Author Topic: Newbie to forum with Extra Cash  (Read 5587 times)

kcore2000

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Newbie to forum with Extra Cash
« on: March 09, 2015, 09:08:08 AM »
Hey there, I'm a newbie to MMM and like what I see so far. Here is my situation. I'm a 30 yr old who has recently purchased a house, so I currently have the following setup ...

  • Mortgage Loan (25% Down, No PMI, 75% LTV)
  • 401(k) via Employer
  • 10k in an Emergency Fund (0.80%)
  • 15k Extra in a Credit Union (0.80%)

I feel that the "Extra" 15k could be more profitable else where. Anyone have any suggestions or advice?

Thanks!
« Last Edit: March 10, 2015, 07:13:28 AM by kcore2000 »

ShoulderThingThatGoesUp

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Re: Newbie to forum with Extra Cash
« Reply #1 on: March 09, 2015, 09:11:23 AM »
Need more details - are you paying PMI right now and that money could get you closer to 80% LTV? Do you have other debts? Are you maxing your 401k? What income bracket are you in; does putting it in a tIRA for tax benefits make sense? Still time to do that for 2014.

Two9A

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Re: Newbie to forum with Extra Cash
« Reply #2 on: March 09, 2015, 09:12:15 AM »
Welcome to the forum! A lot of people recommend index-tracking funds or low-cost managed funds; Vanguard are the most recommended provider of the latter. I have some cash in a Vanguard LifeStrategy fund myself, 40% stocks and 60% bonds automatically managed by Vanguard.

I don't know how IRAs work, since I'm in England, but there's very likely a way you can put all of that 15k to work in a fund of some kind.

I'm a red panda

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Re: Newbie to forum with Extra Cash
« Reply #3 on: March 09, 2015, 09:23:43 AM »
Are you maxing out your 401k?  If not, you might want to add more to it, to prevent the "too much cash" issue from coming up again.

I'd start a Roth IRA too, and you can contribute some of that extra cash to it.

kcore2000

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Re: Newbie to forum with Extra Cash
« Reply #4 on: March 09, 2015, 09:23:55 AM »
Need more details - are you paying PMI right now and that money could get you closer to 80% LTV? Do you have other debts? Are you maxing your 401k? What income bracket are you in; does putting it in a tIRA for tax benefits make sense? Still time to do that for 2014.

@ShoulderThingThatGoesUp,

Not paying PMI since I put almost 25% down on house. My current LTV would be a little less than 75%. I can't afford to max out my employer 401k, however I am putting enough in to meet the company match. As far as tax brackets, I am in the 25% tax bracket. Thanks for your quick prompt response!

I'm a red panda

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Re: Newbie to forum with Extra Cash
« Reply #5 on: March 09, 2015, 09:42:17 AM »
Quote
I can't afford to max out my employer 401k, however I am putting enough in to meet the company match.

Even if you can't max it, if you are in a situation where you have "extra" money, you could increase your contribution.


Chrissy

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Re: Newbie to forum with Extra Cash
« Reply #6 on: March 09, 2015, 09:50:45 AM »
I agree:  up your 401k contribution.

Meanwhile, put $5,500 of the 15k into a ROTH for 2014 (you have until Apr 15 to do this), and another $5,500 for 2015.  Vanguard or Fidelity would be fine, and you can do it online.

Put the remaining $4,000 into a taxable account at the same institution where you open the ROTH.  You can throw it in the ROTH in Jan of 2016.

Sibley

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Re: Newbie to forum with Extra Cash
« Reply #7 on: March 09, 2015, 09:58:44 AM »
Or throw some of that at the mortgage, save some interest now and down the road.

RexualChocolate

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Re: Newbie to forum with Extra Cash
« Reply #8 on: March 09, 2015, 10:10:15 AM »
As an aside, no one who has more than 40k at Vanguard should ever be using the LifeStrategy funds. They're always Investor Shares which have higher expense ratios than the Admiral shares you'll get to after 10k.


kcore2000

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Re: Newbie to forum with Extra Cash
« Reply #9 on: March 09, 2015, 11:40:43 AM »
Thanks for all the recommendations, looks like I need to up my Employer 401k contributions a little and open up at ROTH IRA with Vanguard to drop some of the "Extra" cash into OR put some towards mortgage. I started the Vanguard process and have came to the "Select Funds" stage. The portfolio below is what I currently have set for my Employer 401k. Do I make this Vanguard IRA the same? or is there a better option ...

2050 Portofilio
STOCKS
Vanguard Total Stock Market - Index Fund Institutional (VITSX) 63.4%
Vanguard Total International Stock - Index Fund Institutional Plus (VTPSX) 26.5%

FIXED INCOME
Vanguard Total Bond Market II - Index Fund Institutional (VTBNX) 8.2%
Vanguard Total International - Bond Index Fund Institutional (VTIFX) 1.9%
Vanguard Short-Term - Inflation-Protected Securities Fund Institutional (VTSPX) 0.0%

TOTAL HOLDINGS 100.0%

Chrissy

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Re: Newbie to forum with Extra Cash
« Reply #10 on: March 09, 2015, 03:17:39 PM »
You're 30.  Keep the bonds you have, but don't add to them for another 10 years.  I'd put all the money in the new ROTH in VITSX.

GregO

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Re: Newbie to forum with Extra Cash
« Reply #11 on: March 09, 2015, 03:46:07 PM »
Thanks for all the recommendations, looks like I need to up my Employer 401k contributions a little and open up at ROTH IRA with Vanguard to drop some of the "Extra" cash

If you're in the 25% tax bracket, I would not be putting money into a Roth IRA.  First check and see if you are over the limits to be able to deduct Traditional IRA contributions:
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

If you are over the income limits for a Traditional IRA, then I would heavily increase your 401(k) contributions to max it out and supplement your living expenses with your extra cash. 

kcore2000

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Re: Newbie to forum with Extra Cash
« Reply #12 on: March 10, 2015, 07:12:59 AM »
The one thing that confuses me in these forums is the majority of the time people have different opinions. :(

I'm single and in the 25% tax bracket ($36,901 to $89,350) and I will be in that bracket for awhile, unless I climb the corporate ladder quickly here. From what I found so far I definitely need to contribute more to my Employer 401k, however with this 15k extra cash, some people are saying Roth IRA and some are saying Traditional IRA. How do I know which is right? Can someone maybe give me some scenarios?

Thanks!

thd7t

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Re: Newbie to forum with Extra Cash
« Reply #13 on: March 10, 2015, 07:28:31 AM »
Thanks for all the recommendations, looks like I need to up my Employer 401k contributions a little and open up at ROTH IRA with Vanguard to drop some of the "Extra" cash

If you're in the 25% tax bracket, I would not be putting money into a Roth IRA.  First check and see if you are over the limits to be able to deduct Traditional IRA contributions:
http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

If you are over the income limits for a Traditional IRA, then I would heavily increase your 401(k) contributions to max it out and supplement your living expenses with your extra cash.
Second for a Traditional IRA.  Most math shows that your overall earnings will be higher and taxes will be lower if you're in the 25% bracket.

Chrissy

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Re: Newbie to forum with Extra Cash
« Reply #14 on: March 10, 2015, 10:01:19 AM »
The difference in opinion is actually not that big.  Just put as much of the money as you can in a tax advantaged account of some kind.  If you want to take the tax break of the Traditional IRA now, go ahead.  The Traditional IRA is great.  There are things I like about the ROTH, too, though:  you can withdraw the contributions (but not the growth) at any time, and you don't pay any taxes on the amount you withdraw after age 59.5.

Since you're already getting a tax benefit today with your 401k, I suggested the ROTH which has a tax advantage in the future, but there's not really a right or wrong answer... well, I guess the wrong answer would be blowing 15k on hookers and blow.

kcore2000

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Re: Newbie to forum with Extra Cash
« Reply #15 on: March 10, 2015, 11:03:50 AM »
@Chrissy, if there was a like button I would of definitely hit it ... hookers and blow ... haha. I also forgot to mention earlier that my Employer 401k is a ROTH.

Chrissy

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Re: Newbie to forum with Extra Cash
« Reply #16 on: March 10, 2015, 08:02:30 PM »
Ah.  Well, if your contributions are post-tax to the 401k, then, by all means, go for the tIRA instead of the ROTH.

GregO

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Re: Newbie to forum with Extra Cash
« Reply #17 on: March 12, 2015, 12:07:49 PM »
some people are saying Roth IRA and some are saying Traditional IRA. How do I know which is right? Can someone maybe give me some scenarios?
There's a lot of research out there for Roth vs. Traditional IRAs (and 401ks).  And you will find differing opinions there, as well.  You will always find that.  But here's your example:

If you have $5000 to put into an IRA, you could:
1. Put it into a Roth IRA (or Roth 401k).  It grows tax free and you will never have to pay tax on the withdrawals.  However, you paid 25% on your contribution for that right.
2. Put it into a Traditional IRA (or 401k).  You receive a tax deduction on your tax return for $5000*25%= $1250.  You could then reinvest that $1250 into the IRA so you had $6250 invested instead of the $5000 invested in the Roth.  However, whenever you withdraw the money, you will have to pay taxes on it.

You don't know what your taxes will be in the future, that is the main reason why there is varying opinions.  I'd say the majority of financial planners would agree that money in the 25% tax bracket is better served by using a Traditional account, but everyone does not agree.  Here is a popular article that people reference, but it is geared toward early retirement.
http://www.madfientist.com/retire-even-earlier/

There are a some advantages of a Roth IRA over a Traditional IRA, but there are very few advantages of a Roth 401k over a Traditional 401k.  At a minimum, I'd suggest changing your 401k contributions to Traditional.

kcore2000

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Re: Newbie to forum with Extra Cash
« Reply #18 on: March 23, 2015, 12:16:30 PM »
Thanks everyone for all the input above. What I have learned from my thread and various resources are the following changes in my portfolio. How does this look, would you make any other adjustments? Also, when choosing the funds for my Traditional IRA.  What would be some recommendations if I don't want to manage it and would rather it automatically be aggressive to start and more conservative over time?

Current Portfolio
  • Mortgage Loan (25% Down, No PMI, 75% LTV)
  • ROTH 401(k) via Employer (2050 Portfolio /// Stocks - VITSX: 63.4%, VTPSX: 26.4% // Fixed - VTBNX: 8.2%, VTIFX: 1.9%, VTSPX: 0%)
  • 10k in an Emergency Fund (0.80%)
  • 15k Extra (0.80%)

Portfolio w/ Adjustments
  • Mortgage Loan (25% Down, No PMI, 75% LTV)
  • ROTH 401(k) via Employer (2050 Portfolio /// Stocks - VITSX: 63.4%, VTPSX: 26.4% / Fixed - VTBNX: 8.2%, VTIFX: 1.9%, VTSPX: 0%)
  • 10k in an Emergency Fund (0.80%)
  • 15k Extra
    • 5K Extra in Vanguard Traditional IRA for 2014
    • 5K Extra in Vanguard Traditional IRA for 2015
    • 5K Extra in Vanguard Traditional IRA for 2016

nereo

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Re: Newbie to forum with Extra Cash
« Reply #19 on: March 23, 2015, 12:26:25 PM »
Portfolio w/ Adjustments
  • Mortgage Loan (25% Down, No PMI, 75% LTV)
  • ROTH 401(k) via Employer (2050 Portfolio /// Stocks - VITSX: 63.4%, VTPSX: 26.4% / Fixed - VTBNX: 8.2%, VTIFX: 1.9%, VTSPX: 0%)
  • 10k in an Emergency Fund (0.80%)
  • 15k Extra
    • 5K Extra in Vanguard Traditional IRA for 2014
    • 5K Extra in Vanguard Traditional IRA for 2015
    • 5K Extra in Vanguard Traditional IRA for 2016

Your above scenario looks good, but I'd suggest the following edits:  Contribute $5,500 to your tIRA for both 2014 and 2015.  Then save the remaining $4k in whatever low-cost taxable account you like best (I personally like the VFINX - sp500 index fund from Vanguard).  Then make it a priority to fund your 2016 tIRA from your paycheck starting January 1st, 2016.  That's $458.33/month. 
Contribute as much as you can to your 401(k) plan with a goal of maxing that out as well.
If they are available to you, check out Health Savings Accounts (HSAs) as they give you the possibility of putting pre-tax dollars in and taking them out as post-tax dollars (i.e. you will never pay taxes on that money, if done right).

If you do that you will be looking at Financial Independence (FI) by your mid 30s.