When to open taxable brokerage?

[brooklynbrde]

When to open a taxable brokerage account?

I max out a 401k offered through work as well as an IRA. Husband maxes out an IRA and also has a pension through his union. We have 6 months of emergency savings in cash. Our savings goals are a little nebulous, mostly travel, home improvements and baby.

We just saved up and bought a (cheap, used) car in cash. We own a house with a reasonable mortgage. The house was just appraised at 1m, we bought it for 250 and owe 170. We rent out part of the house, and the rental income covers the mortgage with a few hundred left over. We have no debt other than the mortgage, however we would like to tap into a HELOC to put $100k improvements into the house. Our neighborhood is very rapidly gentrifying and we are confident the $100k will be a good investment, and we have like 800k equity in the house already.

We want to have a baby next year, and have been stashing around 500 month away for that, with the goal of 5k saved before baby comes. Maybe 3 babies eventually. And we try to throw extra money into a travel fund, usually a few hundred a month, in order to take 2 trips a year for a total of 8-10k in travel each year.

We can keep the above emergency cash/short-term savings, and move 5-7k into a taxable brokerage account immediately, then contribute maybe 300-500 a month to it. Should we do that? Our retirement accounts are earning crazy returns right now; and it’s sad to see our savings sit in a regular bank account earning next to nothing.

Our HELOC rate is locked at 3%, so it seems to make more sense to use it to pay for the home renos and invest the cash. Right? Also, the rental income will cover the mortgage payments plus the HELOC monthly payments. In March we will raise the rent by $150. Some of the home improvements are necessary before baby comes due to lead etc.

I realize we can open a 529 for future baby, put it in our name until baby is born, then roll it over to a baby’s name. But it seems weird to do that before even trying to conceive. Should we also open a 529 and just contribute a small amount, in addition to a taxable brokerage?

If we open a brokerage account, we’d manage it ourselves and invest in mutual funds or ETFs. Is that what we should do??  Our HHI is 155 in HCOL New York City. I'm 28, husband 39.  We're saving around 41% of our income, and are able to do that mostly because of the house situation.

I don't know if we're really looking for FIRE but just want to live comfortably, pay for kids' college, travel.

[Financial.Velociraptor]

There is a sticky that outlines the orthodoxy around here on investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/

Probably best to start there.

[sokoloff]

We rent out part of the house, and the rental income covers the mortgage with a few hundred left over. We have no debt other than the mortgage, however we would like to tap into a HELOC to put $100k improvements into the house. Our neighborhood is very rapidly gentrifying and we are confident the $100k will be a good investment

If it's in the part of the house that you will live in, it's probably (and that's being generous) not a good investment from a financial perspective.

If it serves to increase the rent you will receive on the part you rent out it might be, but when you think about "take a HELOC and do a renovation", you need to think "take a HELOC for house-related consumption" not "take a HELOC and use it for a house-related investment". If you spend that $100K on the house, it's likely that you'll create about $50-65K in value from the $100K of expense. In 18 years, that value created might grow back to $110-150K, so you can think it was a good investment to spend $100K and get $105-140K out in resale after commission. If you took that $100K and put it in the market, it is likely to grow to $400K in that time, get taxed back to something just north of $300K, making the actual investment a much better plan.

I realize we can open a 529 for future baby, put it in our name until baby is born, then roll it over to a baby’s name. But it seems weird to do that before even trying to conceive. Should we also open a 529 and just contribute a small amount, in addition to a taxable brokerage?

I wouldn't if you expect your future situation to be similar to your current situation. If you were temporarily flush with cash but expect less in the future, you could, but otherwise I'd wait to have the kid, and we waited until we were past the windows for major early childhood developmental disabilities to show up before plowing in enough money to project to fund the kids' college education.

Money that you put into a taxable brokerage account has a lot more flexibility than money you put into a 529, even if the 529 has some tax advantage [only if you spend it on something eligible]. You can put the money in a brokerage now and move it to a 529 later with no fuss; the reverse is not true.