What should I do with extra income now that my retirement accounts are maxed

[lilybluerose]

Hi ! I am just curious what others would do in my situation . I try my best to learn, but find myself unsure sometimes .

Here are some stats. I am 36 yrs old, divorced. Full time single parent to two young children. Self-employed making 180-200k before taxes.

I have no debt besides my house which I owe 103k on. The home is probably worth around 200-230k .

I am definitely wanting to move to a bigger home eventually. So I have around 112k saved in an ally savings account solely for this purpose. I will have to have two mortgages when I decide to move as I have no where to pack up and move my kids and I in order to be able to sell first and buy second. The houses that is like seem to run around 400k here give or take.

I have 158k in my vanguard account.

$18.4 in my brokerage which is all in vtsax

$51.3 in my IRA which is tde 2055

$88.7 in my solo 401k in the 2044

I have currently around 12k in my general checking account.

I maxed out my IRA and solo 401k for the year. First year I was able to do this .

What should I do now ? Should I toss more at my mortgage ? Some into my kids 529s? Save a lil more in my ally for moving ? Or keep throwing it at my vtsax brokerage ? Save it to be able to put a big chunk in my vanguard account right away next year ?

My main goals really are to be able to be financially secure so my kids hopefully never have to worry or take care of me.

Ty so much for any input !

Edit. Also can someone please help me understand what happens when I withdraw from a brokerage account ? How does this work in terms of taxes ? Would you guys keep going all in vtsax or should I look into the total bonds fund too ? Ty so much . I've googled but this stuff confuses me sometimes

[Freedomin5]

Many of us here follow the Investment Order: https://forum.mrmoneymustache.com/investor-alley/investment-order/

[MDM]

Edit. Also can someone please help me understand what happens when I withdraw from a brokerage account ? How does this work in terms of taxes ? Would you guys keep going all in vtsax or should I look into the total bonds fund too ? Ty so much . I've googled but this stuff confuses me sometimes

Freedomin5 addressed the main question.

When you sell an investment, you have either a capital gain or loss depending on whether you sell the investment for more or less than you paid for it.  See What is cost basis for taxes? | Vanguard for some information about how you identify what you paid for what you choose to sell.  Does that reduce confusion, or make it worse?

[GilesMM]

529s is the logical next step.

[lilybluerose]

Edit. Also can someone please help me understand what happens when I withdraw from a brokerage account ? How does this work in terms of taxes ? Would you guys keep going all in vtsax or should I look into the total bonds fund too ? Ty so much . I've googled but this stuff confuses me sometimes

Freedomin5 addressed the main question.

When you sell an investment, you have either a capital gain or loss depending on whether you sell the investment for more or less than you paid for it.  See What is cost basis for taxes? | Vanguard for some information about how you identify what you paid for what you choose to sell.  Does that reduce confusion, or make it worse?

Way worse :( I need this in an explain like I'm five style lol. I also have COVID brain so it's even worse lol

[MDM]

Edit. Also can someone please help me understand what happens when I withdraw from a brokerage account ? How does this work in terms of taxes ? Would you guys keep going all in vtsax or should I look into the total bonds fund too ? Ty so much . I've googled but this stuff confuses me sometimes

Freedomin5 addressed the main question.

When you sell an investment, you have either a capital gain or loss depending on whether you sell the investment for more or less than you paid for it.  See What is cost basis for taxes? | Vanguard for some information about how you identify what you paid for what you choose to sell.  Does that reduce confusion, or make it worse?

Way worse :( I need this in an explain like I'm five style lol. I also have COVID brain so it's even worse lol

a) You bought 80 shares of VTSAX for $85/share in 2020.  You sell those shares for $109/share in 2023 to get cash.  You can withdraw 80 * $109 = $8,720.  Your capital gain is 80 * ($109 - $85) = $1,920.  How much tax you will pay on that capital gain depends on the rest of your income in 2023.
b) You bought 80 shares of VTSAX for $117/share in 2021.  You sell those shares for $109/share in 2023 to get cash.  You can withdraw 80 * $109 = $8,720.  Your capital loss is 80 * ($117 - $109) = $640.  How much tax you will save on that capital loss depends on the rest of your income in 2023.

Getting better?  If not, do you have a specific example in mind?

[nereo]

Just adding to MDMs excellent posts - typically your brokerage will calculate your gain or loss on a particular investment, so it’s not something you need to do yourself.
To make matters slightly more confusing,  there are different ways one can calculate gain/loss, particularly for investments where you bought shares every month like people tend to do with retirement accounts. You may have several hundred shares of a fund, but purchases over many years an all at different prices.

Never fear, again your brokerage will calculate everything for you. Typically the brokerage will default to “first in, first out” ( or FICO) when calculating your capital gains, which just means when you sell a bunch of shares it assumes you are selling the shares you have held the longest. However, you can direct your brokerage to calculate capital gains other ways, like selling the shares you bought most recently.  This as a much more advanced tactic typically used to defer paying taxes until later, such as when your tax rate is very high right now but you anticipate it being much lower in future years.

In summary: your brokerage will calculate capital gains for you, but it’s very useful to know how it’s calculated and which method your brokerage is using.


This concept took me years to grasp, and I still make mistakes, so please continue to ask questions

[Ron Scott]

First, you’re doing great and you should be proud of yourself. You have your own challenges but you have good goals and you’re killing it. Congrats.

Thoughts:

Most people need a good accountant.  The self-employed need a very good one.

Any funds you might need in the short term (new house?) can be kept in low volatility assets in your taxable account…maybe MMs that take advantage of todays higher rates.

Asset Allocations with very high stock weightings have been successful for some time now, but balance is a better long term bet.  60-40 is a good standard; 70-30 is usually considered aggressive.

Given your high income, tax efficient funds like VTI/VTSAX and asset location strategies should be considerations, to avoid manufacturing unnecessary taxable income.

Ground yourself in a productive financial strategy in which all the piece parts work toward your goals in lock-step. Don’t just Google this stuff on a one-off basis and don’t rely on the forums. The Bogleheads’ Guide To Investing would be a good start.

You can always withdraw income and dividends from a taxable account without incurring additional taxes. If you’ve been automatically reinvesting in appreciating stock funds you can reduce the tax on withdrawals by selling the shares that have appreciated the least. Your Vanguard rep can help as necessary.

Good thinking on the 529s. Remind relatives of the tax advantages they’ll get too.

You need to be a bit assertive on closing dates when selling and buying houses to avoid owning both for too long. Very often the party who makes this a priority can call the shots. If you’re deliberately owning 2 so you can have some work done on the new one you’re buying, make sure the contractor is ready to work on a fast schedule as soon as you close on it. I had the guys start on refinishing the wood floors in my current place the day after I closed.

To save on moving costs have the movers focus on the big heavy stuff. You can prepack most everything else in advance, buy a couple cases of beer, and hit up your friends to chip in.

Your life and your kids’ childhoods happen while you’re saving for the future. Develop a sense for what level of spending vs. saving will give the 3 of you the best life experience and go for it. Enjoying your money is not a crime last time I checked.

[lilybluerose]

Just adding to MDMs excellent posts - typically your brokerage will calculate your gain or loss on a particular investment, so it’s not something you need to do yourself.
To make matters slightly more confusing,  there are different ways one can calculate gain/loss, particularly for investments where you bought shares every month like people tend to do with retirement accounts. You may have several hundred shares of a fund, but purchases over many years an all at different prices.

Never fear, again your brokerage will calculate everything for you. Typically the brokerage will default to “first in, first out” ( or FICO) when calculating your capital gains, which just means when you sell a bunch of shares it assumes you are selling the shares you have held the longest. However, you can direct your brokerage to calculate capital gains other ways, like selling the shares you bought most recently.  This as a much more advanced tactic typically used to defer paying taxes until later, such as when your tax rate is very high right now but you anticipate it being much lower in future years.

In summary: your brokerage will calculate capital gains for you, but it’s very useful to know how it’s calculated and which method your brokerage is using.


This concept took me years to grasp, and I still make mistakes, so please continue to ask questions

Ty ! I have a lot more reading and learning to do it seems before I feel comfortable putting in more and withdrawing from here ugh . Lol I wish this stuff was more simple , I've had such a time wrapping my mind around it all !

[Catbert]

Let me try even simpler to explain the basics of capital gains.  You buy a stock or mutual fund for $100.  A year or more later* you sell it for $125.  You'll owe capital gains on the $25 profit.  Capital gains rate for you is probably 15% so you'd owe 15% of $25 or $3.75.  It gets more complicated from here but that's at its core.

Whatever you decide, don't pay down your mortgage.  It's likely sub-4%, right?  You can get CDs that will beat that rate.

*it's different if you have short term capital gains by holding the stock/mutual fund for less than a year.

[Dicey]

Great start on saving for the next home. What's the interest rate on the current mortgage? Is it a fixed rate? How many years left?

[2sk22]

In the early 1990s, when my wife and I started working, we lived pretty frugally and discovered that we had a lot of extra money left over every month despite maxing out our 401Ks. Finding nothing better, we opened a brokerage account in the early 1990s and started buying a S&P index fund every month via automated purchase. We have yet to sell a single share thirty years later :-)

I remember seeing a quote somewhere to the effect of "every dollar you save should have a purpose and a use-by date". But when we started investing thirty years ago, we had absolutely no idea what it was for - we were renting and had no kids.

Initially, we had this vague thought that it would be the downpayment for our house. But thankfully, we didn't need it as we saved enough cash by then. Later at one point, we thought we would use that money for the kids college but our salaries increased to the point where we could cover college expenses without dipping into this money. So now, it has become our retirement money until RMDs kick in.

[farmecologist]

Given that interest rates are favorable these days, our excess income ( after maxing retirement accounts ) is being used to bulk up our cash balance. 

We are using a loose "three bucket" strategy once we retire, and cash will be essential to live on until we can tap retirement accounts.   And living off cash is essential for ACA subsidy qualification, etc...

[moof]

...

I remember seeing a quote somewhere to the effect of "every dollar you save should have a purpose and a use-by date". But when we started investing thirty years ago, we had absolutely no idea what it was for - we were renting and had no kids.
...

I thing that is one of those things people say to sound wise, but fall apart under scrutiny.  I grew up poor and realized the amazing power of having even modest savings can have.  It is hard to invest and save for a specific unknown future events, but saving to protect yourself against anything life can throw at you is easier to wrap my head around.

While my savings was slower than I wish, I still look back and thank my past self for consistently setting money aside.  If I had waited until I found MMM to start saving I would be 10 years behind where I am now.  My original motivation was to simply save enough that if ageism caught up with me I would have a life raft to fall back on in my 50's.  Over time I became burned out on my career faster than I ever imagined I would, so I am truly thankful I ramped up savings and built a much better plan over the last ~8-9 years since finding MMM, but the vague unplanned savings is still the lion's share of our savings and investments.

[nereo]

...

I remember seeing a quote somewhere to the effect of "every dollar you save should have a purpose and a use-by date". But when we started investing thirty years ago, we had absolutely no idea what it was for - we were renting and had no kids.
...

I thing that is one of those things people say to sound wise, but fall apart under scrutiny.  I grew up poor and realized the amazing power of having even modest savings can have.  It is hard to invest and save for a specific unknown future events, but saving to protect yourself against anything life can throw at you is easier to wrap my head around.

While my savings was slower than I wish, I still look back and thank my past self for consistently setting money aside.  If I had waited until I found MMM to start saving I would be 10 years behind where I am now.  My original motivation was to simply save enough that if ageism caught up with me I would have a life raft to fall back on in my 50's.  Over time I became burned out on my career faster than I ever imagined I would, so I am truly thankful I ramped up savings and built a much better plan over the last ~8-9 years since finding MMM, but the vague unplanned savings is still the lion's share of our savings and investments.

Agreed.  Having savings gives you options, which is just another term for freedom.
I'd argue that we ought to challenge this notion that all earning should be spent.  That's the kind of consumeristic nonsense that put us in this environmental catastrophe in the first place.

[lilybluerose]

I took a few days to try to do some research on this, and I am still a bit.... confused lol. But am I correct in my thoughts ?

When I am ready to use money from my brokerage, I transfer it to my bank, and then I will pay tax on the dividends/capital gains, not what was deposited initially by me ? Vangaurd will keep track of these stats and come tax time, my tax preparers will simply tell me what I owe?

If this is the case, I think I am ready to just start putting away some money in there, and just use it down the road when needed, while making sure to have money saved to pay taxes?

I have 115k in my new home down deposit savings account, and I am going to get that to 125 to have a lil extra for an emergency fund. I also keep around 10k in my checking at all times for monthly expenses. So hopefully I wont have to pull from the brokerage too often . I am just thinking to have that there for future expenses for the kids, house, anything major I may eventually want to splurge on or something lol

Ugh, I wish this stuff were easier for me to wrap my mind around! Ty so much for all of the responses.

As for my mortgage, it is Current Interest Rate:4.25000% Maturity Date:06/01/2045  Current Principal Balance:$102,855.05

Edit- one last thing, I was just looking on vanguard to see what the process would be like. In my brokerage account, I am guessing I have to choose "sell funds" correct? When I want to transfer some to my bank? Which cost basis method is best to use? Minimum tax, Hifo, fifo, or avgcost? Ty so much!!!

[Catbert]

Yes, you understand the basics.

[lilybluerose]

Yes, you understand the basics.

woohoo thats a start lol! Right now I have around 18k in there in vtsax. I think I am going to add 3k to vtiax and 3k to vbtlx as well. Does shit sound like a good plan? Ty!

[MDM]

I took a few days to try to do some research on this, and I am still a bit.... confused lol. But am I correct in my thoughts ?

When I am ready to use money from my brokerage, I transfer it to my bank, and then I will pay tax on the dividends/capital gains, not what was deposited initially by me ? Vangaurd will keep track of these stats and come tax time, my tax preparers will simply tell me what I owe?

Close.  You pay tax on dividends every year, regardless of whether you withdraw the dividends, leave them as cash inside the brokerage, or reinvest them in more shares.  This is similar to being taxed every year on the interest your earn in your bank account.

But yes, capital gains (what you received for the sale of the shares, minus the cost you paid for the shares) are taxable for the year in which the sale occurred - again regardless of whether you withdraw the money, leave it in the account, or reinvest it in other shares.  No sale of shares means no capital gains incurred, regardless of how much more valuable the shares have become since purchasing them.

If this is the case, I think I am ready to just start putting away some money in there, and just use it down the road when needed, while making sure to have money saved to pay taxes?

Good plan.  You might also spend a little time learning how to do your own taxes.  Don't recall whether you own a business - if so it might be worth using a CPA, but if it is just W-2, interest, dividends, and capital gains, tax software makes it reasonably easy to do it yourself.  Something to consider....

Edit- one last thing, I was just looking on vanguard to see what the process would be like. In my brokerage account, I am guessing I have to choose "sell funds" correct? When I want to transfer some to my bank? Which cost basis method is best to use? Minimum tax, Hifo, fifo, or avgcost? Ty so much!!!

If I recall correctly, you want to start by using "specific ID" (or something like that) so each group of shares that you buy (called a "lot") gets its own cost basis.  Then when you sell some shares you can choose which lots are the ones being sold.  "Minimum tax" is often the best choice, but you have to have that "specific ID" in place first.  Does that make sense?

[ATtiny85]

Yes, you understand the basics.

woohoo thats a start lol! Right now I have around 18k in there in vtsax. I think I am going to add 3k to vtiax and 3k to vbtlx as well. Does shit sound like a good plan? Ty!

Bonds (vbtlx) are generally better suited for tax advantaged accounts due tax efficiency.

Personally I only do Total (US) Stock (VTSAX) in our taxable account. There are some plusses and minuses about International in taxable, but I prefer to keep it simple.