What to do with extra cash after maxing out all retirement vehicles?

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NuBogleHead
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What to do with extra cash after maxing out all retirement vehicles?

Post by NuBogleHead »

Currently, we have ~180k in cash. Where should we allocate some of it? I'm thinking 529 or a brokerage account? Any recommendations on how to decide or other options to consider?

Pertinent info:
1- Married couple (late 30s) with a 13 month old
2- 190k 2020 combined income and 200k estimated 2021 combined income
3- ~650k across 401k and IRAs
4- Put around 89k into ROTH retirement vehicles annually (401k or IRA)
5- Monthly combined spend is a little under 4k without childcare and a little under 6k with
6- Zero debt, own no cars nor homes. For now, no interest in buying a home in the near future.
7- Pension fund in 15 years that provides 100% of pay. No clue if I'll stay that long in my company and for simplicity value this to $0.
8- Maryland resident

After having our child we expected more lifestyle inflation, but that didn't really happen, and we already take a good amount of vacation that's already included in our monthly expenses. I paid for 100% of my undergrad and grad, and for this reason, it's foreign to me as to how much is a good amount to put, if any, into a 529.
Last edited by NuBogleHead on Wed May 12, 2021 4:06 am, edited 1 time in total.
chipperd
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by chipperd »

If you expect to continue to bring in the household income levels you posted, and more in the future, there are plenty of financial calculators that can estimate how much you need to put away monthly to reach a certain investment goal in your child's 529 account. The real question is how much of your child's education do you wish to fund?
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
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NuBogleHead
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by NuBogleHead »

chipperd wrote: Wed May 12, 2021 3:53 am If you expect to continue to bring in the household income levels you posted, and more in the future, there are plenty of financial calculators that can estimate how much you need to put away monthly to reach a certain investment goal in your child's 529 account. The real question is how much of your child's education do you wish to fund?
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
To get a sense of some different scenarios. What if I decide to contribute 0 my child's education? Where should I put the money? If a child's expenses really pick up when they're ~9, that gives me 9 years of somewhere to place this money besides a savings account.
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wander
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by wander »

Easy, open a taxable brokerage account.
chipperd
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by chipperd »

NuBogleHead wrote: Wed May 12, 2021 4:06 am
chipperd wrote: Wed May 12, 2021 3:53 am If you expect to continue to bring in the household income levels you posted, and more in the future, there are plenty of financial calculators that can estimate how much you need to put away monthly to reach a certain investment goal in your child's 529 account. The real question is how much of your child's education do you wish to fund?
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
To get a sense of some different scenarios. What if I decide to contribute 0 my child's education? Where should I put the money? If a child's expenses really pick up when they're ~9, that gives me 9 years of somewhere to place this money besides a savings account.
Yeah, that's my point.
Those hypothetical situations need to be answered prior to one offering you sound financial options. One can't really offer options to an endless stream of hypotheticals.
As a new parent, these questions can seem daunting, as they touch on one's core beliefs. I would encourage you to do a deep dive in a discussion with your spouse to hash these questions out now so that a plan can be developed, knowing it may shift in the future.
Also, just as an aside, when I mentioned expenses pick up, it's not really all that black and white as to say in 9 years my kids expenses pick up 50%. It's more of a gradual slope than that, so planning is a bit more difficult in that sense.
So I guess if you wanted an answer without going into that discussion with your wife, put the "extra" in taxable, perhaps a mix of stock, bond and cash.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
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NuBogleHead
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by NuBogleHead »

wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Thanks. I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?
DownToThis
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by DownToThis »

NuBogleHead wrote: Wed May 12, 2021 4:48 am
wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Thanks. I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?
Yes, vanguard makes it pretty simple if as it has two columns, short term and long term gains, so you can see when it changes over. But why are you interested in selling at the 12 month mark?
Nate7out
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by Nate7out »

NuBogleHead wrote: Wed May 12, 2021 4:48 am
wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Thanks. I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?
Every time you buy, you get specific shares at a specific price. When you sell, you pick which shares to sell. The amount of gain depends on the change in share price and the taxes depend on how long you've held the shares.
PaunchyPirate
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by PaunchyPirate »

Agree with the above. It's time to open a regular brokerage account and invest in 1 or 2 (no need for more) well diversified index mutual funds (or ETFs) that align with your overall desired asset allocation. Turn on dividend reinvestment. Make sure your account/holdings are set up for Specific ID basis tracking so that you can easily identify which purchase lots are short term and which are long term. Only sell if you need the money for something. Accumulate.

At higher income levels, this account may grow larger than your 401k/IRAs. My taxable account is 2.5x larger than my 401k/IRA accounts.
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Stinky
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by Stinky »

wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Yes, this is a great answer.

One thing that you should NOT do is purchase permanent life insurance (whole life or universal life). People like you who have maxed out their tax-deferred savings vehicles are often targeted by life insurance agents, who cite the (purported) advantages of permanent life insurance. So you could be the target of a whole life salesman.

As has been discussed in many threads on the Forum, permanent life insurance is not an efficient savings vehicle. It is a useful financial tool for a very small segment of the population - but the vast majority of folks should be providing for their life insurance needs with level term insurance.
It's a GREAT day to be alive! - Travis Tritt
HomeStretch
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by HomeStretch »

+1 to Taxable brokerage account

If your asset allocation includes bonds, consider I-Bonds. Composite rate on bonds issued from May-October 2021 is 3.49%, state tax exempt and tax deferred.

Contribute enough annually to a Maryland 529 account to receive the state tax deduction.
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anon_investor
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by anon_investor »

HomeStretch wrote: Wed May 12, 2021 6:22 am +1 to Taxable brokerage account

If your asset allocation includes bonds, consider I-Bonds. Composite rate on bonds issued from May-October 2021 is 3.49%, state tax exempt and tax deferred.

Contribute enough annually to a Maryland 529 account to receive the state tax deduction.
+1. ^^^This is what I basically do, max out state 529 deduction, rest to taxable brokerage (100% equities) and some I Bonds.
Topic Author
NuBogleHead
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by NuBogleHead »

DownToThis wrote: Wed May 12, 2021 5:23 am
NuBogleHead wrote: Wed May 12, 2021 4:48 am
wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Thanks. I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?
Yes, vanguard makes it pretty simple if as it has two columns, short term and long term gains, so you can see when it changes over. But why are you interested in selling at the 12 month mark?
What are your thoughts on when I should realize the long-term gains? On the one hand, if I realize them every year I avoid the sticker shock if I wait too long, but on the other hand, the longer I way the long I keep the money and, in real terms, it'll be less due to inflation.

Edit: Thank you for the Vanguard guidance. Very valuable.
backpacker61
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by backpacker61 »

If eligible, I would open a Health Savings Account, fund it to the maximum every year, and invest any unspent balance.

After that, fund a taxable brokerage account. I would just retain the capital gains, rather than realizing them periodically. If I need a little more cash flow (which I currently do), I direct dividends and capital gains distributions to the brokerage's sweep account to support current spending.
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PaunchyPirate
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by PaunchyPirate »

NuBogleHead wrote: Wed May 12, 2021 8:27 am
DownToThis wrote: Wed May 12, 2021 5:23 am
NuBogleHead wrote: Wed May 12, 2021 4:48 am
wander wrote: Wed May 12, 2021 4:12 am Easy, open a taxable brokerage account.
Thanks. I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?
Yes, vanguard makes it pretty simple if as it has two columns, short term and long term gains, so you can see when it changes over. But why are you interested in selling at the 12 month mark?
What are your thoughts on when I should realize the long-term gains? On the one hand, if I realize them every year I avoid the sticker shock if I wait too long, but on the other hand, the longer I way the long I keep the money and, in real terms, it'll be less due to inflation.

Edit: Thank you for the Vanguard guidance. Very valuable.
There is no reason you should feel you have to realize your capital gains unless you need the money for something. I certainly wouldn't feel compelled to sell every year just to realize your gains. Let it ride. Don't pay the taxes until you must. You WILL be paying taxes yearly on any dividends generated by the investments, so plan for that. But otherwise, there's nothing wrong with just letting a fund grow for many years until you need the money. I would venture to say there are quite a few on this board that have left investments to grow in their taxable account for more than one or two decades. Pick good investments to start with so you don't feel compelled to have to sell it so you can invest in the next great thing that pops up.
calwatch
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by calwatch »

You may be in the subset of the population where EE Bonds might be useful, if you feel a need for government bonds in your allocation, in addition to the I Bonds. If you are concerned about increased expenses for your child, you could buy I Bonds in the child's name and pay taxes on the interest for them. If the interest is less than $1,100 you don't have to pay taxes on the child's interest.
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by stoptothink »

chipperd wrote: Wed May 12, 2021 3:53 am
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
I may sound like a broken record on this topic, but as a father of 9 and 6yr olds, my experience has been completely the opposite. Once our kids got out of daycare, child-rearing costs reduced dramatically, and they could be cut further because a big chunk of that is totally discretionary (expensive travel sports) - daycare isn't discretionary for many families. Of course there could be expensive medical/mental health issues, but those could happen at any time and aren't a given.

I can tell you what we did in a very similar position (early-mid 30's, two young kids, similar income and retirement assets) a few years ago, but this is a very personal topic. We prioritized paying down the mortgage (now done), then funding 529s (done, 4yrs at local U covered for both - we also 100% funded our own education, but decided we would give our kids a little head start), and now everything is thrown into taxable.
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by chipperd »

stoptothink wrote: Wed May 12, 2021 11:39 am
chipperd wrote: Wed May 12, 2021 3:53 am
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
I may sound like a broken record on this topic, but as a father of 9 and 6yr olds, my experience has been completely the opposite. Once our kids got out of daycare, child-rearing costs reduced dramatically, and they could be cut further because a big chunk of that is totally discretionary (expensive travel sports) - daycare isn't discretionary for many families. Of course there could be expensive medical/mental health issues, but those could happen at any time and aren't a given.

I can tell you what we did in a very similar position (early-mid 30's, two young kids, similar income and retirement assets) a few years ago, but this is a very personal topic. We prioritized paying down the mortgage (now done), then funding 529s (done, 4yrs at local U covered for both - we also 100% funded our own education, but decided we would give our kids a little head start), and now everything is thrown into taxable.
That's a great point about childcare. We didn't go that route and it's been a long time since my kids were that age and I wasn't thinking along those lines. Thanks for getting me to Stop to Think. :sharebeer
Not sure if that's OP's situation, but point taken.
"A portfolio is like a bar of soap, the more it's handled, the less there is." Dr. William Bernstein
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Mullins
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by Mullins »

I've actually never used a taxable brokerage. If I deposit money, let's say every pay check, how do I realize the long-term capital gains? Do I have to wait after 12 after last deposit or purchase various funds so that I can sell at the 12-month mark to realize annual long-term capital gains?...

What are your thoughts on when I should realize the long-term gains? On the one hand, if I realize them every year I avoid the sticker shock if I wait too long, but on the other hand, the longer I way the long I keep the money and, in real terms, it'll be less due to inflation.
Let it grow. The expectation is that the long term growth will exceed the rate of inflation.
I'd say you never sell it until you must.
The more you save during your career the more you should have (hopefully) for retirement. Not a bad thing.
But also, as Michael Kitces points out, the more you save the less you have to live on, making yourself acclimated to a lower cost of living which, when you get to retirement, works out well.

You also might want to dabble with an online 1040 estimator, such as https://www.mortgagecalculator.org/calc ... ulator.php to to get a sense of how dividends (ordinary and qualified) and any cap gains incurred might affect federal taxes.
stoptothink
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by stoptothink »

chipperd wrote: Wed May 12, 2021 11:45 am
stoptothink wrote: Wed May 12, 2021 11:39 am
chipperd wrote: Wed May 12, 2021 3:53 am
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
I may sound like a broken record on this topic, but as a father of 9 and 6yr olds, my experience has been completely the opposite. Once our kids got out of daycare, child-rearing costs reduced dramatically, and they could be cut further because a big chunk of that is totally discretionary (expensive travel sports) - daycare isn't discretionary for many families. Of course there could be expensive medical/mental health issues, but those could happen at any time and aren't a given.

I can tell you what we did in a very similar position (early-mid 30's, two young kids, similar income and retirement assets) a few years ago, but this is a very personal topic. We prioritized paying down the mortgage (now done), then funding 529s (done, 4yrs at local U covered for both - we also 100% funded our own education, but decided we would give our kids a little head start), and now everything is thrown into taxable.
That's a great point about childcare. We didn't go that route and it's been a long time since my kids were that age and I wasn't thinking along those lines. Thanks for getting me to Stop to Think. :sharebeer
Not sure if that's OP's situation, but point taken.
Sounds like OP has (or is expecting) ~$2k/month in childcare costs. When we got childcare out of the way it was a huge financial weight lifted.
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NuBogleHead
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Re: What to do with extra cash after maxing out all retirement vehicles?

Post by NuBogleHead »

stoptothink wrote: Wed May 12, 2021 11:52 am
chipperd wrote: Wed May 12, 2021 11:45 am
stoptothink wrote: Wed May 12, 2021 11:39 am
chipperd wrote: Wed May 12, 2021 3:53 am
Also, with a 13 month old, your child's costs haven't really ramped up yet. Once a child in today's world hits 8-10 years old, costs really start to increase, so just be aware the most expensive part of child rearing is the decade + roughly between ages 10-21/22. That's if there are no medical/mental health issue that preclude typical development through the various life stages prior to launch, which can add untold expenses regardless of the quality of healthcare coverage.
Best of luck!
I may sound like a broken record on this topic, but as a father of 9 and 6yr olds, my experience has been completely the opposite. Once our kids got out of daycare, child-rearing costs reduced dramatically, and they could be cut further because a big chunk of that is totally discretionary (expensive travel sports) - daycare isn't discretionary for many families. Of course there could be expensive medical/mental health issues, but those could happen at any time and aren't a given.

I can tell you what we did in a very similar position (early-mid 30's, two young kids, similar income and retirement assets) a few years ago, but this is a very personal topic. We prioritized paying down the mortgage (now done), then funding 529s (done, 4yrs at local U covered for both - we also 100% funded our own education, but decided we would give our kids a little head start), and now everything is thrown into taxable.
That's a great point about childcare. We didn't go that route and it's been a long time since my kids were that age and I wasn't thinking along those lines. Thanks for getting me to Stop to Think. :sharebeer
Not sure if that's OP's situation, but point taken.
Sounds like OP has (or is expecting) ~$2k/month in childcare costs. When we got childcare out of the way it was a huge financial weight lifted.
Have. We've been paying it for half a year now, and will probably pay it for another 3.5 years until he goes to public school. The scenario under which we'd stop paying it is if one of us were to lose our job. It's impressive that on childcare alone we will have spent 84k in 3.5 years.
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