Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
courageousdinero
Posts: 10
Joined: Sun Mar 12, 2017 4:16 pm

Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by courageousdinero »

Hi folks.

Background:
  • I'm employed full time, my spouse part time.
    Household gross income is typically $70-95k, taxable income <$50k.
    Over the last couple of years we have finally started to fully max out all tax-advantaged accounts for retirement/FI.
    We contribute enough towards retirement/FI accounts, and our family is large enough, that we typically incur a $0 tax bill, and get a fairly large return ($3-5k) each spring.
I've got 2 questions.

1) Start brokerage account vs saving for next year's Roth contribution?
At the beginning of 2021 I was able to do full contributions towards both my and my spouses' Roth's. It looks like by mid-2021 I'll have maxed out my 403(b), and perhaps my spouse will max out her 403(b) by the end of the year. Since I will have 'left over' retirement/FI money starting this summer, my question is whether or not to hold on to the extra to throw it all into our Roth's again at the beginning of 2022, or if I should finally open a taxable account. I'd likely be able to contribute fully to Roths in 2022 with or without 'saving up' in 2021. I'm hesitant to open a taxable account, in case I would want to move that money into the Roth in 2022 and incur a (possible) capital-gains tax. I think that if I were to move/sell from a taxable account after holding the shares for less than 12 months, it would be a short-term investment and higher capital gains tax rate, so if I contribute to a taxable account, I'd likely want to keep the money there for at least a little longer than 12 months. What should I be considering that I'm not? What would you do as far as accounts? I think eventually our income will be high enough that we'll want a taxable account, but I'm trying to hold off til it makes sense to have and keep one. What do you think?

2) How do I reduce my tax withholding so I'm not giving the government a free loan each year?
As noted above, we get a $3-5k tax return each year, and our federal tax liability has been $0 recently. I'd like to decrease my withholding (by increasing my allowances?), in order to have less tax withheld. The reason this has been difficult is because: my HR department doesn't give me clear instructions on how to make this change, and because I am skittish about reducing my withholding to $0, just in case I do have a tax liability at the end of the year. (Maybe this is silly, because I'd likely have cash on-hand to pay it?) What do you think? What have you done? How do you know how many 'allowances' to mark? I've used the IRS tax calculator, but it doesn't get specific enough about how to use allowances. Since we have 3 dependents, that's all that I've marked for allowances so far, but obviously too much tax is still being taken out. How would you proceed?

Thanks in advance for your thoughts and help.


Additional background per request:

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?
Somewhere in the neighborhood of$55-65k (income varies somewhat).
Generally speaking our annual expenses run about $48k

Do you have any debt? If so what types, amounts and interest rates?
Only the mortgage (about $320k left on 30-yr mortgage).
4.15% interest, but we may be moving in the next couple years so re-fi doesn't make much sense for us right now.
No credit card, and finished school debt last year (woohoo!)

How often is your paycheck?
Bimonthly

What is your tax filing status?
Married filing jointly

What fund firm or brokerage are your Roth IRAs with?
Vanguard, as well as old 401ks that have been moved over to them
Current employer is through Fidelity

I suggest setting the deduction from payroll so that you reach the annual employee maximum ($19.5k) to both of your 403b accounts at the end of the year instead of mid-year. (Any employer match or employer contribution does not count toward that annual employee limit, it's extra.)
Yes - this hasn't been my approach (I've basically tried to save as much as possible as fast as possible), but I can see the smoothness/intuitiveness of this way of doing it.

Do your employers also offer a 457b plan? Is each employer a government or government agency? Or is each employer a non-profit or charity? (It makes a difference for a 457 plan.) (If offered a governmental 457b plan with decent fund options you can contribute to that too.)
It's a non-profit medical center. No 457b plan available.

Allocation?
We're currently 100% stocks (VTSAX or similar fidelity offerings). I'm aware of the bogglehead criticism of this, but this is what we're comfortable with right now. And we never sell. Ever.

Goals?
Financial independence. Coast FI = 1.5m. FI = 2.0m. Fat FI = 2.5m.
Our household income may double or triple in the next 3 years, making our time horizion something like 6-8 years til Coast FI at least. :)

Current FI Savings?
$170k
Last edited by courageousdinero on Sun Mar 28, 2021 8:54 am, edited 2 times in total.
User avatar
retired@50
Posts: 6220
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by retired@50 »

Regarding question #1

I would consider smoothing out the contributions to the various retirement accounts so you reach the max by December, instead of half way through the year. I always liked the idea of buying all year long, just in case there is a "sale" from a market dip. This notion may help you keep your savings plans a little more consistent throughout the year so you don't have chunks of money waiting for some purpose.

Regards,
This is one person's opinion. Nothing more.
User avatar
ruralavalon
Posts: 21697
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by ruralavalon »

It looks like you are doing very well :) .

A little more information will help.

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

Do you have any debt? If so what types, amounts and interest rates?

How often is your paycheck?

What is your tax filing status?

What fund firm or brokerage are your Roth IRAs with?

I suggest setting the deduction from payroll so that you reach the annual employee maximum ($19.5k) to both of your 403b accounts at the end of the year instead of mid-year. (Any employer match or employer contribution does not count toward that annual employee limit, it's extra.)

Do your employers also offer a 457b plan? Is each employer a government or government agency? Or is each employer a non-profit or charity? (It makes a difference for a 457 plan.) (If offered a governmental 457b plan with decent fund options you can contribute to that too.)

Don't save money during the year to fund next year's Roth IRA contributions. If you have extra money then invest it.

If paid once a month, then set your Roth IRA contributions at $500 per month to each of the Roth IRAs so you reach the annual maximum at the end of the year. You can set up automatic contributions via withdrawals from your checking account for a couple of of days after your payday.

This way everything is on autopilot.

If beyond that you have extra money to invest then consider a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab. In a taxable account invest in very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement", link.

Examples of very tax-efficient stock index funds include Vanguard Total Stock Market Index Fund (VTSAX) or the ETF share class Vanguard Total Stock Market ETF (VTI), and Vanguard Total International Stock Index Fund (VTIAX) or the ETF share class Vanguard Total International Stock ETF (VXUS).

Is a High Deductible Health Plan (HDHP) offered at work so that you are eligible to contribute to a Health Savings Account (HSA)?

Please simply add any additional information in answer to questions to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

Finally I suggest that you read one or two good books on investing. Wiki article "Books: recommendations and reviews", link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
courageousdinero
Posts: 10
Joined: Sun Mar 12, 2017 4:16 pm

Re: Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by courageousdinero »

ruralavalon wrote: Sat Mar 27, 2021 11:08 am It looks like you are doing very well :) .

A little more information will help.

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

Do you have any debt? If so what types, amounts and interest rates?

How often is your paycheck?

What is your tax filing status?

What fund firm or brokerage are your Roth IRAs with?

I suggest setting the deduction from payroll so that you reach the annual employee maximum ($19.5k) to both of your 403b accounts at the end of the year instead of mid-year. (Any employer match or employer contribution does not count toward that annual employee limit, it's extra.)

Do your employers also offer a 457b plan? Is each employer a government or government agency? Or is each employer a non-profit or charity? (It makes a difference for a 457 plan.) (If offered a governmental 457b plan with decent fund options you can contribute to that too.)

Don't save money during the year to fund next year's Roth IRA contributions. If you have extra money then invest it.

If paid once a month, then set your Roth IRA contributions at $500 per month to each of the Roth IRAs so you reach the annual maximum at the end of the year. You can set up automatic contributions via withdrawals from your checking account for a couple of of days after your payday.

This way everything is on autopilot.

If beyond that you have extra money to invest then consider a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab. In a taxable account invest in very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement", link.

Examples of very tax-efficient stock index funds include Vanguard Total Stock Market Index Fund (VTSAX) or the ETF share class Vanguard Total Stock Market ETF (VTI), and Vanguard Total International Stock Index Fund (VTIAX) or the ETF share class Vanguard Total International Stock ETF (VXUS).

Is a High Deductible Health Plan (HDHP) offered at work so that you are eligible to contribute to a Health Savings Account (HSA)?

Please simply add any additional information in answer to questions to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

Finally I suggest that you read one or two good books on investing. Wiki article "Books: recommendations and reviews", link.

OK. I think I've supplied the information you asked for above. Thanks for your thoughts!
User avatar
grabiner
Advisory Board
Posts: 30083
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by grabiner »

courageousdinero wrote: Sat Mar 27, 2021 10:20 am 2) How do I reduce my tax withholding so I'm not giving the government a free loan each year?
As noted above, we get a $3-5k tax return each year, and our federal tax liability has been $0 recently. I'd like to decrease my withholding (by increasing my allowances?), in order to have less tax withheld. The reason this has been difficult is because: my HR department doesn't give me clear instructions on how to make this change, and because I am skittish about reducing my withholding to $0, just in case I do have a tax liability at the end of the year. (Maybe this is silly, because I'd likely have cash on-hand to pay it?) What do you think? What have you done? How do you know how many 'allowances' to mark? I've used the IRS tax calculator, but it doesn't get specific enough about how to use allowances. Since we have 3 dependents, that's all that I've marked for allowances so far, but obviously too much tax is still being taken out. How would you proceed?
Allowances have been eliminated on the new new Form W-4. Instead, you report your expected tax credits and deductions, and HR adjusts accordingly. Thus, if you have three qualifying children under 17, you enter this on the form, converting this to a $6000 tax credit, and HR will withhold $6000 less during the year. If you have other tax credits such as the Earned Income Credit or the Saver's Credit, you can claim those on Line 3 as well, adding to the Line 3 total; see the instructions. Similarly, if you have deductions or adjustments to income that your HR doesn't know about, such as $6000 contributed to a deductible IRA, you would enter this on line 4b, and HR will withhold as if your salary were $6000 less than it actually is.
Wiki David Grabiner
User avatar
ruralavalon
Posts: 21697
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Start Brokerage Accnt vs Hold for 2022 Roth? Also, reducing withholding for $0 tax bill?

Post by ruralavalon »

courageousdinero wrote: Sat Mar 27, 2021 10:20 am Hi folks.

Background:
  • I'm employed full time, my spouse part time.
    Household gross income is typically $70-95k, taxable income <$50k.
    Over the last couple of years we have finally started to fully max out all tax-advantaged accounts for retirement/FI.
    We contribute enough towards retirement/FI accounts, and our family is large enough, that we typically incur a $0 tax bill, and get a fairly large return ($3-5k) each spring.
I've got 2 questions.

1) Start brokerage account vs saving for next year's Roth contribution?
At the beginning of 2021 I was able to do full contributions towards both my and my spouses' Roth's. It looks like by mid-2021 I'll have maxed out my 403(b), and perhaps my spouse will max out her 403(b) by the end of the year. Since I will have 'left over' retirement/FI money starting this summer, my question is whether or not to hold on to the extra to throw it all into our Roth's again at the beginning of 2022, or if I should finally open a taxable account. I'd likely be able to contribute fully to Roths in 2022 with or without 'saving up' in 2021. I'm hesitant to open a taxable account, in case I would want to move that money into the Roth in 2022 and incur a (possible) capital-gains tax. I think that if I were to move/sell from a taxable account after holding the shares for less than 12 months, it would be a short-term investment and higher capital gains tax rate, so if I contribute to a taxable account, I'd likely want to keep the money there for at least a little longer than 12 months. What should I be considering that I'm not? What would you do as far as accounts? I think eventually our income will be high enough that we'll want a taxable account, but I'm trying to hold off til it makes sense to have and keep one. What do you think?

2) How do I reduce my tax withholding so I'm not giving the government a free loan each year?
As noted above, we get a $3-5k tax return each year, and our federal tax liability has been $0 recently. I'd like to decrease my withholding (by increasing my allowances?), in order to have less tax withheld. The reason this has been difficult is because: my HR department doesn't give me clear instructions on how to make this change, and because I am skittish about reducing my withholding to $0, just in case I do have a tax liability at the end of the year. (Maybe this is silly, because I'd likely have cash on-hand to pay it?) What do you think? What have you done? How do you know how many 'allowances' to mark? I've used the IRS tax calculator, but it doesn't get specific enough about how to use allowances. Since we have 3 dependents, that's all that I've marked for allowances so far, but obviously too much tax is still being taken out. How would you proceed?

Thanks in advance for your thoughts and help.


Additional background per request:

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?
Somewhere in the neighborhood of$55-65k (income varies somewhat).
Generally speaking our annual expenses run about $48k

Do you have any debt? If so what types, amounts and interest rates?
Only the mortgage (about $320k left on 30-yr mortgage).
4.15% interest, but we may be moving in the next couple years so re-fi doesn't make much sense for us right now.
No credit card, and finished school debt last year (woohoo!)

How often is your paycheck?
Bimonthly

What is your tax filing status?
Married filing jointly

What fund firm or brokerage are your Roth IRAs with?
Vanguard, as well as old 401ks that have been moved over to them
Current employer is through Fidelity

I suggest setting the deduction from payroll so that you reach the annual employee maximum ($19.5k) to both of your 403b accounts at the end of the year instead of mid-year. (Any employer match or employer contribution does not count toward that annual employee limit, it's extra.)
Yes - this hasn't been my approach (I've basically tried to save as much as possible as fast as possible), but I can see the smoothness/intuitiveness of this way of doing it.

Do your employers also offer a 457b plan? Is each employer a government or government agency? Or is each employer a non-profit or charity? (It makes a difference for a 457 plan.) (If offered a governmental 457b plan with decent fund options you can contribute to that too.)
It's a non-profit medical center. No 457b plan available.

Allocation?
We're currently 100% stocks (VTSAX or similar fidelity offerings). I'm aware of the bogglehead criticism of this, but this is what we're comfortable with right now. And we never sell. Ever.

Goals?
Financial independence. Coast FI = 1.5m. FI = 2.0m. Fat FI = 2.5m.
Our household income may double or triple in the next 3 years, making our time horizion something like 6-8 years til Coast FI at least. :)

Current FI Savings?
$170k
It's good to see that you are debt free other than the mortgage note. Congratulations on paying off your student debt :)

When you move to a new home, consider a 15 year mortgage.

I think it's best to invest your money whenever you have money available.

Contribute every payday to both 403b accounts and both Roth IRAs so as to reach the annual maximum for each account at year end. Don't save up one year to make the full next year's Roth IRA contributions in January.

As it is now, every year you miss a half year's return on the money you hold back to contribute to the Roth IRAs the next January. Keeping that money in cash for a half year guarantees a negative real return net of inflation and taxes.

Instead contribute to a taxable brokerage account whenever you have more money available to invest. I suggest a joint taxable brokerage account at Vanguard and investing in very tax-efficient stock index funds. The funds I suggest are Vanguard Total Stock Market ETF (VTI), and Vanguard Total International Stock Index Fund (VTIAX) or the ETF share class Vanguard Total International Stock ETF (VXUS).

With no 457bs and no HSA I don't see a better way to invest.

Investing "in the neighborhood of $55-65k (income varies somewhat)" let's you max 2 403bs ($39k) plus 2 Roth IRAs ($12k) and still contribute to a taxable brokerage account annually. Your savings rate is excellent in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Post Reply