Author Topic: What to do with a lot of extra cash?  (Read 1437 times)

videoschoolonline

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What to do with a lot of extra cash?
« on: March 22, 2017, 04:37:44 PM »
Hi,

Big fan of the forum. Haven't posted in a while.

My wife and I are currently in a very fortunate situation of trying to figure out what to do with our extra money.

Our situation:
- Wife and I are in our late twenties. We have $200k invested so far.

- Income was around $300k in 2016. Looks like it will be slightly more this year.

- We already max out our 401k accounts, and I run my own s-corp so contribute an extra 15k to profit sharing. In total, we are investing $51k per year into our tax-deductible accounts.

- We purchased a home in southern california last August (boooo - high prices!). We started with a $440k loan. It's down to $416k currently. Interest rate is 3.75%

My question is

What do you recommend us doing with extra savings?

We're already maxing out retirement accounts. We're making extra principle payments most months. We have an emergency account.

Do we plow through our mortgage and put all our extra towards that?

Do we invest some into our regular Vanguard index fund account?

Do we do both? And if so, what is the split?

We earn too much to contribute to a Roth IRA. But is there are way with IRA conversions that it would make sense to contribute to a Traditional, then convert to a Roth even though we're maxing out our 401k accounts? Is that even possible?

Something else?

Thanks in advance!
« Last Edit: March 22, 2017, 04:39:50 PM by videoschoolonline »

Meg77

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Re: What to do with a lot of extra cash?
« Reply #1 on: March 23, 2017, 12:08:27 PM »
You should be maxing out backdoor Roth IRAs and a Health Savings Account if you have access to one.  A backdoor Roth IRA contribution is just as you describe: you contribute to a traditional IRA (your contribution won't be tax deductible since you make too much), and then you immediately convert that to a Roth IRA.  You won't owe any taxes on the conversion as long as you have no other Traditional IRA balances.  In order to keep this up my husband and I roll our 401ks to our new employers' 401k plans when we leave jobs rather than to Traditional IRAs. 

I would pile up quite a bit of cash in addition to a 6 month emergency fund.  You want enough sitting there to fund anything you might need or want in the next couple of years (car purchase, home renovations, business investment, unpaid maternity leave...).  Then I'd start dumping it in brokerage.  Paying off the house doesn't make sense to me at that interest rate (especially considering your effective rate after the tax benefits are taken into account).  Your tax effective rate is less than inflation, and it's less than you can earn on conservative investments like muni bonds and some long term CDs now.  Soon it may be less than you can earn in a savings account again.  So personally I'd avoid paying extra on the house and invest instead.

Meg77

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Re: What to do with a lot of extra cash?
« Reply #2 on: March 23, 2017, 12:10:50 PM »
Another idea besides index funds is to save up to buy rental property or participate in other investments.  My husband and I put $100K into a few private equity deals last year that were formed to buy apartment buildings in our area.  I don't want to own my own apartment building, but in this way we can diversify our holdings without having to save as much as it would take to get into commercial RE ourselves.

Bracken_Joy

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Re: What to do with a lot of extra cash?
« Reply #3 on: March 23, 2017, 12:21:08 PM »
http://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153

I personally would not pay down a mortgage with that low of interest rates. It's an inflation hedge, for one. And remember- real estate is part of your asset allocation. Do you have an investing policy statement (IPS)? If not, it's time to make one. https://www.bogleheads.org/wiki/Investment_policy_statement That will help guide you in how much money you want tied up in a relatively illiquid asset like a home.

And as Meg said, I would look into HSA and if backdoor roth stuff is an option. http://www.madfientist.com/after-tax-contributions/

After that, then I would look at post-tax investments.

honeybbq

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Re: What to do with a lot of extra cash?
« Reply #4 on: March 23, 2017, 02:27:05 PM »
Similar household income, way higher mortgage here :)

We do 4k/month to taxable, $1500 extra to mortgage to pay down like a 15 yr (which corresponds when I want to retire ((at the latest)) ).

It's really up to you though. For me, a feel like after all of our pre-tax contributions and deferred compensation, there's nothing wrong with a fixed 3-4% return on a mortgage. Diversity is good an important. If it were to pick EITHER/OR I would pick after tax. I also itemize my deductions and the mortgage interest is a huge deduction for me, so I don't want to pay it off TOO quickly. :) *waits for flames*