Investment Advice (1st Post)

[RJC]

Hello folks!

Was wondering if you could give me any recommendations on where to invest money (~200k) that we've saved up over the years.

Currently we have:
1. Enough money in an emergency fund
2. Maxed out our 401k plans
3. Do not have any long term debt other than a mortgage (4.25%)
4. Do not qualify for a Traditional Roth/IRA
5. Funding a 529 for the kids
6. Not eligible for a HSA

Is our only option to put it in a taxable account (e.g. S&P index ETF)?

Thanks in advance!

[terran]

Do you have a balance in any Traditional IRA accounts from past contributions or rollovers from employer plans? If not you could do a backdoor Roth contribution. This is the colloquial name for making Traditional IRA contributions (anyone can contribute, the income limits dictate whether they're deductible) and converting this to Roth (only any gains between contribution and conversion will be taxable). The reason this only works if you don't have an existing traditional IRA balance is that if you do then you'll be taxed in proportion to the existing balance as compared to the non-deductible balance you just contributed.

Beyond that you're stuck with a taxable account, but that's not so bad. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

[JGS1980]

How much do you owe on the Mortgage?

I'm a fan of investing, but if you can pay off the mortgage in one go, it might not be a bad choice to get a risk free 4.25% return. This is especially true if you are already maxing out 401K and 529 plans and don't have any other debt.

I'm in the same boat as you, and I'm building up a Taxable account that I could use to pay off the mortgage (or not) depending on how things go in the next few years.

Best of luck. If you are capable of doing #1->#5 already, I have a feeling you will be fine no matter what you do.

JGS

[RJC]

Do you have a balance in any Traditional IRA accounts from past contributions or rollovers from employer plans? If not you could do a backdoor Roth contribution. This is the colloquial name for making Traditional IRA contributions (anyone can contribute, the income limits dictate whether they're deductible) and converting this to Roth (only any gains between contribution and conversion will be taxable). The reason this only works if you don't have an existing traditional IRA balance is that if you do then you'll be taxed in proportion to the existing balance as compared to the non-deductible balance you just contributed.

Beyond that you're stuck with a taxable account, but that's not so bad. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I have a few thousand in a Rollover IRA and a Roth IRA from a previous employer. Is that what you mean?

[RJC]

How much do you owe on the Mortgage?

I'm a fan of investing, but if you can pay off the mortgage in one go, it might not be a bad choice to get a risk free 4.25% return. This is especially true if you are already maxing out 401K and 529 plans and don't have any other debt.

I'm in the same boat as you, and I'm building up a Taxable account that I could use to pay off the mortgage (or not) depending on how things go in the next few years.

Best of luck. If you are capable of doing #1->#5 already, I have a feeling you will be fine no matter what you do.

JGS

There is still a sizable amount (~500k) on our mortgage but we still have about 25 years left on it. I was tempted to pay it down but reading these forums make it sound like investing is the better option in the long run.

Thank you!

[terran]

Do you have a balance in any Traditional IRA accounts from past contributions or rollovers from employer plans? If not you could do a backdoor Roth contribution. This is the colloquial name for making Traditional IRA contributions (anyone can contribute, the income limits dictate whether they're deductible) and converting this to Roth (only any gains between contribution and conversion will be taxable). The reason this only works if you don't have an existing traditional IRA balance is that if you do then you'll be taxed in proportion to the existing balance as compared to the non-deductible balance you just contributed.

Beyond that you're stuck with a taxable account, but that's not so bad. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I have a few thousand in a Rollover IRA and a Roth IRA from a previous employer. Is that what you mean?

The Roth isn't an issue for this purpose, but the rollover IRA is. You could see if our current employer's 401(k) plan will accept the rollover IRA rollover into the plan. Make sure they know it's a rollover as they may be more likely to accept it than if it was from contributions since that might be more similar to accepting rollovers from another 401(k). If not, it might be worth just converting the rollover to Roth along with a non-deductible contribution. You'll pay tax on the conversion at your current marginal rate, but it will open you to many future years of backdoor Roth contributions

Does your spouse have any existing traditional IRA balances? IRAs are individual accounts, so either of you can make backdoor Roth contributions without an issue if you have no other traditional IRA balance regardless of the other spouse's situation.

Take a read through this and see if you can follow how it works: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

[RJC]

Do you have a balance in any Traditional IRA accounts from past contributions or rollovers from employer plans? If not you could do a backdoor Roth contribution. This is the colloquial name for making Traditional IRA contributions (anyone can contribute, the income limits dictate whether they're deductible) and converting this to Roth (only any gains between contribution and conversion will be taxable). The reason this only works if you don't have an existing traditional IRA balance is that if you do then you'll be taxed in proportion to the existing balance as compared to the non-deductible balance you just contributed.

Beyond that you're stuck with a taxable account, but that's not so bad. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

I have a few thousand in a Rollover IRA and a Roth IRA from a previous employer. Is that what you mean?

The Roth isn't an issue for this purpose, but the rollover IRA is. You could see if our current employer's 401(k) plan will accept the rollover IRA rollover into the plan. Make sure they know it's a rollover as they may be more likely to accept it than if it was from contributions since that might be more similar to accepting rollovers from another 401(k). If not, it might be worth just converting the rollover to Roth along with a non-deductible contribution. You'll pay tax on the conversion at your current marginal rate, but it will open you to many future years of backdoor Roth contributions

Does your spouse have any existing traditional IRA balances? IRAs are individual accounts, so either of you can make backdoor Roth contributions without an issue if you have no other traditional IRA balance regardless of the other spouse's situation.

Take a read through this and see if you can follow how it works: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

My wife only has a current 401k. I think she pulled out money from her IRAs from previous employers (ugh!).

I'll check these links out and will do further research on Backdoor Roths. Thanks Terran!

[Financial.Velociraptor]

Regarding paying down the mortgage:

I paid mine down early as my first "investment" before putting a penny in the market (save the 5% I contributed to 401k to get company match).  It was the right decision for me emotionally and strategically as I couldn't mentally justify investing in anything "risky" if it fit a subconscious description of the "house money". 

If I could do it again, I'd invest in fixed income and debt like securities. Especially closed end municipal bond funds.  There is a free tool at https://www.cefconnect.com/closed-end-funds-screener that has 85 closed end funds available for search and sorting.  They range from 0.40% yield to 5.5% yield.  Most of them trade at a discount to NAV.  If you can put the "house money" some place that earns as much as they interest rate on your loan (or more!) you'd have a tax arbitrage situation where you could deduct mortgage interest and collect offsetting income federal tax free.  Upon accumulating your pay off balance in munis, your position would become self liquidating.  That is how I would do it again, knowing what I know now.

Otherwise, check the sticky thread here: https://forum.mrmoneymustache.com/investor-alley/investment-order/

[MustacheAndaHalf]

Taxable isn't as bad as you might think.  Assuming you don't qualify for Roth/Traditional IRA owing to the income limit, that means tax-exempt bond funds are probably worth it for you.  That lets you use taxable accounts for bonds.

But also, passive stock funds are tax efficient.  You will pay a reduced tax on dividends each year, and a 15% tax on long-term gains (for most people).  So right now Vanguard Total Stock Market ETF (VTI) has a 1.93% dividend.
So if you invest $10,000 in VTI, you'd get $193 in dividends, and pay $27.50 in taxes on that $10,000.  That's only 0.25%, and some funds are actually more expensive than that before taxes.

[RJC]

Regarding paying down the mortgage:

I paid mine down early as my first "investment" before putting a penny in the market (save the 5% I contributed to 401k to get company match).  It was the right decision for me emotionally and strategically as I couldn't mentally justify investing in anything "risky" if it fit a subconscious description of the "house money". 

If I could do it again, I'd invest in fixed income and debt like securities. Especially closed end municipal bond funds.  There is a free tool at https://www.cefconnect.com/closed-end-funds-screener that has 85 closed end funds available for search and sorting.  They range from 0.40% yield to 5.5% yield.  Most of them trade at a discount to NAV.  If you can put the "house money" some place that earns as much as they interest rate on your loan (or more!) you'd have a tax arbitrage situation where you could deduct mortgage interest and collect offsetting income federal tax free.  Upon accumulating your pay off balance in munis, your position would become self liquidating.  That is how I would do it again, knowing what I know now.

Otherwise, check the sticky thread here: https://forum.mrmoneymustache.com/investor-alley/investment-order/

Thanks for the link. I guess I need to figure out when I would like to use this money. If short term (0-4 years), the municipal bonds seem like a great idea. If longer (5+ years), perhaps an index fund in a taxable account would be the better bet?

[RJC]

Taxable isn't as bad as you might think.  Assuming you don't qualify for Roth/Traditional IRA owing to the income limit, that means tax-exempt bond funds are probably worth it for you.  That lets you use taxable accounts for bonds.

But also, passive stock funds are tax efficient.  You will pay a reduced tax on dividends each year, and a 15% tax on long-term gains (for most people).  So right now Vanguard Total Stock Market ETF (VTI) has a 1.93% dividend.
So if you invest $10,000 in VTI, you'd get $193 in dividends, and pay $27.50 in taxes on that $10,000.  That's only 0.25%, and some funds are actually more expensive than that before taxes.

Thanks for your comment. Do you pay taxes on the dividend if it automatically reinvests into the fund?

[terran]

Taxable isn't as bad as you might think.  Assuming you don't qualify for Roth/Traditional IRA owing to the income limit, that means tax-exempt bond funds are probably worth it for you.  That lets you use taxable accounts for bonds.

But also, passive stock funds are tax efficient.  You will pay a reduced tax on dividends each year, and a 15% tax on long-term gains (for most people).  So right now Vanguard Total Stock Market ETF (VTI) has a 1.93% dividend.
So if you invest $10,000 in VTI, you'd get $193 in dividends, and pay $27.50 in taxes on that $10,000.  That's only 0.25%, and some funds are actually more expensive than that before taxes.

Thanks for your comment. Do you pay taxes on the dividend if it automatically reinvests into the fund?

Yes.

[JGS1980]

but you can alsp tax loss harvest when needed, which counteracts some or all of the dividend taxes

[RJC]

but you can alsp tax loss harvest when needed, which counteracts some or all of the dividend taxes

Good to know. Thanks!