Check my investment order - low income, no employer plans

[Tass]

I just want a little reassurance before I change my direct deposit info. I'm about to max out my Roth IRA for the first time, which means I need a new account to save in for the rest of the year. I am a graduate student one year into MMM-style saving, with low expenses, no debt, and no immediate-future financial upheavals since my degree will take 2-3 more years. I save about $1000/month currently, which I used to max last year's Roth before April and then focused on this year's.

From Investment Order thread:

            
0. Establish an emergency fund to your satisfaction Done, $5k in the bank.   
1. Contribute to your 401k up to any company match N/A: grad students don't get retirement benefits.
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. No debt.
3. Max HSA Grad students get good health coverage but don't get to choose what kind. Thus, no HSA.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level The step I'm about to finish. Funding a Roth.
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA deduction, swap #4 and #5) Still N/A.            
6. Fund a mega backdoor Roth if applicable. Not applicable, by my understanding.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. No debt.            
8. Invest in a taxable account and/or fund a 529 with any extra. So here we arrive.

My AGI was $42k last year (tuition and taxes are both deducted, leaving me with $33k take-home), so I am outside the 0% tax bracket for long-term capital gains (filing single). Plus California taxes. Incorrect, I think; see update: https://forum.mrmoneymustache.com/investor-alley/check-my-investment-order-low-income-no-employer-plans/msg2106811/#msg2106811

I may increase my emergency fund when I'm closer to graduating, but I'm satisfied with it for now. I don't have any specific goals to save for at the moment - the PhD comes first - though of course the advantage of a taxable account is that I can still access it to put toward something else in a few years.

My plan is to start on the taxable investing. I don't think I can put 529 funds toward my own education; on paper, my institution pays me and I pay it back through payroll deduction, but in practice I never see any education costs. In fact, the payroll deduction strategy depends on what kind of grant my stipend comes out of - when I first started, I was paid $33k without any deductions and tuition was waived.

Mostly I feel weird about jumping to the very end of this list when I'm clearly still at the beginning of my saving, but none of the other steps look very viable to me right now. I have an empty Fidelity Brokerage account already open, I just need to do the paperwork to start funding it. Have I missed anything?

[TexasRunner]

Additional emergency fund in a rolling CD ladder- probably another 6 grand on a 6 month timeline -would be wise.  That would get you quite a while to handle any (very) bad situations.

Otherwise, Vanguard taxable account with whatever allocation you are comfortable with (being young (presumably) and in school means I would go 100% stocks).  I would suggest VTI (and then VTIX when you get 5k in there) for a total stock that will capture emerging companies as a long term goal.

Set up a IPS.  This is not an option:
https://www.investopedia.com/terms/i/ips.asp
https://www.bogleheads.org/wiki/Investment_policy_statement

The market will crash and that IPS is one of the few psychological factors going for you when it does (and it always does, eventually).

Robotics and technology is going to expand IMO.  If you go with S&P 500, you may miss out on bottom innovators.  Yes its (kinda) market timing, but with good reason.  Total Market Indexes pick up companies that the top 500 or 1000 will not.  My IPS is written to reflect this fact and I put a hard timeline on when I can switch out of total market funds or get any bonds.

[Tass]

Had to google a CD ladder. I'll look more into it when considering expanding my e fund.

I already have a Fidelity account (not Vanguard) and the fee difference isn't worth switching. (Fidelity fees were actually slightly lower last I checked but they keep slightly out-doing each other.) I'm currently in a target date index fund - I haven't been at this long enough to feel confident doing my own rebalancing. (The target date of 2060 doesn't reflect my actual target date, but the fact that the further-out dates will grow faster for longer.) https://fundresearch.fidelity.com/mutual-funds/summary/315793695

Right now my investing plan is something like "Put money I don't need anytime soon into index funds." I'm not planning (nor able) to FIRE anytime soon so I'm just not fussed about what happens to it right now, as far as riding out a crash goes. I have an emergency fund and job security for the next several years; right now I'm just trying to plan the next 6 months.

[terran]

You might consider traditional instead of Roth. What tax bracket are you in now vs what you expect to be in when you start withdrawing (retirement)?

[PDXTabs]

Also check out I series savings bonds as an alternative to the CD ladder.

[Tass]

You might consider traditional instead of Roth. What tax bracket are you in now vs what you expect to be in when you start withdrawing (retirement)?

That's a good point, actually. In 2016 my AGI was $34k (same take-home $$, just change in stipend payments) which put me just shy of the 25% bracket - lower than I want my retirement income to be. I didn't bother to re-check where the next cutoff was when I did my taxes this year and got bumped up into the next one - but now that I'm in the $38k-$92k range I am probably in the same tax bracket I want to be in later. Probably.

So I can open a Traditional IRA, but I can't add much more this year since I'm close to the limit in the Roth (and it's cumulative). Still need to move to taxable for the next 5 months or so. Useful to know for next year, though.

[Tass]

Dredging this back up (sorry) to think out loud. My AGI is over the limit to the new 22% bracket, but my taxable income post-deductions was under $32k last year, so well within the new 12% bracket. I certainly don't expect to move into a lower bracket in retirement, and I may move into a higher bracket, so I think the Roth still makes sense.

Now that I realized I'm supposed to establish my bracket using my taxable income, I also believe I'm in the 0% bracket for long-term taxable gains, with about $6k between me and the ceiling. In CA, taxable gains are counted as income, and I am also 2.5k shy of the next state bracket. Given that my gains from the last year is in the three digits, these seem like safe margins for the moment.

This makes me less anxious about my choice of what to buy in a brokerage account, because it doesn't look like I will have to pay capital gains tax on it no matter how tax-inefficient it is. This may not be a great strategy long-term, of course. In my Roth I'm in a target date index fund; any reason I shouldn't stick with this in a brokerage account? I will have enough to clear the minimum investment at my next paycheck in 2 weeks.

Also, this feels like a stupid question, but... should I be selling and re-buying each year (after the rollover to long-term) to realize my gains in the 0% bracket, so I will have less to realize when I (hopefully) move up a bracket post-grad school?

I suppose the downside there - assuming I'm not missing something obvious - is that I'm realizing the gains as income in California, a high-tax state I plan to move away from after graduating. If this is the only downside, the choice might require some actual math.

[ag271]

I've done the math regarding selling to realize gains for California residents in the 0% federal tax bracket for capital gains. I forget exactly what assumptions I made, I think something like 4% annual growth for 35 years, and it turned out there was a slight advantage to not selling to avoid the California tax on capital gains. The money you save by not paying the tax now ends up growing to be worth more than the tax you'd save in 35 years.

[Tass]

Good to know. If the timing is perfect maybe I'll get residency in another state at the end of a year where I don't quite make it out of the 0% bracket, and I can have my cake and eat it too, but I'm not counting on it.

[talltexan]

When I finished my Ph.D. and went on the job market, a lot of my friends were caught by surprise when there was a dead period--perhaps as long as 4-5 months--of no income before their first paycheque at the new job. You will want to set some money aside for that.

[Tass]

I have 3-5 months of my current expenses set aside already, depending on how far I stretch it. I'd like to move somewhere cheaper after graduating, so maybe it would go further, but of course moving costs money too. Anyway, I plan to build this up bigger maybe next year when I'm closer to finishing, but I don't see much point making it first priority when I have over 2 years to go.