Author Topic: What would you do with this extra money?  (Read 4672 times)

PlanB

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What would you do with this extra money?
« on: November 17, 2014, 09:25:43 AM »
We are inheriting an annuity that will pay out $1,000 (after taxes)/month for 10 years. I have an additional $500/month available to save, in perpetuity.
We have no debt, other than our mortgage with a 3.5% interest rate. We have a fully-funded EF. We have two older (paid off) cars, and have an auto maintenance/replacement fund for them.

Where would you put the $1,500/mo? I just signed up for a Betterment account. Would you invest it all? What fund would you put it in? I currently have 15k in VFINX.
We are in our early 30's and I currently put in enough in 401k to get company match.

Our income tax rate is low (bc of one income, primarily) and two kids. For the past two years, I haven't paid federal, and state is minimal.

I'm not trying to retire early, just be smart about how to get my money to grow. We most likely will inherit a large amount but I am not counting on this. My 401k is projected to cover retirement expenses x3, so I'm not inclined to put more in there right now.
I am okay with my children paying their own way (with some help) with post-high school plans (whether college or other).

I have been investing in VFINX. That's why there is 15k in there. My next inclination is to move funds into Betterment, partially because I like the idea of having access to my money. I've read on the forums for years, but am confused on how to handle my own case.

Can you tell me more about this: "Then a traditional IRA might be best, particularly if your income is low enough that you qualify to make deductible contributions. The immediate tax break on your earned income, plus the tax free growth, plus the opportunity to do tax free and penalty free withdrawals (with a five year waiting period and below your deduction/exemption amounts) at any point before traditional retirement age makes the 401k pretty attractive."

Thanks for any advice!
 
« Last Edit: November 17, 2014, 11:06:47 AM by PlanB »

sol

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Re: What would you do with this extra money?
« Reply #1 on: November 17, 2014, 09:30:48 AM »
Kind of depends on your age and your goals, doesn't it?

In my case I would be investing that money in a taxable investment account, in about a 50/50 split of domestic/international stocks.  But that's because we've already maxed out our 401k and Roth IRA plans, and don't have anywhere else to put it.

For someone else, the right answer might be holding it in a savings account until they buy a house, or creating an emergency fund, or replacing an aging vehicle, or giving it away to a grandchild who is struggling to pay his way through college.  All depends on your circumstances.

PlanB

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Re: What would you do with this extra money?
« Reply #2 on: November 17, 2014, 09:47:55 AM »
I've modified my initial posting to add age, and 401k info.

James

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Re: What would you do with this extra money?
« Reply #3 on: November 17, 2014, 09:56:56 AM »
For me personally at that age, I would suggest maxing 401k because my own tax rate is pretty high. But you don't mention your income/tax rate or future plans so we can't compare the benefit of pre versus post-tax contributions. You don't even mention what it would take to max your 401k.


I suggest two options. The first options is to post a lot more information regarding your financial situation, including income, savings, future plans, spending, etc, etc. Then we can give a better suggestion as to what to do with that money.


But the better option is to read enough of what information is already posted on MMM and in these forums to come to your own conclusions. Then post those conclusions and your rationale for it and ask for feedback. That does two things, you will learn a lot about making good decisions regarding your finances, and you will get better feedback from the community regarding your proposed decision.


But with the limited information you provided our recommendations are going to be pretty vague...

arebelspy

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Re: What would you do with this extra money?
« Reply #4 on: November 17, 2014, 09:57:22 AM »
We are in our early 30's and currently put in enough in 401k to get company match.

Absent the more info James mentions: Max out your 401k and/or IRA.

Thats much better than a taxable Bettermint account, most likely. (Depending on fees, tax bracket, etc., but very likely, IMO.)
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4alpacas

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Re: What would you do with this extra money?
« Reply #5 on: November 17, 2014, 10:07:21 AM »
We are in our early 30's and currently put in enough in 401k to get company match.

Absent the more info James mentions: Max out your 401k and/or IRA.

Thats much better than a taxable Bettermint account, most likely. (Depending on fees, tax bracket, etc., but very likely, IMO.)
+1
Without tax bracket information, I would also recommend maxing out retirement accounts ($18k/person/year 401k, $5500/person/year IRA).  The type of IRA (Roth vs. traditional) would be dependent on your income/tax bracket. 

sol

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Re: What would you do with this extra money?
« Reply #6 on: November 17, 2014, 10:35:26 AM »
90% of the time we hear this question from a new person, the answer is to max out their 401k plans first.

The set if circumstances where this is not the best option for someone looking to retire early are somewhat rare, but they would include the following...

1.  Are you in a super low tax bracket now, but expect to be in a much higher one in retirement?  For example, do you expect a very large inheritance at some point?  Then maybe a Roth IRA or Roth 401k would be a better option for you.

2.  Do you not want to retire early, already have enough money in your 401k to support yourself, but can't access that money for the first five years of your 401k to Roth rollover pipeline?  Then you might consider a taxable account to build up a 5 year supply of expenses to cover that initial period.

3.  Are an employee who doesn't have a 401k plan at work?  Then a traditional IRA might be best, particularly if your income is low enough that you qualify to make deductible contributions.

The immediate tax break on your earned income, plus the tax free growth, plus the opportunity to do tax free and penalty free withdrawals (with a five year waiting period and below your deduction/exemption amounts) at any point before traditional retirement age makes the 401k pretty attractive.

PlanB

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Re: What would you do with this extra money?
« Reply #7 on: November 17, 2014, 11:07:58 AM »
Thank you for your questions and insight. I've added more to my original post, to hopefully gain a little clarity.

I'm a complete newbie at investing, so the confusion lies between taxable and tax-free investing, I think.

PlanB

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Re: What would you do with this extra money?
« Reply #8 on: March 16, 2015, 08:38:36 AM »
Thanks Sol,

I was waiting until the annuity began paying out in order to learn more about how to handle this situation. I'm in a very low tax bracket right now. I pay 0% federal and minimal on state taxes. However, we have been warned that even with taxes taken out of the annuity, it being taxable income could raise our tax bracket.
My current plan:

Save the annuity funds in a regular savings account as we have spent down our EF, and I'd like to rebuild to 14k.
After that, I think I'd be better off maxing 401k and using the annuity to replace the income that I'm putting into 401k. Is that correct? Taxable versus non-taxable is super confusing to me for some reason.

Many thanks for any advice!