Author Topic: Taxable account. Need help with what to buy  (Read 3681 times)

Rodgers12

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Taxable account. Need help with what to buy
« on: July 20, 2015, 08:44:04 PM »
Here is my situation. Maxing out Roth IRA and putting in enough to get the company matching 3% contribution in my simple Ira. Just paid off my student loan after two years (thanks to my mustachian lifestyle) so I Do not have any debt. Looking at opening a vanguard table account with enough to get into one 3k min etf or mutual fund and then dollar cost average monthly. I plan on adding about $200-300 a month so a total of 2,400 to 3,600 a year depending on spending habits. The money in this account is not intended to be used and is a long term account. I may touch a small portion about 3-5 years out when I'll be able to afford a house but my current budget/projection is set up so I won't have to. So my question is, What eft or fund would be recommended in my situation?

Appreciate you taking time to read this and any thoughts or advice would be appreciated.

MDM

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Re: Taxable account. Need help with what to buy
« Reply #1 on: July 20, 2015, 09:02:59 PM »
...any thoughts or advice would be appreciated.

What is the reasoning behind using a taxable account instead of maximizing your annual tax-advantaged investments?

mrpercentage

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Re: Taxable account. Need help with what to buy
« Reply #2 on: July 20, 2015, 10:09:46 PM »
Anything you think you will want to keep forever. Its selling that will bite you in a taxed account. The no penalty sell might still make it worth it. Taxed accounts have few strings attached. I like the freedom they provide.

Despite what many will tell you, I like strait stock because I completely control all the selling. BRK-B is an excellent choice. It performs well, and currently has no dividend. Should Mr. Buffett perish you might see a liquidation of investments held that will be a special dividend of epic proportions. Im just saying with or without Buffett you should fair well. I prefer with. I really like that old dude.

Well established dividend stocks are good as well. Using the rule of 72-- divide 72 by the yield and thats how long it will take to double your money in dividends alone. Most good dividend stocks pay 2.5-3.5%. Procter & Gamble is 3.3% so 21 years if dividends are taken in cash. Compounding is better.

Rodgers12

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Re: Taxable account. Need help with what to buy
« Reply #3 on: July 21, 2015, 06:07:30 AM »
What is the reasoning behind using a taxable account instead of maximizing your annual tax-advantaged investments?
[/quote]

The reasoning for putting this money into a taxable account is because if there comes a time I do need to touch it, the funds will be quickly available and there will not be a penalty for withdrawing from the account. The money in this account is to be kept in for long term but small amounts could be used for vacations, possible down payment for cottage 10-15 years from now, emergencies.

forummm

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Re: Taxable account. Need help with what to buy
« Reply #4 on: July 21, 2015, 06:46:05 AM »
Quote
What is the reasoning behind using a taxable account instead of maximizing your annual tax-advantaged investments?

The reasoning for putting this money into a taxable account is because if there comes a time I do need to touch it, the funds will be quickly available and there will not be a penalty for withdrawing from the account. The money in this account is to be kept in for long term but small amounts could be used for vacations, possible down payment for cottage 10-15 years from now, emergencies.

If you want an emergency fund, just keep a few grand in checking or savings, and have access to $10k in credit limits on your cards (just don't use the credit unless it is a actual *emergency* or it's paid off each month). If you want to have money for 10-15 years from now, you can start that fund later. It sounds like maxing out your 401k is the better bet. There are plenty of ways to save up or otherwise get a down payment fund that only take a couple years or less. Worry about it later.

Rodgers12

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Re: Taxable account. Need help with what to buy
« Reply #5 on: July 24, 2015, 06:34:33 PM »
Quote
What is the reasoning behind using a taxable account instead of maximizing your annual tax-advantaged investments?

The reasoning for putting this money into a taxable account is because if there comes a time I do need to touch it, the funds will be quickly available and there will not be a penalty for withdrawing from the account. The money in this account is to be kept in for long term but small amounts could be used for vacations, possible down payment for cottage 10-15 years from now, emergencies.

If you want an emergency fund, just keep a few grand in checking or savings, and have access to $10k in credit limits on your cards (just don't use the credit unless it is a actual *emergency* or it's paid off each month). If you want to have money for 10-15 years from now, you can start that fund later. It sounds like maxing out your 401k is the better bet. There are plenty of ways to save up or otherwise get a down payment fund that only take a couple years or less. Worry about it later.

I have 9k credit card  limit between my two cash rewards cards. Only use them for everyday purchases and pay off in full every month so I have that covered. I also should had mentioned that I have a personal FIRE goal between 45-50. So if my projections are correct I should need about 300-400k  in a taxable account due to the fact that I would not be able withdrawal from my retirement accounts till 59 1/2. I do realize I could touch the Roth IRA contributions penalty free but that's not an option because I want that growing as much as possible. With that into consideration is my taxable account plan reasonable now or should I still be throwing this money into my Simple Ira. Or maybe there is anonther way to go about it that I am not seeing? 


Rodgers12

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Re: Taxable account. Need help with what to buy
« Reply #7 on: July 24, 2015, 07:39:49 PM »
http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I have actually seen that post and I am aware of the conversion rules. But I don't see as to how it is beneficial as a tax strategy I guess. Say I withdrawal enough at age 45 so it could be touched at age 50 and last me till 59 1/2. Or to be more practical withdrawal smaller amounts starting earlier to strategically keep the taxes in whatever my current tax bracket would be before the withdrawal, because every withdrawal would be considered ordinary income and the full amount withdrawn is taxed. So although I am forgoing tax right away and allowing the money to grow tax free, once I withdrawal the money to make the conversion, I will paying tax on the full amount withdrawn in whatever tax bracket I fall into. Which would be either the 25 or  the 28% brackets. Plus wouldn't that also be banking on the tax rates staying the same 25 years from now. Which I think its safe to say they will not be getting any lower. And as a taxable account the gains/dividends would only be taxed at 15% as they would be long term cap gains.

Maybe I am over thinking this. Are there any studies out there showing that the 401k/simple ira conversion is more beneficial than just putting in the minimal amount of money needed in a taxable account to supplement income till the 59 1/2 age?

forummm

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Re: Taxable account. Need help with what to buy
« Reply #8 on: July 24, 2015, 08:03:32 PM »
I'm not sure I understand what the question is. If you have a choice to either put money in a tax-advantaged account or a taxable account, it's usually better to put it in the tax-advantaged account. One of those scenarios is when you expect to have a lower taxable income in retirement than you make now.

One way people do the Roth ladder:
Age 45: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 46: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 47: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 48: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 49: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 50: Live on Roth conversion, Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
etc

Since you want to retire in 20 years, you'll probably have quite a lot of Roth contributions and taxable savings by then.

forummm

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Re: Taxable account. Need help with what to buy
« Reply #9 on: July 24, 2015, 08:08:26 PM »
So although I am forgoing tax right away and allowing the money to grow tax free, once I withdrawal the money to make the conversion, I will paying tax on the full amount withdrawn in whatever tax bracket I fall into. Which would be either the 25 or  the 28% brackets.

When you retire, especially if you have a mustachian lifestyle, you will probably not be anywhere near the 25% bracket. You could be in the 0% or 15% bracket. So you would be paying little or no tax on the amount you were converting.

Rodgers12

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Re: Taxable account. Need help with what to buy
« Reply #10 on: July 24, 2015, 08:27:58 PM »
I'm not sure I understand what the question is. If you have a choice to either put money in a tax-advantaged account or a taxable account, it's usually better to put it in the tax-advantaged account. One of those scenarios is when you expect to have a lower taxable income in retirement than you make now.

One way people do the Roth ladder:
Age 45: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 46: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 47: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 48: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 49: Live on Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
Age 50: Live on Roth conversion, Roth IRA contributions and/or taxable savings, and do a conversion of the amount you want to spend 5 years later
etc

Since you want to retire in 20 years, you'll probably have quite a lot of Roth contributions and taxable savings by then.

And the light bulb clicked haha. I follow the concept now, Thanks for laying out the scenario. I kept thinking the conversion would be done when still working full time generating the huge tax bill.

So that 4k I planned on putting into a taxable account this year I will put into the simple Ira instead.

Thanks much for the help!

MDM

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Re: Taxable account. Need help with what to buy
« Reply #11 on: July 24, 2015, 08:31:54 PM »
Maybe I am over thinking this. Are there any studies out there showing that the 401k/simple ira conversion is more beneficial than just putting in the minimal amount of money needed in a taxable account to supplement income till the 59 1/2 age?
You could try some scenarios for your personal situation on the '401k vs Taxable' tab in the case study spreadsheet.  Might not answer everything but it might be helpful to clarify some things.  Or maybe it's clear now.... :)