Author Topic: Using brokerage funds to pay off student loans - when should I do it?  (Read 1894 times)

Spondulix

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I started with $100k of student loans almost 15 years ago and the end is in sight. I've got cash stashed in an account to pay it off but trying to figure out how to best pull the trigger.

Student loans: $16k @ 1.75% (awesome, right?). Currently paying $225/month with about $25 going towards interest. The bill is only $182/month.
Vanguard Brokerage: $24k in index funds. I've got long term capital gain of $3,750.

Should I just leave everything be until my capital gains exceed my loan balance then withdrawal pay it off? Or pay it down periodically with the gains? I have no idea where it'll be easiest on the taxes to take out from the brokerage. Should I stop paying extra to my loan? (I think that makes sense - cash flow is tight and the rate is so low).

Bracken_Joy

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #1 on: August 14, 2017, 03:51:52 PM »
Why pay extra on your loan? At 1.75%, I would let that ride as long as possible.

As always, I refer to MDM's investing order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

therethere

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #2 on: August 14, 2017, 04:17:25 PM »
I'm in the same boat. I paid into a brokerage account instead of paying off my loans. My loans are variable but ~3.75% right now. I don't plan to cash out the brokerage account until the avg rate creep over 5.5% OR we need the cash to pay the monthly payments. I figure at the point where I would need the money to pay the monthly payment, I'd be short on income (either by FI, job loss, or sabbatical) and likely in the 15% bracket or less, making the capital gains tax rate 0%.

That's the plan anyway.

Spondulix

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #3 on: August 14, 2017, 04:43:27 PM »
Why pay extra on your loan? At 1.75%, I would let that ride as long as possible.

As always, I refer to MDM's investing order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
Yup totally makes sense to me. The big question I have though is what do the taxes look like when I take out of the brokerage eventually? I can't remember if that's taxed as income in which case taking out $10k+ is going to have an impact... vs doing $1k a year or such.

Edit: Also I see the value of making minimum payments but that's another 10 years of payments when I've already been doing it for 15. I'm pretty sick of it.
« Last Edit: August 14, 2017, 04:46:13 PM by Spondulix »

Bracken_Joy

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #4 on: August 14, 2017, 04:46:19 PM »
Why pay extra on your loan? At 1.75%, I would let that ride as long as possible.

As always, I refer to MDM's investing order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
Yup totally makes sense to me. The big question I have though is what do the taxes look like when I take out of the brokerage eventually? I can't remember if that's taxed as income in which case taking out $10k+ is going to have an impact... vs doing $1k a year or such.

THAT one I don't know the answer to, unfortunately. I'm still working on filling up my tax advantaged space =)

Goldielocks

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #5 on: August 14, 2017, 05:10:15 PM »
Assuming this is not a 401k or regular IRA ...

You are taxed in one of three ways on your brokerage account

1)  Any interest you receive (e.g., bonds) is taxed just like your income.   This is like a bank savings account.  Taxed in the year you earn the interest.
2)  Any dividends you receive are taxed at a preferred dividend rate (can be complex in the US, there are amounts that based on your income level, may not be subject to tax, etc).  Taxed in the year you RECEIVE the dividend
3)  Taxed on the capitals gains x 50% at your marginal income rate.   for example, let's say your $12k investment grew by $2k.  You would have 50% x $2k = $1k at your top marginal income tax rate.  Taxed in the year that you SELL.

Was that your question?

Spondulix

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #6 on: August 14, 2017, 08:10:07 PM »
Assuming this is not a 401k or regular IRA ...

You are taxed in one of three ways on your brokerage account

1)  Any interest you receive (e.g., bonds) is taxed just like your income.   This is like a bank savings account.  Taxed in the year you earn the interest.
2)  Any dividends you receive are taxed at a preferred dividend rate (can be complex in the US, there are amounts that based on your income level, may not be subject to tax, etc).  Taxed in the year you RECEIVE the dividend
3)  Taxed on the capitals gains x 50% at your marginal income rate.   for example, let's say your $12k investment grew by $2k.  You would have 50% x $2k = $1k at your top marginal income tax rate.  Taxed in the year that you SELL.

Was that your question?
Yes this is exactly what I was trying to figure out. It's not an IRA - just a brokerage account. There's no bonds - it's just a total market fund (VTSAX). Looking at the 1099 from last year I was taxed on the dividend. So in that case would I still be taxed on the gains when I take the money out (your #3)?

Goldielocks

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Re: Using brokerage funds to pay off student loans - when should I do it?
« Reply #7 on: August 14, 2017, 08:14:55 PM »
Assuming this is not a 401k or regular IRA ...

You are taxed in one of three ways on your brokerage account

1)  Any interest you receive (e.g., bonds) is taxed just like your income.   This is like a bank savings account.  Taxed in the year you earn the interest.
2)  Any dividends you receive are taxed at a preferred dividend rate (can be complex in the US, there are amounts that based on your income level, may not be subject to tax, etc).  Taxed in the year you RECEIVE the dividend
3)  Taxed on the capitals gains x 50% at your marginal income rate.   for example, let's say your $12k investment grew by $2k.  You would have 50% x $2k = $1k at your top marginal income tax rate.  Taxed in the year that you SELL.

Was that your question?
Yes this is exactly what I was trying to figure out. It's not an IRA - just a brokerage account. There's no bonds - it's just a total market fund (VTSAX). Looking at the 1099 from last year I was taxed on the dividend. So in that case would I still be taxed on the gains when I take the money out (your #3)?

Yep.   Only taxed on the capital gains, and then only at x 50% of it.  Pretty sweet deal, actually (no taxes on your original contribution, only the increase in value).
If you have any more dividends this year, those will be included on your tax return, too, just like last year.

If you have  fluctuating income -- very high then very low years of regular income, plan to sell your investments in a year of low total income, for even lower tax to be paid on the capital gains.