Author Topic: Am I putting too much of my savings in taxable accounts?  (Read 5628 times)

kh

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Am I putting too much of my savings in taxable accounts?
« on: September 23, 2013, 05:34:50 PM »
I have some slightly odd timetables for spending, and was hoping you fine folks might weigh in on my situation.

I'm 28, with an annual salary in the range of $120K with bonuses and so forth.  I've only been working for a year (Ph.D.), have no debts of any kind, and about $125K in savings.  Of this amount:
  • 10K is in checking/savings accounts for an emergency fund
  • 40K is in retirement accounts - 30K in a Roth IRA, 10K in my company's 401k (6%, with 9% match)
  • 15K in company stock - this is not yet vested, so the value is preliminary, and I can't really do anything with it for awhile
  • The rest (~60K) is in taxable investment accounts (Vanguard, of various flavors)
I have a boyfriend who is in grad school right now, working on a lit Ph.D.  Realistically, I will likely be paying off his student loans (~20K) when he gets out, or possibly a little sooner (the M-bomb has been dropped, but we're working on getting a little more settled before going through with it).  He's paying into them now, but not much on a grad student salary.

So here is the dilemma: in 5 years, we are likely going to have to move to find the boyfriend a job.  (I'm an optimist, but we're trying to get him as much geographic flexibility as possible given his chosen field.)  Also in 5 years or less, I am likely going to eat his student loans so the interest on those goes away.  Unsubsidized loans won't get touched until he's out of school ($12K) but the remainder is collecting interest ($8K), which seems pointless when I can write a check and make it go away.

Now ideally, I'm also saving up for a down payment on a house.  Since I don't yet know where we're going to land, I can't calculate out the rent/buy value, but I am primarily employable in the parts of the country that have ridiculous rents.  Because of the location uncertainty, I have no idea how large this down payment will have to be, aside from, well, large.  I maxed out my Roths all through grad school knowing that I can withdraw the principal (and earnings in a pinch, as a first-time home buyer).  I may run into Roth contribution limits soon, but it's hard to know since a big chunk of my salary comes as a bonus.  However, I'm hesitant to go too wild and crazy on the 401K, knowing I have these medium-term big expenses coming up.  Downside, sitting in a high tax bracket in a high-tax part of the country (Northeast), it hurts in the short term not having tax protection.  The house down payment is invested because, if the stock market takes a big hit and tanks, no big deal, we just rent a few more years.

So - how to balance a known future expense with a high tax hit today?  Am I contributing way too much to taxable investments?

Roland of Gilead

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #1 on: September 23, 2013, 05:51:49 PM »
I would max your 401K up to $17,500 for your contribution, contribute $5500 to a Roth, and max an HSA if you have that option.  I hate taxes and love these ways to reduce income.

Your income is high enough that you should be able to get a house with 20% down.  $60,000 will get you a $300,000 house with a $240,000 mortgage at 4.5% or so (haven't checked rates in awhile, but we have a 3.5% loan and I think they have gone up).

I wouldn't even suggest spending $300,000 on your first home though.

Max that 401K.  6% is just too little.

kh

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #2 on: September 23, 2013, 06:11:23 PM »
Unfortunately, the options for housing here on the Gold Coast (CT) are pretty thin under $300K - mostly 0-1 bedroom "starter condo" type situations.  Personally, I find the idea of a "starter" home ridiculous - if I'm going through all the bother of buying a house, I sure don't want to go through it all again in 3 years when a kid or two shows up and "oh crap a 1 bedroom isn't going to work."  It's possible to luck out on a foreclosure, but it's really embarrassing how limited the affordable housing stock is (almost as embarrassing as is the idea that $300K passes for "affordable" here).  Granted, we'll probably move, but the options only get more expensive from here (Boston, NYC, San Francisco, Chicago if I really luck out).

Maybe I'll just be renting forever...ugh.  Hard to put a cost on "having landlords treat you like sh*t for 10 years," but it can't be insignificant.

Roland of Gilead

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #3 on: September 23, 2013, 06:31:27 PM »
Do you have to stay in that area (or do you just love it?)

We are in Seattle and I thought house prices were high, but I can get a nice place for $300,000 in the burbs and be in the city in 20 or 25 min.   

A high price house might be a good deal, except now you mention things like kids in 3 years.  If you go ahead and get your $600,000 dream home then decide to be a SAHM, who is going to pay the $4000 a month mortgage and $10,000 a year real estate tax?

Also, with a PHD at 28, why would you even want kids anytime soon?  Maybe wait until you are 35 or 36.  If I spent 10 years on a higher education I would not want to be saddled with kids for at least a decade.

StarryC

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #4 on: September 23, 2013, 06:52:49 PM »
You also have the potential of using the Roth, and even a 401K for a first time home.  What are your prospects for a $500,000 home?  I'd imagine that ANYWHERE in the country other than Manhattan and possibly some neighborhoods in San Francisco, $500,000 buys you a 2-3 bedroom home or condo with 2 bathrooms that is perfectly livable by any standards, let alone Mustachian standards.  A 20% payment there would be $100,000. 

You said 5 years to go before you are even looking at buying right?  So that is 5 years to save an additional $40,000.  Plus an additional $20,000 for the loans, right?

I'd say it is absolutely worth maxing out the tax advantaged savings as they don't prevent you from using that money for a down payment, but especially if you can do that and put an additional $12,000 per year in the non-tax advantaged accounts.  That would be saving $35,000 a year, 29%. 

I'd also wonder what your boyfriend is planning to contribute (other than love and affection)?  If you are moving for him to get a job, it seems like he should get paid at least $40,000 a year, and really more like $60,000.  A couple could easily and happily and profligately live off of $60,000 after taxes and savings from your work.  His salary could go 100% (after taxes, 401K and Roth) to the house fund/ loan pay off for a year or two after he graduates and then you could buy a house. 

ny.er

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #5 on: September 23, 2013, 07:05:44 PM »
There's a thread today regarding "ratcheting" up your 401k incrementally and seeing how easily you can get along with the remaining amount. If you increase your 401k withholding to 10-15%, it sounds like you'll still have plenty left to save for a house too. Even if you don't know exactly what you'll pay for a house, you can get a rough idea - CT, NY have high col, so base it on that. In other words, save simultaneously for both while you're making lots of mullah. Definitely continue to rent until you know where you'll settle, in as small and inexpensive a place as you can find.

kh

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #6 on: September 23, 2013, 08:40:37 PM »
No rush on kids, that's for sure. Totally not cut out to be a stay at home mom either, and dating a poet, someone will have to make sure we eat! Just trying to think ahead here, I don't want to buy something that's not suitable for a long term arrangement. Not stuck in CT exactly, but the other options in my industry are as high COL or more so. The beau is on a grad stipend of $20k per year for the next 5, so housing is on me, although he will ideally be contributing more later.

I'm a little confused but interested in this idea of using 401k money for a down payment... is that taking a loan, or the early withdrawal penalty? I'm not especially well-versed on any flexibility on the 401k, and am concerned about committing to not touch it for 30 years.

Yes, my ballpark number is about $120k in savings, $100 for a house and $20 for the loans.

Thanks for the advice folks. May be time to up the 401k... I've just been on a grad salary for so long that the idea that I could save significantly past $17,500 per year is hard to wrap my head around. Especially since that was basically what I was making until this year.

jrhampt

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #7 on: September 24, 2013, 08:00:55 AM »
Oh, another CT person!  I totally agree with you on the ridiculousness of "starter homes".  We bought a home 5 years ago, and I have no desire to relive the transaction or the transaction costs.  It is possible to find a decent place under $300k, though -- I believe the median home value in the state is a little over $230k, so there's no excuse for blowing $300k or more.  It does limit your options, but I consider it a good thing not to be spoiled for choice (too overwhelming).  What part of CT are you looking in?  And why would you move for his job if you'll be the one making most of the cash?  Will you be able to find a comparable job wherever you move?  And how long will it take for your company stock to vest?  You don't want to lose out on that by moving, either.

On taxes, I agree with others that you should begin maxing out the full 17.5k contributions to your 401k immediately.  This will help to reduce your taxes, and I think you'll be pleasantly surprised at how little your paycheck is reduced compared to how much goes into your accounts.  At your salary, you should be able to continue investing in taxable accounts even while maxing out your 401k contributions.  As for worrying about locking up the money for 30 years, there are ways to get it out earlier with 72(t) and Roth pipelines.  But the good news is that you shouldn't have to choose between post-tax and pre-tax investing.
« Last Edit: September 24, 2013, 08:04:31 AM by jrhampt »

cynthia1848

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #8 on: September 24, 2013, 08:06:04 AM »
I agree with the others, max out your 401k and then you can think about putting more $$ into taxable accounts/down payment.  I might also consider paying off your SO's student loans (if you are comfortable doing that) sooner rather than later if the interest rates are high.

AlanStache

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #9 on: September 24, 2013, 08:24:07 AM »
I took a 401k loan for part of my down payment, all worked out fine.  You will have to liquidate holdings to barrow the money, then pay yourself interest while paying it back with post tax funds, but you can still max out the pre tax 401k while paying it back (I think).  In your uncertain situation I would definitely support maxing the 401k knowing that you can get at that cash-penitently free & tax free-if needed for a down payment. If you stop working for the employer you had when you took the loan the balance becomes taxable income.  IANAL.

Also I made the mistake of buying to small on my first place, regret not getting something more permanent (and closer to work...).
« Last Edit: September 24, 2013, 08:29:01 AM by AlanStache »

StarryC

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #10 on: September 24, 2013, 10:26:32 AM »
I don't know the details, but I know in my company's meeting they discussed it in an effort to get younger people in to the 401K.  I don't think it is a "you should do this" type of thing.  You can't get these years back on the 401K and you are making enough that your tax bracket as a single person with no mortgage is probably the highest, so the pre-tax nature of the 401K is especially beneficial to you. 
If you happen to move someplace where a $300,000 or even $200,000 home is reasonable, if your partner gets a better paying job to contribute to the down payment, you decide to rent for a while longer for one reason or another,  or your field collapses and you have to get a lower paying job, you won't have lost the early big contributions to your 401K.

kh

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Re: Am I putting too much of my savings in taxable accounts?
« Reply #11 on: September 24, 2013, 03:27:41 PM »
Seems to be something of a consensus emerging! I currently have budget slush of about $1400/mo, most of which gets stashed in a savings account and periodically dumped in a taxable investment. I believe about half of that or a little more would max me out on the 401k, with plenty left over to save. You all are right, I have a lot of time to keep building a flexible down payment... Just feel a little antsy about not having the cash in hand, but since that's completely irrational, I'll get over it. Thanks for being the voice of reason, MMM hive mind, I'll get right on boosting my 401k contribution!

I live in New Haven at the moment, with the flexibility to move anywhere on the Metro North line from Manhattan to New Haven. I figure that gives the beau anywhere from Jersey to Hartford to cast the job net, which is the best I can do with my current job. Annoyingly, those coastal cities don't come cheap (New Haven seems to be on the low end), but my train commute keeps us to a 1 car household. So "moving" means "moving within the radius of where I can keep my job, and his commute isn't psychotic." We can't buy in New Haven now in case he finds a job in Hoboken or something when he gets out, which would require a move back towards NYC.