31 Maxing out Roth & 401k -extra cash available to invest?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

31 Maxing out Roth & 401k -extra cash available to invest?

Post by PhillyPhan » Wed Dec 12, 2012 1:05 pm

I have a strategy in place for 2013 to contribute the maximum allowable contributions for 401k as well as Roth IRA.
This will leave me with 45K in cash sitting in an ING savings account earning .75% interest. Also automatic payroll savings will bring in an additional 7,000.00 throughout the year to this total. 5,500.00 of this will be used for my 2014 Roth IRA contribution. I am single and have no plans of purchasing a home or marriage within the near future 3-5 years. I understand I should keep a fair amount of cash liquid for an emergency fund , however 45,000.00 seems to be excessive in my opinion. I realize much of my strategy regarding the additional cash I have available to invest lies on my risk preferences however I was curious to put a feeler out there to see what other members might suggest.
I see that the current I-Bond rate is not much higher than my ING interest rate however I understand some tax advantages of placing some funds in this vehicle. I do also have around 2,000.00 in ibonds dating back to 2005-2006.
Thanks in advance for your responses

investor1
Posts: 1040
Joined: Thu Mar 15, 2012 8:15 pm

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by investor1 » Wed Dec 12, 2012 1:17 pm

If you are healthy, look into an HSA to increase your tax deferred space. There is a good article on the wiki. It may be too late to do this for 2013.

I-bonds are a decent option as well.

harikaried
Posts: 1185
Joined: Fri Mar 09, 2012 3:47 pm

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by harikaried » Wed Dec 12, 2012 1:21 pm

Just checking, you have no debts, e.g., student loans or car loans? If so, it seems pretty reasonable to put that extra cash in taxable investments through a brokerage account with international equities if you're willing to take that risk (if it fits your asset allocation). If you otherwise would have had international equities in your tax-advantaged/tax-free accounts, it would make sense to "move" them to the taxable account, so you can get the tax credits when filing income taxes.

But perhaps a step back, if you haven't set up some goals, it might be useful to plan things out to get a better grasp on what you're saving for. You seem on a good track for retirement, and aren't planning right now for a house or family, so what do you want to save for? If anything health/vision/dental related, you might be able to put money aside in a HSA/FSA for 2013 as well. Plans for remodeling? furniture? vacation? education? self-improvement? charity? Any money not needed for these short-term goals and emergency fund would be good to put as taxable investments.

PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by PhillyPhan » Wed Dec 12, 2012 1:31 pm

1. I am signed up for my company HSA in 2013 , I am going to set aside 1,100 plus my company will contribute $500.
The 2013 max is 3,250.00 , would contributing an addtional 2,150.00 be advantageous?

2. No debt , living below my means, educating myself on how to do this most in the most efficient manner while enjoying life. Expecting 2-3% salary increases for years to come.

3. Main goal is security and funding retirement. I realize the harsh reality of the world is that I will most likely be displaced from my job at somepoint throughout my career and I would rather look back and be content with how I strategized for this rather than to lament on why didnt I save & strategize more.

4. I also understand that my priorities and goals are subject to change over time and that a family and housing purchase is not out of the question.

BuckyBadger
Posts: 594
Joined: Tue Nov 01, 2011 11:28 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by BuckyBadger » Wed Dec 12, 2012 1:45 pm

In your situation with all that cash I would absolutely max out your HSA but don't spend it. Pay for your medical expenses out of pocket and just use your HSA as another tax advantaged investment "bucket."

STC
Posts: 415
Joined: Wed Nov 14, 2012 9:22 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by STC » Wed Dec 12, 2012 1:50 pm

PhillyPhan wrote:I see that the current I-Bond rate is not much higher than my ING interest rate however



iBond rates are more than double your ING rate, and grow tax-deferred. If I were you I would pick up $10k in iBonds for 2012, then another $10k in January for 2013. This would serve as my emergency fund after the 1 year requirements. The remainder I would put into a taxable account and invest according to my Investment Policy Statement.

PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by PhillyPhan » Wed Dec 12, 2012 1:51 pm

STC wrote:
PhillyPhan wrote:I see that the current I-Bond rate is not much higher than my ING interest rate however



iBond rates are more than double your ING rate, and grow tax-deferred. If I were you I would pick up $10k in iBonds for 2012, then another $10k in January for 2013. This would serve as my emergency fund after the 1 year requirements. The remainder I would put into a taxable account and invest according to my Investment Policy Statement.



Correct me if I am wrong , but the current I-Bond rate is .88% ?

STC
Posts: 415
Joined: Wed Nov 14, 2012 9:22 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by STC » Wed Dec 12, 2012 1:55 pm

PhillyPhan wrote:
STC wrote:
PhillyPhan wrote:I see that the current I-Bond rate is not much higher than my ING interest rate however



iBond rates are more than double your ING rate, and grow tax-deferred. If I were you I would pick up $10k in iBonds for 2012, then another $10k in January for 2013. This would serve as my emergency fund after the 1 year requirements. The remainder I would put into a taxable account and invest according to my Investment Policy Statement.



Correct me if I am wrong , but the current I-Bond rate is .88% ?


Incorrect. The iBond rate is in two parts, the fixed rate (currently 0%) and the floating rate which follows CPI. A quick look at my account suggest that the current rate is 1.76%, and the previous period was 2.2%.

STC
Posts: 415
Joined: Wed Nov 14, 2012 9:22 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by STC » Wed Dec 12, 2012 2:00 pm

I figured out where you got the 0.88%. That is the "semi-annual" rate. The equation is:

Here's how the composite rate for I bonds issued November 2012 – April 2013 was set:

Fixed rate = 0.00%
Semiannual inflation rate = 0.88%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0000 + (2 x 0.0088) + (0.0000 x 0.0088)]
Composite rate = [0.0000 + 0.0176 + 0.0000000]
Composite rate = 0.0176
Composite rate = 0.0176
Composite rate = 1.76%

http://www.treasurydirect.gov/indiv/res ... .htm#rates

PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by PhillyPhan » Wed Dec 12, 2012 2:13 pm

Thank you for the explanation , I think that is a good idea and I plan on moving 10K for 2012 and 10K for 2013. The only risk I see with this is if the semiannunal inflation rate drops to 0% and my bonds do not earn anything for 8 months of 2013.
Any thoughts on this?

User avatar
telemark
Posts: 2027
Joined: Sat Aug 11, 2012 6:35 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by telemark » Wed Dec 12, 2012 2:14 pm

Another option is to buy stocks in a taxable account and increase the percentage of bonds in your 401K so that the overall allocation is still the same. Rebalance with new money or by adjusting your 401K allocation.

I'm kind of wondering now why I don't do this myself. I think it just seemed too complicated for my simple brain...

STC
Posts: 415
Joined: Wed Nov 14, 2012 9:22 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by STC » Wed Dec 12, 2012 2:17 pm

PhillyPhan wrote:Thank you for the explanation , I think that is a good idea and I plan on moving 10K for 2012 and 10K for 2013. The only risk I see with this is if the semiannunal inflation rate drops to 0% and my bonds do not earn anything for 8 months of 2013.
Any thoughts on this?


The bonds cannot pay less than 0%. So in a deflationary environment, they act just like cash - i.e. the purchasing power increases. There is no NAV risk.

Keep in mind that you cannot redeem them for 12 months after purchase. So just be aware of your liquidity needs for the next 12 months.

I would also add that the Fed has expanded its balance sheet to $4 TRILLION specifically to avoid deflation. I would suspect that they would come out, guns blazing, if there was risk of CPI @0% or negative.
Last edited by STC on Wed Dec 12, 2012 2:22 pm, edited 1 time in total.

PhillyPhan
Posts: 23
Joined: Wed Nov 28, 2012 9:35 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by PhillyPhan » Wed Dec 12, 2012 2:21 pm

I understand that there is no risk to losing money however theoretically if the $ was kept in a savings account there would have been some interest earned that is not realized . Any input as to the forecast on the potential for deflation ?

STC
Posts: 415
Joined: Wed Nov 14, 2012 9:22 am

Re: 31 Maxing out Roth & 401k -extra cash available to inve

Post by STC » Wed Dec 12, 2012 2:30 pm

My crystal ball is cloudy. All I can tell you is how iBonds act in certain circumstances. I have no insight into future inflation, or future savings rates offered by ING.

Post Reply