Author Topic: Taxable Account, large sum of money- how to invest  (Read 525 times)

Ready2Save27

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Taxable Account, large sum of money- how to invest
« on: April 06, 2019, 07:29:54 AM »
Hi,

I am just getting into the workforce and have some investing questions. Iíve read over the investment order, and plan to max out my 401k and IRA, but will have a lot of money left over as my living expenses are minimal for the next 4-5 years. I have no debt, and have $20k+ to invest plus whatever is left over from my salary (probably ~$20k after expenses and maxing 401k). So my questions are:
-How does investing in a taxable account work? How is it different than investing in a 401k in terms of taxes?
-I am a little hesitant to invest a lot of money since the market has been doing well for so long, but I know you canít time the market. So I was thinking about investing some money each month (maybe $2-3k, and ramping it up if the market goes ďon saleĒ (such as during a recession). I was also considering putting it all in at once. If I did this and the market crashed, how would it affect my long term wealth? Which strategy would you recommend?

I plan to have a portfolio of 90%-100% stocks since I am younger, all in one or two Vanguard index funds.

Thanks in advance for any advice you can provide.

nereo

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Re: Taxable Account, large sum of money- how to invest
« Reply #1 on: April 06, 2019, 09:18:07 AM »
So my questions are:
-How does investing in a taxable account work? How is it different than investing in a 401k in terms of taxes?
-I am a little hesitant to invest a lot of money since the market has been doing well for so long, but I know you canít time the market. So I was thinking about investing some money each month (maybe $2-3k, and ramping it up if the market goes ďon saleĒ (such as during a recession). I was also considering putting it all in at once. If I did this and the market crashed, how would it affect my long term wealth? Which strategy would you recommend?

Welcome.
You may first want to read and and understand the Investment Order sticky. It will help you understand the answers to your question

Investing in a taxable account is pretty straightforward.  You choose a broker (e.g. Vanguard, Fidelity, Schwab), open an account, and deposit money into whatever you want (e.g. an SP500 index fund, individual stock, bonds).  Most funds require a minimum, though Vanguard and Fidelity have eliminated the minimum for their most popular index funds.  When you want to sell, you put in a sell order.  If you've held the investment for >1 year you will pay long term capitol gains taxes only on the gains (the amount it has gone up in value), which for most people will either be 0% or 15%. You typically pay these when you file your income taxes.

Investing 'some each month' as opposed to dumping it all in at once is called 'Dollar Cost Averaging'.  Most of the time it is less optimal that putting all your money in at once (called "lump-sum investing') - because the amount of time you spend in the market is of primary importance.  Of course if it makes you nervous you can dollar-cost-average( DCA) your cash as you see fit.  Just put a plan in action and carry it out.

Another resource you may find helpful:
https://jlcollinsnh.com/stock-series/
This is a very easy to understand series of posts which will address investing, tax advantaged / taxable accounts, 'why vanguard', DCA and many other important topics. 

Ready2Save27

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Re: Taxable Account, large sum of money- how to invest
« Reply #2 on: April 06, 2019, 09:20:28 AM »
Thanks, Iíll check out the link.

nereo

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Re: Taxable Account, large sum of money- how to invest
« Reply #3 on: April 06, 2019, 11:44:02 AM »
Thanks, Iíll check out the link.

Don't forget to check out the Investment Order too (linked at the top of my previous post).  That really gets at the "where do I put my money" question.

MoneyTree

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Re: Taxable Account, large sum of money- how to invest
« Reply #4 on: April 06, 2019, 08:39:59 PM »
agree with the other posters here that the investment order post is an excellent guide. Lots of wisdom from a lot of people distilled into a simple list. If I had that when I started, I probably would be FI by now.

Taxable accounts are treated VERY differently from a 401K, in that with a taxable account, you are investing post tax dollars AND your gains will be taxed when you realize them. Dividends will also be taxed. Still, if you've maxed out all of your tax-advantaged options, following the guidance in that Investment Order post, you should still end up putting some money into a taxable account.

As for lump sum investing vs DCA, that discussion is one of the topics that can bring out an intense debate on these forums.

I have my opinions, but I'll just say if you're in it for the long haul, you should do fine with either one.

MustacheAndaHalf

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Re: Taxable Account, large sum of money- how to invest
« Reply #5 on: April 06, 2019, 10:21:02 PM »
If you look decade by decade, you'll see U.S. and international trading off the top spot for performance.  So if you're worried about the long bull market in the U.S., take a look at a higher allocation to international - maybe 1/3rd?  Normally I'd suggest 20% as having the most diversification for the least regret, but maybe you can go higher (up to 40%, like you'll see in Vanguard and Fidelity target date funds).

When you buy a stock mutual fund, there's some growth that gets taxed each year (stock dividends) and some that only gets taxed when you sell (the increase in value over what you paid).  The dividends right now are 2-3% (U.S. - int'l), and also have favorable tax treatment (mostly qualified dividends, which for most people are taxed at 15%).  So all told, you might be paying 15% of 2% = 0.3% on a U.S. total stock market fund.

For most people, what's leftover of your paycheck is what you can invest - it's DCA and lump sum all in one, you just invest when you have the money for it.  Note this assumes you use commission-free ETFs and mutual funds.