Bonus investing

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Meaty
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Bonus investing

Post by Meaty »

First off thank you for this board. I've been liking for awhile and found it very informative. I'll be receiving a low/mid 5 digit bonus and would like input on how it's best invested. I have no debt except 1 car loan. I max out my 401k but have some room left in my wife's plan. I'm 29 and have emergency savings, etc taken care of. I've narrowed my choices to 3 options

1) invest in a taxable account (total stock market index fund)
2) payoff the car loan (3% rate)
3) increase my wife's 401k contribution and use the bonus to fund living expenses (in part) over the next year

Which would you recommend and why? Other ideas? Thanks in advance
"Discipline equals Freedom" - Jocko Willink
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MrBigglesworth
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Re: Bonus investing

Post by MrBigglesworth »

Congrats on the bonus!

If it were me, I would do a hybrid of 2 and 3. Depending on the size of the bonus, I would:

1. Pay off the car loan (even at 3%, to me no debt just feels nicer)
2. Any remaining bonus goes towards your wife's 401k (tax advantaged > taxable)
3. Pretend that you still have a car loan payment, and make monthly payments (same amount as car loan) into your wife's 401k until it maxes.

Hope this helps -- congrats again, best of luck!

--Biggs
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mhc
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Re: Bonus investing

Post by mhc »

Congrats on the bonus.

I would:
1. go have a nice dinner (got to enjoy life)
2. max 401k (reduces tax burden)
3. pay off car (good to be out of debt)
4. take a nice trip or splurge on something big (got to enjoy life)
5. roth ira ( backdoor if necessary) (reduce future tax burden)
6. taxable account (liquidity)

These are in order.
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ofcmetz
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Re: Bonus investing

Post by ofcmetz »

mhc wrote:Congrats on the bonus.

I would:
1. go have a nice dinner (got to enjoy life)
2. max 401k (reduces tax burden)
3. pay off car (good to be out of debt)
4. take a nice trip or splurge on something big (got to enjoy life)
5. roth ira ( backdoor if necessary) (reduce future tax burden)
6. taxable account (liquidity)

These are in order.

+1. I couldn't have made a better list if I had tried.
Never underestimate the power of the force of low cost index funds.
MoonOrb
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Re: Bonus investing

Post by MoonOrb »

I'd use it to increase your wife's contributions to her 401k. Tax advantaged space is precious and the opportunity to maximize it in my opinion outweighs paying off debt at only 3%. For that reason I'd devote anything left over to a back door Roth IRA if that's an option for you.

And it's okay to do something fun, too!
Last edited by MoonOrb on Tue Jul 23, 2013 1:59 pm, edited 1 time in total.
Default User BR
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Re: Bonus investing

Post by Default User BR »

I'd refinance the car at Penfed to 1.74%, then pay it on schedule.

[edit, corrected the rate]

Brian
Last edited by Default User BR on Tue Jul 23, 2013 1:50 pm, edited 1 time in total.
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G-Money
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Re: Bonus investing

Post by G-Money »

Welcome to the forum.

I agree with the above posters: either refi auto loan to 1.74%, or just pay off the loan. Then increase spouse's 401(k) contributions. I trust you know when and how to splurge.
Don't assume I know what I'm talking about.
pastafarian
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Re: Bonus investing

Post by pastafarian »

I'd opt for eliminating the debt, then contribute to your wife's 401(k), then taxable investing. Just curious, if this was lottery winnings or an inheritance (instead of a bonus) would you consider the same three options?
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Meaty
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Re: Bonus investing

Post by Meaty »

pastafarian wrote:I'd opt for eliminating the debt, then contribute to your wife's 401(k), then taxable investing. Just curious, if this was lottery winnings or an inheritance (instead of a bonus) would you consider the same three options?
Thank you all for the advice. To answer the above question, yes, I probably would consider the same 3. I'm pretty conservative with cash. Since I get about this size bonus each year I'll probably do the taxable account next year. We should be able to both max out the wife's 401k and take out a taxable account by then.
"Discipline equals Freedom" - Jocko Willink
pastafarian
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Re: Bonus investing

Post by pastafarian »

Meaty wrote: Since I get about this size bonus each year I'll probably do the taxable account next year. We should be able to both max out the wife's 401k and take out a taxable account by then.
Roth IRAs?
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Meaty
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Re: Bonus investing

Post by Meaty »

pastafarian wrote:
Meaty wrote: Since I get about this size bonus each year I'll probably do the taxable account next year. We should be able to both max out the wife's 401k and take out a taxable account by then.
Roth IRAs?
EDITED: I'm not a big fan of Roths....for some reason :)
Last edited by Meaty on Tue Jul 23, 2013 5:00 pm, edited 2 times in total.
"Discipline equals Freedom" - Jocko Willink
pastafarian
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Re: Bonus investing

Post by pastafarian »

[whispering] Shhhh be advised that the Force is strong with LadyGeek, she feels the ripple in the Force when you hint, allude, speculate, or otherwise opine about tax policy. She will lock your thread and strike your comments in a heartbeat whilst reminding you of Forum policy regarding forbidden topics (not that that is a bad thing, just sayin').
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Meaty
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Re: Bonus investing

Post by Meaty »

pastafarian wrote:[whispering] Shhhh be advised that the Force is strong with LadyGeek, she feels the ripple in the Force when you hint, allude, speculate, or otherwise opine about tax policy. She will lock your thread and strike your comments in a heartbeat whilst reminding you of Forum policy regarding forbidden topics (not that that is a bad thing, just sayin').
Quite right. Sorry
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SeattleCPA
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Re: Bonus investing

Post by SeattleCPA »

Paying off a car loan may be "profitable" in emotional or psychic terms. But it's pretty hard for that option to stand up to the 401(k) option.

I would think about your three choices this way (using $10K as the bonus amount):

Option #1: Take $10,000 and use this money to make a $10,000 contribution to wife's 401(k). You will if you do this right end up with $10,000 earning on a nominal basis (say) 8% a year for next few years...

Option #2: Take the $10,000... pay (say) 25% in taxes... now you've got $7500. Use this to pay down the 3% car loan. So with this option you've got $7500 earning 3%.

Option #3: Take the $10,000... pay (again say) 25% in taxes... now you've got $7500. Use this to invest in taxable account earning (say) 8% a year.. but of course this is taxable so really you've got a return of something less than 8% after tax.

It's totally clear which is best choice: Take the full $10K and let it earn 8%... Taking the $7500 "car loan investment" that earns 3% or even the $7500 investment that earns a currently taxed 8% fall short.
Investing is boring
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Re: Bonus investing

Post by Investing is boring »

Except for extremely odd situations, a ROTH IRA is a GREAT idea.

You may also consider iBonds. Great store of value. Liquid after 1 year. Expands tax deferred space. Can be withdrawn tax free for qualified education expense (if you have/plan to have kids.)
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Meaty
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Re: Bonus investing

Post by Meaty »

SeattleCPA wrote:Paying off a car loan may be "profitable" in emotional or psychic terms. But it's pretty hard for that option to stand up to the 401(k) option.

I would think about your three choices this way (using $10K as the bonus amount):

Option #1: Take $10,000 and use this money to make a $10,000 contribution to wife's 401(k). You will if you do this right end up with $10,000 earning on a nominal basis (say) 8% a year for next few years...

Option #2: Take the $10,000... pay (say) 25% in taxes... now you've got $7500. Use this to pay down the 3% car loan. So with this option you've got $7500 earning 3%.

Option #3: Take the $10,000... pay (again say) 25% in taxes... now you've got $7500. Use this to invest in taxable account earning (say) 8% a year.. but of course this is taxable so really you've got a return of something less than 8% after tax.

It's totally clear which is best choice: Take the full $10K and let it earn 8%... Taking the $7500 "car loan investment" that earns 3% or even the $7500 investment that earns a currently taxed 8% fall short.
So this might be a dumb question, but how do I direct some of the bonus to max out my wife's 401k? As soon as i recieve the funds theyll be taxed. Also, if I am able to do this, I'll still have a good chunk left over and considering I only owe ~8k on the car (and am limited to a 3% return by paying it off) it seems like admiral shares in a vanguard account would still yield more even after taxes.
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MoonOrb
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Re: Bonus investing

Post by MoonOrb »

Meaty wrote:So this might be a dumb question, but how do I direct some of the bonus to max out my wife's 401k? As soon as i recieve the funds theyll be taxed. Also, if I am able to do this, I'll still have a good chunk left over and considering I only owe ~8k on the car (and am limited to a 3% return by paying it off) it seems like admiral shares in a vanguard account would still yield more even after taxes.
You can't direct the bonus to your wife's 401k. Actually what you'll do is just have your wife increase her contributions to her 401k but the same amount as the bonus. So your tax liability will decrease as you deduct that amount of money from your income, and although you will pay taxes on the bonus, the net result will be a smaller overall tax liability.

Not sure if the second part of your statement is a follow up question but I would concur: investing is preferable to paying down a loan at only 3% (and I'm not asking you to talk politics or policy, but regardless of your personal feelings about Roth IRAs, putting any extra amount into a Roth/backdoor Roth is still a good way to maximize your tax-advantaged investing space).
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Meaty
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Re: Bonus investing

Post by Meaty »

MoonOrb wrote:
Meaty wrote:So this might be a dumb question, but how do I direct some of the bonus to max out my wife's 401k? As soon as i recieve the funds theyll be taxed. Also, if I am able to do this, I'll still have a good chunk left over and considering I only owe ~8k on the car (and am limited to a 3% return by paying it off) it seems like admiral shares in a vanguard account would still yield more even after taxes.
You can't direct the bonus to your wife's 401k. Actually what you'll do is just have your wife increase her contributions to her 401k but the same amount as the bonus. So your tax liability will decrease as you deduct that amount of money from your income, and although you will pay taxes on the bonus, the net result will be a smaller overall tax liability.

Not sure if the second part of your statement is a follow up question but I would concur: investing is preferable to paying down a loan at only 3% (and I'm not asking you to talk politics or policy, but regardless of your personal feelings about Roth IRAs, putting any extra amount into a Roth/backdoor Roth is still a good way to maximize your tax-advantaged investing space).
Thanks for your reply. In addition to other concerns, Roths have penalties for withdrawal prior to 59 1/2, correct? So while capital gains are deferred, I still wouldn't be able to use those funds as part of an early retirement strategy, unless I'm missing another advantage.
"Discipline equals Freedom" - Jocko Willink
MKP
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Re: Bonus investing

Post by MKP »

Meaty wrote:
MoonOrb wrote:
Meaty wrote:So this might be a dumb question, but how do I direct some of the bonus to max out my wife's 401k? As soon as i recieve the funds theyll be taxed. Also, if I am able to do this, I'll still have a good chunk left over and considering I only owe ~8k on the car (and am limited to a 3% return by paying it off) it seems like admiral shares in a vanguard account would still yield more even after taxes.
You can't direct the bonus to your wife's 401k. Actually what you'll do is just have your wife increase her contributions to her 401k but the same amount as the bonus. So your tax liability will decrease as you deduct that amount of money from your income, and although you will pay taxes on the bonus, the net result will be a smaller overall tax liability.

Not sure if the second part of your statement is a follow up question but I would concur: investing is preferable to paying down a loan at only 3% (and I'm not asking you to talk politics or policy, but regardless of your personal feelings about Roth IRAs, putting any extra amount into a Roth/backdoor Roth is still a good way to maximize your tax-advantaged investing space).
Thanks for your reply. In addition to other concerns, Roths have penalties for withdrawal prior to 59 1/2, correct? So while capital gains are deferred, I still wouldn't be able to use those funds as part of an early retirement strategy, unless I'm missing another advantage.
No-you can remove the amount of your contributions at any time in a roth with no penalties. You cannot take out the gains, otherwise you are penalized.
MoonOrb
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Re: Bonus investing

Post by MoonOrb »

Well, let me play devil's advocate for a moment before you give up entirely on the idea of a Roth.

First, you can withdraw any of your contributions from a Roth at any time, so they're not wholly unavailable to you before age 59.5 (not really advocating this, but just pointing out that it's only the growth that you can't access without penalties, etc).

Second, even if you're going to retire early, you still need money after age 59.5. So prior to age 59.5, take money from taxable funds, and then don't start drawing down on the Roths until you can do so without penalty.

Third, there is really only so much you'll be able to stick in a Roth anyway. I don't know your circumstances, but I'm having trouble imagining a situation in which you can (a) retire way earlier than age 59.5 but (b) have the bulk of your money tied up in a Roth. Or is the issue that you'll have the bulk of your money in your 401k plans, so that by putting money on top of that into a Roth you'll wind up committing almost all of it to accounts you can't reach before age 59.5?

In general, I'm thinking the circumstances have to be really unusual indeed to forego the nearly free lunch of tax advantaged investing.
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Meaty
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Re: Bonus investing

Post by Meaty »

MoonOrb wrote:Well, let me play devil's advocate for a moment before you give up entirely on the idea of a Roth.

First, you can withdraw any of your contributions from a Roth at any time, so they're not wholly unavailable to you before age 59.5 (not really advocating this, but just pointing out that it's only the growth that you can't access without penalties, etc).

Second, even if you're going to retire early, you still need money after age 59.5. So prior to age 59.5, take money from taxable funds, and then don't start drawing down on the Roths until you can do so without penalty.

Third, there is really only so much you'll be able to stick in a Roth anyway. I don't know your circumstances, but I'm having trouble imagining a situation in which you can (a) retire way earlier than age 59.5 but (b) have the bulk of your money tied up in a Roth. Or is the issue that you'll have the bulk of your money in your 401k plans, so that by putting money on top of that into a Roth you'll wind up committing almost all of it to accounts you can't reach before age 59.5?

In general, I'm thinking the circumstances have to be really unusual indeed to forego the nearly free lunch of tax advantaged investing.
I'm starting to get sold on Roths, didn't know you could withdraw principal penalty free. You're correct, my concern would be that all my cash would be tied up between 401k and Roth, but that probably won't really be the case given how low the Roth limits are.
"Discipline equals Freedom" - Jocko Willink
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