The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: ec2991 on August 31, 2018, 02:06:35 PM
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I'm new to responsible adult life, and trying to figure out what to do with some spare cash: A little information that might be relevant --
-- 26 y/o single, finished PhD last year, and started first 'real job'
-- income before any taxes: ~75k this year
-- Maxing 401k, IRA, and HSA contributions for the year, no debt
Main question: I have ~40k in cash sitting around, which I don't anticipate needing for a very long time. Terrible, I know. What's the prudent thing to do with this money? I have a respectable emergency fund apart from this already.
I was thinking I would just put it into my taxable Vanguard account, but I'm wondering if there's a better strategy. If I understand correctly, I could make sizable after-tax contributions to my 401(k), and then move the money into a Roth later. Is that a better idea? Other factors I should be considering?
If it's relevant, the 401(k) is with Fidelity. I haven't figured out yet if I can do in-service distributions (maybe this depends on the plan?) but in any case I'll be leaving this employer within a year or two (it's limited-term academic appointment). Happy to provide more details if they'd be helpful.
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I think contributing to an after-tax 401k account sounds like a good idea going forward. I don't think you can add money to an after-tax 401k account from a taxable account though. My understanding was contributions had to be from a paycheck.
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I'm not sure that there is a wrong answer for this. You have a lot more options if you just put in in your taxable account.
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Find out if you can do in service distributions (to an IRA) or in service rollover within the plan to a Roth 401(k). If you can do either of those definitely do it, if not only do it if you plan to leave this employer pretty soon (maybe as much as a year?). Your gains will just be taxed at your marginal rate which is worse than capital gains rates in taxable, so I wouldn't want to let too many gains pile up before converting to Roth.
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Thanks for the replies. I appreciate the input!
I've just realized that not all 401(k) plans even allow after-tax contributions, and, after much poking about in prospectuses (prospectii?), I've learned mine doesn't. So a moot point for now. At least I'll know to consider this option at my next job.
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You can get pretty tax efficient in your regular brokerage account.
Vanguard Total Stock Market pays 1.8% in dividends, which as qualified dividends are only taxed at the 15% rate. So with $10,000 invested you might see $180 in dividends and then pay $27 in tax. You could actually pay more than that with the expense ratios of some mutual funds.
And you can use tax-exempt bonds. At higher incomes the tax-exempt yield will beat a taxable yield. Since those bonds are already tax-exempt, they belong in a taxable account.