How can I find a higher return for taxable savings?

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sublimisdeus
Posts: 18
Joined: Sun Sep 28, 2008 6:55 am

How can I find a higher return for taxable savings?

Post by sublimisdeus » Tue Mar 20, 2018 7:19 pm

My wife and I have been saving to buy a house for years, but the market in Hawaii where we currently live is extremely expensive (all the rent vs. buy calculators tell us we're better off renting!). We have $275k in savings that we'd been saving for a down payment but have decided to pass on buying a house in Hawaii. We plan to keep saving and then move to a less expensive state in five years. After moving, we will likely find ourselves in a lower tax bracket.

We do not plan to touch this $275k for five years. After that, we may use some of it for a home purchase in a new state, or we may just continue saving and renting. Whatever funds we don't pull out in 5+ years to buy a home, we'll leave invested for the long-term. Our total assets, including these savings, is currently in the high six figures.

I would really appreciate your suggestions on how to allocate this $275k for a higher return than 1.5% in savings we've been receiving. We are willing to take on some risk but want to conservatively grow our principal. We also want to minimize our taxes on an annual basis.

Right now, I am considering the following:

$100k Everbank Bump Rate CD (currently 2.4% APY for 3.5 years, plus one rate bump during the term)
$175k Vanguard taxable account, consisting of roughly 60% bond funds and 40% stock funds

I like the CD because it acts as a hedge and can get bumped up once to a higher rate during its 3.5 year term. For the 40% stock allocation, I am thinking Vanguard Total Stock Market Index and possibly a limited allocation to Vanguard Total International International Index. For the bond allocation, I have no idea what makes the most sense in a taxable account.. Vanguard Total Bond Market Index, Vanguard Tax-Exempt Bond Index, Vanguard Tax-Managed Balanced Fund, Vanguard Intermediate-Term Tax-Exempt Fund.. or perhaps something else?

Questions..

1) Do you agree with this approach?

2) What funds would you recommend for the Vanguard taxable account?

3) For a taxable account, does a bond index, tax-exempt, or tax-managed make the most sense? We seek to minimize our taxes annually.

4) I saw some posters mention holding bonds in taxable accounts is a bad idea. Does this apply to our situation? Does this apply to bond index funds? I am seeking to lower my risk profile by allocating 60% of the Vanguard taxable account (or 38% of the total $275k in savings) to bonds.

5) We hold Vanguard Total Stock Market Index and Vanguard Long Term Bond Index in my Roth IRA. Some posts state that it is unwise to hold the same funds in both your taxable and tax deferred accounts. Is this true for us? I consider these taxable savings as medium-term savings separate from our long-term retirement accounts. However, after five years whatever we don't pull out to buy a house (which we may or may not do) we will leave invested for the long-term.

More on our situation..

Emergency funds: check. No debt. No mortgage. No kids. Married Filing Jointly.
Effective Tax Rate: 15% Federal, 6.6% State | Marginal Tax Rate: 28%
State of Residence: Hawaii | Age: 39, wife 29

We max out both our Roth IRAs and my 401k annually. Contribute enough to wife's 401k for company match but don't max out.

Retirement accounts currently ~85% stocks / 15% bonds, all Vanguard index funds.

Please let me know if you have any questions or need more information. Thank you in advance for any guidance or insight you can share!
Last edited by sublimisdeus on Wed Mar 21, 2018 3:01 am, edited 1 time in total.

PFInterest
Posts: 1460
Joined: Sun Jan 08, 2017 12:25 pm

Re: Seeking Advice! How can I find a higher return for taxable savings?

Post by PFInterest » Tue Mar 20, 2018 7:31 pm

Use some of it to max out your wife's 401k. Better investment than cash.

N10sive
Posts: 555
Joined: Thu May 05, 2016 6:22 pm

Re: Seeking Advice! How can I find a higher return for taxable savings?

Post by N10sive » Tue Mar 20, 2018 7:35 pm

Using laddered CD's is the right choice.

You need to determine how much you will need for a house if not the full 275k. If you don't believe you would need that then invest the rest according to your AA. With bonds preferably in the tax-deferred accounts.

I agree as well, use some of the money to max out your wife's 401k. Use it as your monthly spending and have her paycheck withdrawn for the 401k.

Olemiss540
Posts: 513
Joined: Fri Aug 18, 2017 8:46 pm

Re: Seeking Advice! How can I find a higher return for taxable savings?

Post by Olemiss540 » Tue Mar 20, 2018 8:42 pm

N10sive wrote:
Tue Mar 20, 2018 7:35 pm
Using laddered CD's is the right choice.

You need to determine how much you will need for a house if not the full 275k. If you don't believe you would need that then invest the rest according to your AA. With bonds preferably in the tax-deferred accounts.

I agree as well, use some of the money to max out your wife's 401k. Use it as your monthly spending and have her paycheck withdrawn for the 401k.
Double down on this. With your future so uncertain, I would shove the money into the market and let it ride until your future becomes clearer. Maybe beef up the EF to 1 year and let all the other money go to work.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

sublimisdeus
Posts: 18
Joined: Sun Sep 28, 2008 6:55 am

Re: Seeking Advice! How can I find a higher return for taxable savings?

Post by sublimisdeus » Tue Mar 20, 2018 9:42 pm

Olemiss540 wrote:
Tue Mar 20, 2018 8:42 pm
N10sive wrote:
Tue Mar 20, 2018 7:35 pm
Using laddered CD's is the right choice.

You need to determine how much you will need for a house if not the full 275k. If you don't believe you would need that then invest the rest according to your AA. With bonds preferably in the tax-deferred accounts.

I agree as well, use some of the money to max out your wife's 401k. Use it as your monthly spending and have her paycheck withdrawn for the 401k.
Double down on this. With your future so uncertain, I would shove the money into the market and let it ride until your future becomes clearer. Maybe beef up the EF to 1 year and let all the other money go to work.
Thanks for each of your responses! So it sounds like step 1 is to max out my wife's 401k. Got it.

Olemiss540.. what do you mean by "beef up the EF to 1 year"?

Even though I am thinking of this $275k in savings as "medium-term savings," I'm getting the message from your responses that it makes more sense to keep bonds in our tax-deferred accounts and factor this into our overall asset allocation.

My concern with all stocks in a taxable account is that if the account loses money, we'd have less cash to take out for a house in five years. This assumes 1) we buy a house in five years, and 2) we need to withdraw a large portion of these savings out to buy it. The upside in this scenario is less / zero capital gains I suppose. Perhaps I'm thinking about this the wrong way.

Is having bond funds in a taxable account that bad an idea?

Olemiss540
Posts: 513
Joined: Fri Aug 18, 2017 8:46 pm

Re: How can I find a higher return for taxable savings?

Post by Olemiss540 » Thu Mar 22, 2018 6:15 pm

Sorry for the late reply. Basically, I would make sure I had enough cash (or CDs) available for a reasonable cash emergency or job loss concern (1 year of expenses?) and then invest the rest in equities.

This allows you to have some flexibility as your future comes into focus (with 1 year of expenses cash onhand) while keeping as little money on the sidelines as possible. There are more options available if you all of a sudden need 300k for a down payment and your equities are down a large amount. Put down 10% until the market recovers? Rent at the new location for a year while the market recovers?

I am not the most conservative of posters, but with near 7 figures in assets, I don't think you are going to have an issue if you decide to take a 60k loss on stocks or pay a little extra interest (due to an 80/10 type loan) if you have to get a mortgage ASAP while the market is down.

If your future becomes a little clearer in a few years and you have a firmer deadline and budget on a house down payment, pull the money out at that time and put it in a MM account or CD.

(All of the above entails you keeping your OVERALL asset allocation through holding bonds in your tax deferred accounts. I would not hold a special allocation for this money, just maintain your 85/15 or 80/20 allocation given this new money in equities.)
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

sublimisdeus
Posts: 18
Joined: Sun Sep 28, 2008 6:55 am

Re: How can I find a higher return for taxable savings?

Post by sublimisdeus » Thu Mar 22, 2018 7:18 pm

Thank you, OleMiss! :sharebeer

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