Author Topic: Investing money set aside for taxes  (Read 7015 times)

Petruchio

  • 5 O'Clock Shadow
  • *
  • Posts: 41
Investing money set aside for taxes
« on: December 04, 2013, 07:55:29 PM »
Hey all,

I am 24 years old and starting my first real profession as a life insurance agent. I will be looking at 30K-50K for my first year (It is commission-based so there is an uncertainty factor, it can go as low as 18K or up into 100K+). I am not technically an employee of the company and so I will not have my income tax deducted each pay period from my paycheck (a first for me).

I was advised by my general agent to put 20% of each paycheck aside in a separate bank account and forget about its existence until tax time. I am risk tolerant and aggressive in my personal fiscal policy, and I believe placing those dollars to more productive, wealth building use until tax time will be better for my 'Stache.

Possible investments include CDs and treasury bonds, which are nice and safe. However I am unimpressed by the interest rates and I do not feel it is worth the additional effort to set that up. I am currently invested in VDAIX, Vanguard's dividend aristocrat index fund, which has a solid philosophy, but may fluctuate too much. What do you all think is a sensible investment for money set aside for taxes?

Petruchio

brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: Investing money set aside for taxes
« Reply #1 on: December 04, 2013, 08:03:46 PM »
An FDIC insured savings account is where this money should reside until tax time.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4313
  • Location: CT
Re: Investing money set aside for taxes
« Reply #2 on: December 04, 2013, 08:33:32 PM »
Investing your money which you need to pay short term bills (tax or otherwise) is a really great way to be burned and owe people money you no longer have. Investing is a long term process, not a get rich quick scheme.

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1145
Re: Investing money set aside for taxes
« Reply #3 on: December 05, 2013, 03:18:25 PM »
Reading this post gave me the shivers, as it dredged up a bad experience from my past.  2007-2008 I was playing the credit card arbitrage game - get a 0% cash advance, put the money in a high interest savings account, bank the interest.  Simple, worked well.

However, on average, can't I get a better return from the stock market?  I ended up using credit card balance transfers to help fund my margin loan for stocks.  I got badly burnt (thankfully I had the income to keep above water). However, I did loose tens of thousands of dollars in real money, and further tens of thousands in opportunity cost, as I didn't have the cash flow to buy stocks at the bottom of the GFC that I otherwise would have.  I got through, and still invest pretty aggressively.

However, your thoughts in your initial post seem like the same state of mind I had at that stage.  I'd be a little cautious about doing this again with money that is for an expense in the short term.

TLV

  • Bristles
  • ***
  • Posts: 492
  • Age: 31
  • Location: Bellevue, WA
Re: Investing money set aside for taxes
« Reply #4 on: December 05, 2013, 03:24:47 PM »
Since you're not an employee, are they not withholding FICA (social security/medicare) taxes either? Look into self-employment tax - another ~14% on top of your income tax, so 20% may not even be enough. Also make sure you factor in any state income tax.

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: Investing money set aside for taxes
« Reply #5 on: December 08, 2013, 01:23:41 PM »
It would be foolish to invest this money in anything other than an ultra-safe investment, regardless of interest rates. Don't get greedy.

Kenoryn

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: Ontario, Canada
Re: Investing money set aside for taxes
« Reply #6 on: December 12, 2013, 10:06:05 AM »
Not sure about the U.S., but here in Canada you can get 2-3% in high interest tax-free savings accounts, not through major banks but smaller credit unions. I would see if you can find something like that. Recognize that since it's only for a year, and the amount each year is relatively small (under $10K), you're not really looking at compounding interest here on large sums, so it's a fairly small amount to worry about. $10K at 2% would translate to $200 for a year. Of course, there's no reason to turn down $200 if you have the option. :) But I would not accept any risk for that very limited gain potential.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Investing money set aside for taxes
« Reply #7 on: December 12, 2013, 11:56:46 AM »
Also, keep in perspective we're not talking about a ton on money.

20% * $40k * 6mo avg holding time * 2% interest = $80.

You could take some more risk and shoot for 4% or even 8%, but it's not really going to move the needle too much in terms of getting to FI.

If you have a decent size emergency fund that can be used to cover your tax liability, then fine, invest away. Just realize you're effectively taking on some leverage (borrowing from the government) to achieve higher returns. Nothing wrong with it, you just have to be aware of what you're doing.

Khan

  • Pencil Stache
  • ****
  • Posts: 616
Re: Investing money set aside for taxes
« Reply #8 on: December 12, 2013, 12:07:00 PM »
Everyone here has done a good job explaining why that's a bad idea. I'd only add that investing money that should go to taxes is like investing on margin, incredibly dangerous and most likely stupid.

Isn't there a way to get Uncle Sam to take your money on a more frequent basis then once a year?

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Investing money set aside for taxes
« Reply #9 on: December 12, 2013, 12:47:23 PM »
Everyone here has done a good job explaining why that's a bad idea. I'd only add that investing money that should go to taxes is like investing on margin, incredibly dangerous and most likely stupid.

Isn't there a way to get Uncle Sam to take your money on a more frequent basis then once a year?

First, I would say that investing on margin isn't a stupid idea, it just has to be done correctly (low borrow cost, modest leverage relative to risk etc.)

Second, you're free to send your money to the IRS whenever you please. But there's no real incentive to unless you feel like you can't trust yourself with the money. Usually, if you've significantly underpaid your taxes by end of year, the government will demand that you send quarterly estimated taxes in the subsequent year (Uncle Sam doesn't love giving you that 0% loan).
« Last Edit: December 12, 2013, 12:48:57 PM by KingCoin »

aglassman

  • Stubble
  • **
  • Posts: 165
  • Age: 33
  • Location: Milwaukee, WI
    • Milwaukee Maven
Re: Investing money set aside for taxes
« Reply #10 on: December 12, 2013, 12:50:42 PM »
Through my bank's checking account, I get about 1.3% interest per month on up to 15k.  This comes out to about 20 bucks a month.  Nothing wrong with that!  There are some stipulations such as I need at least 10 transactions charged as credit on the credit/debit card per month, and setup direct deposit. 

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Investing money set aside for taxes
« Reply #11 on: December 12, 2013, 01:48:32 PM »
I agree with the sentiments expressed above. Don't even think about investing money in the stock market that you will need in the next 3 years (some people say 5 years!). Equity risk is very real. It just doesn't seem like it after several years of a bull market.

notmyhand

  • 5 O'Clock Shadow
  • *
  • Posts: 58
Re: Investing money set aside for taxes
« Reply #12 on: December 13, 2013, 07:26:17 PM »
If you are in the US, you will have to pay quarterly estimated taxes so you would have to withdraw every three months (or every two months during the goofy quarter two).  Just leave it in the account as it isn't worth the hassle.

Khan

  • Pencil Stache
  • ****
  • Posts: 616
Re: Investing money set aside for taxes
« Reply #13 on: December 13, 2013, 07:57:58 PM »
Everyone here has done a good job explaining why that's a bad idea. I'd only add that investing money that should go to taxes is like investing on margin, incredibly dangerous and most likely stupid.

Isn't there a way to get Uncle Sam to take your money on a more frequent basis then once a year?

First, I would say that investing on margin isn't a stupid idea, it just has to be done correctly (low borrow cost, modest leverage relative to risk etc.)

Second, you're free to send your money to the IRS whenever you please. But there's no real incentive to unless you feel like you can't trust yourself with the money. Usually, if you've significantly underpaid your taxes by end of year, the government will demand that you send quarterly estimated taxes in the subsequent year (Uncle Sam doesn't love giving you that 0% loan).

I said most likely stupid, not stupid period ;). I can't find the quote, but somebody intelligence has said something along the lines of "90% of people should never go on the margin" and that it's a key means of wealth destruction by the stupid. I think it was in a Peter Lynch book. I'm inclined to heed those words whenever I play with margin'ed money.