Sunday, February 16, 2014

Once you fill your tax advantaged accounts (401k,Roth IRA) where do you place your extra funds.

Over at Reddit we came across the following discussion: Once you fill your tax advantaged accounts (401k,Roth IRA) where do you place your extra funds.(self.personalfinance)
all 26 comments
[–]United StatesaBoglehead 8 points  ago
Tax-managed funds in taxable accounts are a good idea if they fit in your asset allocation. Otherwise just keep tax-efficient asset allocation in mind.
[–]United Statesjeepbraah[S] 2 points  ago
This is a load of great information, thank you.
[–]friendy11 7 points  ago
Tax, tax, tax.
It doesn't all have to be tax advantaged. Just a relatively efficient index fund in a taxable account also works fine. You don't want to fall into the trap of putting everything in tax advantaged and then having difficulty accessing funds without following tricky rules to avoid penalties. Or possibly eventually facing RMD that boost your taxes. Having some diversity in types of taxable and tax advantaged accounts allows for greater flexibility in the future, which can be useful as rules for these accounts are not guaranteed and can be changed by political action.
[–]Hideyoshi_Toyotomi 2 points  ago
Availability and flexibility have value and should be considered whenever you're doing asset planning. They may be difficult to quantify but are important to everyone's financial situation.
[–]justinhigley 4 points  ago
If a high deductible health plan makes sense for you (or you're already on one) an HSA is a great tool for a bit more space.
[–]United Statesjeepbraah[S] 2 points  ago
With a wife who visits the emergency room at lot (nothing ever comes of it but better to be safe than sorry) and a baby on the way I might have to look at HSA accounts later in life.
[–]gbdavidx 4 points  ago
savings for your kid? college fund? hobby?
[–]Minarch 3 points  ago
The capital you put into your HSA doesn't have to be spent on healthcare. Technically it does, you functionally it doesn't.
Lets say you have $3000 in an HSA and you have $1000 in out of pocket healthcare expenses. You can pay those expenses in cash, save the receipt, and then pull that money out of your HSA whenever you want--maybe years down the line. This gets you incredible tax free compounding, if you so choose.
[–]bilged 1 point  ago
But if you have high current health care expenditure needs, this can be difficult to pull off.
[–]Minarch 2 points  ago
Absolutely. And in that case, then you were just able to save for healthcare pre-FICA and pre-income tax.
[–]dweezil22 3 points  ago
Don't assume an HDHP is worse with high medical bills. Last year my companies HDHP was overall cheaper in virtually every spending scenario:
$5000: Somewhat cheaper
$35000+: $200 more, not counting HSA tax advantages (which more than make up for it)
Other than perhaps concerns about paperwork or OON doctors, there was basically no rational reason for anyone to choose the PPO.
[–]United StatesNothingKing 2 points  ago
You still might want to look at HDHPs. HDHPs are required to have an Out of Pocket Maximum, that non-HDHPs are not required to have. If you keep track of your expenses over the year, you'll have a good basis to compare say a PPO to an HDHP. You have to compare the premiums, deductibles, co-pays, etc. Some companies also contribute money to your HSA.
[–]firstplanthendo1 5 points  ago
If you have kids or are saving for any sort of education, a 529 plan (also tax advantaged).
After that, I just put in normal discount brokerage accounts (fidelity, tdameritrade), invested in tax advantaged securities (high dividend paying stock etfs, muni bonds etfs), and other investments that I intend to hold more than 1 year so they are taxed at the lower long term capital gains tax rate when sold.
[–]United Statesjeepbraah[S] 2 points  ago
Our plan is to set up a 529 once we get our retirement fully funded.
How do you know if a dividend is qualified or not? From my reading that is the better tax advantaged option for dividends.
[–]firstplanthendo1 4 points  ago
Retirement full funded- every year (tax advantaged accts) or your total retirement goal?
On the chance you're saying wait for 529 till your whole retirement is fully funded, and you have children, I personally think it's smart to start doing the 529 early (even before retirement is fully funded), bc if you never get around to it you might end up having to support your kids if they can't afford the right college or are drowning in student debt.
Qualified dividends- yes those are what you want for the tax advantage purposes (max rate is 15-20%). Has to be a U.S. corporation or an "eligible" foreign company (you'll have to research each one individually). And there are holding period requirements you have to meet. More Here Qualified Dividends
[–]autowikibot 4 points  ago

Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. From 2003 to 2007, qualified dividends were taxed at 15% or 5% depending on the individual's ordinary income tax bracket, and from 2008 to 2012, the tax rate on qualified dividends was reduced to 0% for taxpayers in the 10% and 15% ordinary income tax brackets, and starting in 2013 the rates on qualified dividends are 0%, 15% and 20%. The 20% rate is for taxpayers in the 39.6% tax bracket.

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[–]kidjan 5 points  ago
Once I max out my retirement accounts, the surplus goes into a taxable investment account. From that I generally invest in ETFs--usually aggressive ones.
[–]jakobteewashington 3 points  ago
A variable annuity is an option is tax deferral is what you are looking for...
[–]cjg_000 2 points  ago
I like the idea of variable annuities but they still have pretty high fees even for low-cost options. It seems like Vanguard annuity funds seem to have about 0.4% higher expenses than the equivalent admiral shares.
For bonds, it seems like you're better off investing in municipal than paying the higher expenses and losing flexibility (having money stuck in a variable annuity).
For stocks, you're converting capital gains and qualified dividends into normal income. Not much in tax savings.
[–]jakobteewashington 2 points  ago
Generally with the fees come an associated feature, so look into that if you are interested and other than vanguard there are other variable annuities to buy. I am wary about bonds right now until interest rates rise up a lot, however there are some bonds that work inversely with inflation that may be of interest to you, I doubt that they are going to be munis though
[–]cjg_000 1 point  ago
Yeah, I was looking at variable annuities primarily for the tax deferral and ignoring the insurance product which I'm not that interested in. It ends up being the same deal as interest on interest being tax-free plus whatever percent of earnings being tax free based on your drop in marginal rate.
If it weren't for the existence of tax-free bonds with yields not much below regular bonds, I'd put more consideration into it. If interest rates go up, it also makes the 0.4% expenses much less significant so I might reconsider at that point.
[–]United Statesmisnamed 3 points  ago
I Bonds are the best things possible in taxable accounts - they are inflation-protected, government-backed, tax-deferred and state-tax-exempt.
Beyond that muni bond funds are a good place to start. Stocks in a broad-market index are relatively efficient too, but I'd start with I Bonds, regardless.
[–]caribou16 2 points  ago
I'm kind of in the same boat. Currently contributing to 401K up to employee match and maxing out Roth contributions each year, because, hey, free money! Everything left over I'm putting into a savings account though. I'm not currently saving for anything farther out than 5 years (house) and with that short timeline, I don't want to risk it.
[–]cjg_000 2 points  ago
Assuming decent 401k fees, you'd probably be better off putting the savings for your house in your 401k then pulling the principal from your Roth IRA to finance the house and only save in taxable accounts what you can't pull out penalty free from tax-advantaged accounts. This gives you tax-free earnings on your house savings.
With yields where they are though, it isn't that significant of tax savings. It also can also be helpful psychologically to keep your money in separate buckets instead of considering it one big pool.
[–]United StatesNothingKing 2 points  ago
If your 401k plan allows after-tax (not Roth) contributions, and in-service withdraws, it might make sense to contribute there. The limit for all contributions (pre-tax, Roth, employer, after-tax) is $51k. If they allow the in-service withdraws, you can contribute after-tax money, and then immediately roll it over to a Roth IRA, much like the Backdoor Roth IRA.
Here is also another good post on ideas:
[–]bilged 2 points  ago
Another alternative you may want to consider is a rental property. Not only can you deduct mortgage interest, you can also deduct just about every expense associated with the property effectively eliminating taxable income and allowing you to build capital. If you buy in a holiday destination, you can also holiday there and save yourself other costs you may have otherwise incurred. You can even write some of the costs of traveling to see the property as a management expense!
Edit: This article will help get you started with more info.