus on building wealth in a non-retirement account where you can withdrawal money at any age?

Thank you for the support!
Yeah, tax-deferred retirement accounts (401k, 403b, 457, etc) and HSAs are the big ones.  For a single guy with a (relatively) high income, it may be hard to get down from $77k to $62k.  If you're not able to get your MAGI down that far, then you'll have to be satisfied with putting the rest into taxable accounts and/or a Roth IRA.

You can withdraw penalty-free from a traditional IRA by setting up a SEPP.  Basically, you withdraw a set percentage of the balance each year (about 2%), and that number is set in stone until you hit 59.5 years old, or you've been withdrawing that money for 5 years, whichever comes later.  If that's not enough to cover your expenses, you'll need to cover the balance using withdrawals from taxable accounts, Roth contributions, savings, etc.

NoStacheOhio

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Re: Where to invest $2-3K per month?
« Reply #14 on: March 03, 2017, 12:49:41 PM »
Hi NoStacheOhio,

Quote
The contribution limit for 2017 is $18,000, not $15,500, unless you have some wacky plan rules about how much you can contribute as a percentage of your salary?

But yeah, once you've maxed out tax-advantaged space, it's taxable investing.

What's your take on building wealth in a non-retirement account vs. retirement in order to retire early, like MMM and YMOYL (your money or your life)? Seems like the sooner we can save 25x our yearly spending, the sooner we can retire.

Why wouldn't it make sense to put that $18,000 into a Vanguard index fund instead of a retirement account?

Thanks for your help!

I seem to remember a direct comparison of taxable vs. tax-advantaged savings with regard to early withdrawals, but I couldn't tell you where it was.

This sort of gets at it: http://www.gocurrycracker.com/roth-sucks/

There's also this thread: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Mother Fussbudget

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Re: Where to invest $2-3K per month?
« Reply #15 on: March 07, 2017, 01:32:51 PM »

I seem to remember a direct comparison of taxable vs. tax-advantaged savings with regard to early withdrawals, but I couldn't tell you where it was.

This sort of gets at it: http://www.gocurrycracker.com/roth-sucks/

There's also this thread: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
I also recall the comparison of taxable vs tax-advantaged savings RE: early withdrawals.  I *think* it was MadFientist.  The closest article I could find to that thread was this one:  http://www.madfientist.com/how-to-access-retirement-funds-early/