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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: stevesteve on June 07, 2013, 11:37:03 AM

Title: When to start investing in taxable accounts? (No 401k option)
Post by: stevesteve on June 07, 2013, 11:37:03 AM
I have $10,000 in recent earnings that I want to invest.  As a full-time student with two part-time jobs I make some money and want to invest it.  My default--be risk averse and generally focusing on lower costs--has always been to put extra towards my house.  With the extra I pay each year it will be paid off in 6-years and being under 3% APR I feel I need to focus on investing my money.  This year I already put $5,500 towards my Roth IRA.  Being part-time and not salaried I don't have access to a 401k.  I'm in my late-20s I haven't put much towards retirement savings because I have been mostly a contract worker and elected to put money towards my house.  So, I currently have $40k in an IRA and $5,500 in my Roth.

Is it stupid to be thinking of putting this $10,000 into taxable accounts?  I completely plan on maxing out my 401k and Roth when I am out of school with a salaried job but in the meantime I'm thinking 1) putting my future money into retirement will be enough, I also want to start saving money I can use before retirement if I want to turn my future FI to FIRE.  Advice?
Title: Re: When To Start Investing in Taxable Accounts? (No 401k option)
Post by: Megatron on June 07, 2013, 12:00:38 PM
Do you have student loans? In about about long before you will graduate and the repayment begins? If it's short term like within a year, I would put it in a CD or money market, that way I could attack it right out of the gate. but that's just me. If it's 2 years or more, I would put it in a vanguard index fund and watch it grow a bit.
Title: Re: When To Start Investing in Taxable Accounts? (No 401k option)
Post by: stevesteve on June 07, 2013, 12:51:18 PM
Do you have student loans? In about about long before you will graduate and the repayment begins? If it's short term like within a year, I would put it in a CD or money market, that way I could attack it right out of the gate. but that's just me. If it's 2 years or more, I would put it in a vanguard index fund and watch it grow a bit.

Thank you for the reply.  I do have some student loans and will have to start repayment in about 1.5 years.  It's a little more complicated because my grandparents set up an educational trust fund (with an opaque trustee).  Basically I have been paying for part of school with bond dividends and some with loans.  I eventually get the remaining assets in the trust (age 40 or so).  My guess is I will ask the trustee to pay for most of it each year to have it paid off in two years after graduation.  I would probably not be able to get most the money out before 40 otherwise.  I don't know if this is a good financial decision of my bias for control.  Either way, I have enough to pay back more than minimal payments in my budget going forward.
Title: Re: When To Start Investing in Taxable Accounts? (No 401k option)
Post by: Rebecca Stapler on June 07, 2013, 12:59:12 PM
Do you have student loans? In about about long before you will graduate and the repayment begins? If it's short term like within a year, I would put it in a CD or money market, that way I could attack it right out of the gate. but that's just me. If it's 2 years or more, I would put it in a vanguard index fund and watch it grow a bit.

Thank you for the reply.  I do have some student loans and will have to start repayment in about 1.5 years.  It's a little more complicated because my grandparents set up an educational trust fund (with an opaque trustee).  Basically I have been paying for part of school with bond dividends and some with loans.  I eventually get the remaining assets in the trust (age 40 or so).  My guess is I will ask the trustee to pay for most of it each year to have it paid off in two years after graduation.  I would probably not be able to get most the money out before 40 otherwise.  I don't know if this is a good financial decision of my bias for control.  Either way, I have enough to pay back more than minimal payments in my budget going forward.

Just a few things to consider, that come to mind about weighing your options with the trust:

Do you know how the trust $$ is invested? If the investment requires a minimum investment for higher returns, you may not want the balance to dip too low before it's disbursed.

Is the disbursement taxed at all? I don't know too much about trusts, but a transfer for educational purposes might be tax-free; so, that's a benefit for using the money directly for tuition payment and not loan payment. Is there a reason why you didn't ask for it to pay tuition?

How is the trustee paid? Is it a percentage of the assets invested, or a flat rate?
Title: Re: When To Start Investing in Taxable Accounts? (No 401k option)
Post by: stevesteve on June 07, 2013, 01:20:20 PM
Do you have student loans? In about about long before you will graduate and the repayment begins? If it's short term like within a year, I would put it in a CD or money market, that way I could attack it right out of the gate. but that's just me. If it's 2 years or more, I would put it in a vanguard index fund and watch it grow a bit.

Thank you for the reply.  I do have some student loans and will have to start repayment in about 1.5 years.  It's a little more complicated because my grandparents set up an educational trust fund (with an opaque trustee).  Basically I have been paying for part of school with bond dividends and some with loans.  I eventually get the remaining assets in the trust (age 40 or so).  My guess is I will ask the trustee to pay for most of it each year to have it paid off in two years after graduation.  I would probably not be able to get most the money out before 40 otherwise.  I don't know if this is a good financial decision of my bias for control.  Either way, I have enough to pay back more than minimal payments in my budget going forward.

Just a few things to consider, that come to mind about weighing your options with the trust:

Do you know how the trust $$ is invested? If the investment requires a minimum investment for higher returns, you may not want the balance to dip too low before it's disbursed.

Is the disbursement taxed at all? I don't know too much about trusts, but a transfer for educational purposes might be tax-free; so, that's a benefit for using the money directly for tuition payment and not loan payment. Is there a reason why you didn't ask for it to pay tuition?

How is the trustee paid? Is it a percentage of the assets invested, or a flat rate?

It's invested in 50% individual stocks.  5% mutual funds.  35% Fixed income (mix of "fixed income" mutual funds and bonds).  10% sweep.  It's made to pump out steady money not make money.  I don't believe there are threshold fees on most things but I will ask.

It's all taxed and in fact I pay the taxes on disbursements (I'm in a low bracket).  Disbursements are pretty regular to avoid the trust itself paying much higher level of taxes than I would.  That's one reason I took them and put them towards school.  Basically, it didn't have enough money to pay for everything in the past and now it does because of death.

So a manager is paid as a percentage and the trustee is paid at a flat rate for filing taxes, etc.  This is one of the reasons I am wary of assuming this will grow for my retirement and my own cash would be used for my school loan.