Author Topic: What do I do with my monies?  (Read 7837 times)

more4less

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What do I do with my monies?
« on: May 28, 2013, 05:45:50 PM »
Hello mustachians, I need your advice.
I have quite lean lifestyle which enables me to save slightly more than a half of my income. At this moment I'm 28, debt free, maxed out my 401K, invested $5000 in LendingClub, sitting on the wad of cash (savings account with .85% APY), and having no property. I thought about investing into real estate (duh!), but couldn't find a good option as I live in SF Bay Area where real estate market is a little bit tricky. So here I am with considerable amount of cash on my hands. Need your investment advice.

My options are:
1) Considering bumping LendingClub investment up to $10000 (which will be my limit)
2) Investing the the rest of my income in mutual funds through Vanguard (or Fidelity). Not sure which though - most likely dividend paying to get some cash flow (which will be reinvested until FI)
3) Real estate really attracts me, but given the place where I happen to live (Silicon Valley) this idea seems to be quite questionable

Any suggestions or comments are very welcome and appreciated.

PS: Are dividends from mutual funds taxed as qualified dividends (at 15% rate) if I hold them for several years?
« Last Edit: May 28, 2013, 06:34:05 PM by more4less »

samustache

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Re: What do I do with my monies?
« Reply #1 on: May 28, 2013, 06:03:48 PM »
Start a vanguard account with a brokerage account and buy the Vanguard ETFs commission free. Fidelity has much higher fees if I remember right. Mutual funds have two types of payout - the normal qualified dividend ones are 15%, but sometimes they have to return capital which is at your marginal rate for the first year you hold the fund. It can be very annoying if the fund is down and you have to pay cap gains tax anyway. ETFs don't have that same issue.

 Lending Club is a total gamble unless you can invest in 1000+ notes, so I'd build up a healthy amount in etfs first.

daverobev

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Re: What do I do with my monies?
« Reply #2 on: May 28, 2013, 07:12:43 PM »
2) Dividend paying but re-investing - it makes no difference whether you have dividend-paying but reinvest or accumulation shares/units - it will amount to the same thing, assuming all else equal (slightly better to have acc. units for ETFs - with ETFs you can only hold whole units).

I'm not in the US so don't know how it all works there. You're totally out of tax-shelters for this year?

With real estate you REALLY need to do your homework as it is a LOT of money - and a lot of leverage, so money you don't even have yet - all on one bet. It's absolutely an awesome way to reach FI quickly if you do your homework. But, if you are an armchair investor, MUCH easier to just stick with your asset allocation - x% stocks, y% bonds, z% REITS and/or precious metals and/or whatever else.

tylerherman

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Re: What do I do with my monies?
« Reply #3 on: May 29, 2013, 05:49:47 PM »
You really should avoid dividend paying stocks in your taxable accounts as a general rule.

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

Joet

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Re: What do I do with my monies?
« Reply #4 on: May 29, 2013, 05:54:13 PM »
Did you do the following already?

17.5k+ match 401k [beware of an employer that doesnt offer a true-up, aka dont miss the 'match' inadvertantly! alternatively slow contribs down to 5% or whatever catches the match without going over 17.5k before the end of the year]
5.5k Roth [backdoor if necessary]
3.125k HSA [do you have a high deductible health plan at work?]
5K Ibonds with your tax return [woo paper Ibonds]

Beyond that Lending Club seems ok for up to 10% of your portfolio I'd say---and most likely in tax-advantaged only. Ideally a Roth!

In taxable, look at tax efficient holdings. That means foreign large equity index and not things like bonds/REITs, generally. Learn to love that long-term capital gains tax rate (15%!) if you ever are in a position to have to sell. Ideally only time that is the case is for tax loss harvesting.

aj_yooper

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Re: What do I do with my monies?
« Reply #5 on: May 30, 2013, 03:53:20 AM »
Am I understanding Lending Club or P2P correctly? 

Firms that do P2P (like Lending Club) have a great business model: charge a fee for the loan to the consumer upfront; collect a fee from each payment transaction; and, charge a fee on loans that go to collections.  Liabilities on bad loans go to the other person in the P2P.  Unlike banks, they don't have to collect funds in CDs and checking accounts, maintain many buildings, or cover bad loans.  LC gets the consumer late or missed payment fees;LC gets a charge for debt collection.  They do have to build an internet presence and spread the word.  If this is accurate, I can see why Google would want to get in on the internet mechanics of the process.  Investors carry all of the risks, not Lending Club.  The prospectus also indicates they may do some notes themselves.  Cherry picking?  If you put in $5000 to LC you can have 200 individual notes of $25; you are doing unsecured loans to an non diversified risk pool.  Not looking good to me.

more4less

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Re: What do I do with my monies?
« Reply #6 on: May 30, 2013, 04:38:09 PM »
You really should avoid dividend paying stocks in your taxable accounts as a general rule.
I understand this; however, I would like to reach FI in my 30s. Which means I'll have to wait another 25-30 years till my funds in 401K or IRA will be available.
Also, in my understanding, in case of ETFs' dividends will be taxed only when they are realized. In other words, they will be taxed in the year when I withdraw some of dividends from Vanguard (or similar financial institution) account (in case of FI). Let us see what tax rate I should expect... My living expenses are ~$2k/mo. Assuming no need for big ticket purchases I will withdraw only $24k per year (dream on - $600k in Vanguard account :), which puts me into 2nd tax bracket (less than $36k, or $72k if married). With this level of income (1st and 2nd tax brackets) capital gains are tax free. Please correct me if I wrong.
« Last Edit: May 30, 2013, 04:39:53 PM by more4less »

Joet

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Re: What do I do with my monies?
« Reply #7 on: May 30, 2013, 04:39:41 PM »
dividends are immediately taxable if they are in a taxable account


72(t) and Roth conversions allow you to not really worry so much about your tax-advantaged pile, imo

eg in a 0-15% federal tax bracket, take your tax advantaged pile [free from working taxes in the 25-30 something range] and convert it to Roth for spending $$, win-win
« Last Edit: May 30, 2013, 04:42:03 PM by Joet »

more4less

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Re: What do I do with my monies?
« Reply #8 on: June 04, 2013, 09:50:06 AM »
Thanks for the tip, Joet.

So where we are?
17.5k + match 401k - Done! Whoohoo!
5.5k Roth - I slept on it and decided to convert my LendingClub balance into their Roth IRA (I have roughly 5.5k already there). Not sure how it's done though - will try to get more info on LC's site.
3.125k HSA - Pass on this one. I have quite a good plan. My last year's "medical expenses" were like 2 packs of Advil, 6 toothbrushes and value packs of floss and toothpaste.
5K Ibonds with your tax return - Can you give me more info about these? As far as I understand they are tax exempt, but have awfully low yield. Or am I wrong?

And what do I do with other monies? What share of funds people keep in saving account? What goes in ETF (and which)?
« Last Edit: June 04, 2013, 02:02:24 PM by more4less »

markstache

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Re: What do I do with my monies?
« Reply #9 on: June 04, 2013, 10:14:14 AM »
5K Ibonds with your tax return [woo paper Ibonds]

Any particular reason to avoid electronic ibonds via TreasuryDirect?

Joet

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Re: What do I do with my monies?
« Reply #10 on: June 04, 2013, 01:47:08 PM »
if you're medical expenses are that low, you are a PERFECT candidate for a high-deductible health savings account (HSA) it increases your tax-advantaged space [equivalent to 401k] by 3.1k individual/6.25k family. Those with high expenses --where the larger deductible starts to become an issue---are the ones that should be wary. Many employers will offer incentives/directly contribute to your HSA. I believe mine is typical and they hand me $1300/yr for my HSA and I payroll deduct the other $1800. Medical expense receipts I keep in a folder for eventual claims against this fund. For now--tax advantaged savings.

If a 401 plan is good, so is an HSA.

No real reason to prefer paper Ibonds over electronic: I'm just kinda annoyed by the treasury security features and I like paper I guess. Something to put in the safe, take images of, store redundantly 'in the cloud', along with the proof of purchase receipts.

Return of Ibonds is expected to not be impressive with one caveat--if inflation picks up you're good. If not, no biggee. Inflation insurance really. Personally I like to use Ibonds as the stable source of my emergency fund--tough to beat in that application. [VS HY checking, MM, CDs, App-o-Rama schemes, savings accounts]. I'm a huge fan of de-risking a portfolio where it makes sense. Ibonds are perfect for that.
« Last Edit: June 04, 2013, 01:50:26 PM by Joet »

Nords

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Re: What do I do with my monies?
« Reply #11 on: June 04, 2013, 08:08:32 PM »
5K Ibonds with your tax return [woo paper Ibonds]
Any particular reason to avoid electronic ibonds via TreasuryDirect?
The Bogleheads' consistent criticism of electronic I bonds has been that, unlike paper I bonds, there's no provision for replacement.  If the Treasury Direct account is hacked or wiped out then the Treasury does not plan to replace electronic savings bonds.

I haven't checked that issue in a couple years, so if anyone knows of a change in the Treasury policy then I'd appreciate a link.

more4less

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Re: What do I do with my monies?
« Reply #12 on: June 18, 2013, 03:52:00 PM »
As it turned out, I'm not eligible for HSA. Looks like my employer doesn't offer high deductible plan/

I just called LendingClub and was told that there's no way to convert my taxable LC account into IRA. But that's alright. Most surprising thing was that in order to open IRA I need to use another email. I think I will go for it since I got 19.2% return on my taxable LC. However, from this moment I decided to stop reinvesting into new notes on taxable account draining slowly money back into checking. What do you guys think about Roth IRA with LendingClub (besides that this model is new and very risky)? It seems quite logical to me to put LC into IRA since unlike dividends or cap gains, it's taxed as regular income (also you get 1099-OID with 200-400 strings :).

Ok, I overcame my fear and officially started my investment with opening an account with Vanguard ($10k in VTSAX for starters). Thinking of going for VTSAX, VEIEX, VTIAX. Not sure about proportions. No bonds. I know - this ride will be rough sometimes. Hopefully, I won't sell it all low when the next one hits :)

Any suggestions about ETFs?
« Last Edit: June 18, 2013, 03:57:27 PM by more4less »

matchewed

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Re: What do I do with my monies?
« Reply #13 on: June 18, 2013, 04:45:25 PM »
Maybe write out an investment plan. You seem to be all over the board with not much in the way of direction. "Oooooh Shiny" is a great way to get burned - http://www.bogleheads.org/wiki/Investment_Policy_Statement

aj_yooper

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Re: What do I do with my monies?
« Reply #14 on: June 18, 2013, 06:44:30 PM »
Maybe write out an investment plan. You seem to be all over the board with not much in the way of direction. "Oooooh Shiny" is a great way to get burned - http://www.bogleheads.org/wiki/Investment_Policy_Statement

+1  Really work on what matchewed is suggesting.  Also, in taxable accounts, not making any changes is a virtue due to capital gain taxes.  That is why the total market index is perfect; it doesn't really change stocks at all.  If a stock is no longer in the index, it is either purchased by another company or it is out of business. 

I believe the total international index does not show the foreign investment tax credit as it is a fund of funds.  Might be better to buy the individual foreign fund indices instead. 

icefr

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Re: What do I do with my monies?
« Reply #15 on: June 20, 2013, 10:55:58 PM »
I believe the total international index does not show the foreign investment tax credit as it is a fund of funds.  Might be better to buy the individual foreign fund indices instead.

I have the Total International Index and it does get the foreign tax credit. (It said so on my 1099-DIV last year.)

Freeyourchains2

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Re: What do I do with my monies?
« Reply #16 on: June 21, 2013, 12:40:58 PM »
You really should avoid dividend paying stocks in your taxable accounts as a general rule.

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

But they get you covering your expense passively faster in life, then you don't have to pay any taxes after FI for the rest of your life...with dividend income below $35k or $85k for married filers.

www.dividendmantra.com
« Last Edit: June 21, 2013, 12:45:17 PM by Freeyourchains2 »

matchewed

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Re: What do I do with my monies?
« Reply #17 on: June 21, 2013, 12:49:36 PM »
Is there a particular post from that website which details the math behind that claim?

aj_yooper

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Re: What do I do with my monies?
« Reply #18 on: June 21, 2013, 12:52:17 PM »
I believe the total international index does not show the foreign investment tax credit as it is a fund of funds.  Might be better to buy the individual foreign fund indices instead.

I have the Total International Index and it does get the foreign tax credit. (It said so on my 1099-DIV last year.)

You are correct.  And from the Bogleheads' Forum:

"Total International
The fund has distributed, on average, 75% qualified dividends under the qualified dividend tax regime. The fund qualifies for the foreign tax credit. [2] It's very unlikely to distribute capital gains in the event that a country moves out of emerging markets and joins developed markets."