Where to put (temporary) extra income ?

[new2bogle2]

Starting this year our household will be adding $40-$60k of 1099 income. While this extra income should be continuous for more than a decade or two, there is still a very tiny amount of risk that this income ends after just a couple years.

So, what to do with this extra income?

A small amount of that extra income will be used to max out all current retirement plans, which doesn’t quite happen at this time. So Traditional, Roth’s and HSAs will all get maxed out.

Taxes of course reduce this amount too. But I’m seeking advice with what should be done with the remaining amount.

Option 1) I open a self employed plan, contribute about 25% of this income as an employer contribution as I will have already maxed my employee contribution with my company.

Option 2) I have a few young children and one is 8 years away from college so opening a 529 could help as I’ll be paying for school or paying off their loans for them.

Option 3) I can open a taxable account and can use this extra money to help max Traditional/Roth/HSA in future years if this 1099 income expires.

Option 4) I use it to buy Powerball tickets and don’t stop until I win.


It’s possible to do a combination also but how would the BH community set the priority list? And I should not even before this extra income our retirement savings rate is around 20%

[sailaway]

Have you confirmed that current workplace plans do not allow after tax contributions that can be used for the Mega Backdoor Roth?

Would you be willing to put in a little extra work to create a ,401k plan that supports MBR?

Barring those, I would use a solo 401k to defer the employer portion and put the rest in taxable, or the 529 if that makes sense for your situation.

[lthenderson]

Option 2) I have a few young children and one is 8 years away from college so opening a 529 could help as I’ll be paying for school or paying off their loans for them.

Option 3) I can open a taxable account and can use this extra money to help max Traditional/Roth/HSA in future years if this 1099 income expires.

It’s possible to do a combination also but how would the BH community set the priority list?

After paying for my retirement and paying the bills, I would go for Option 2 or 3 depending on your state. My state gives a tax deduction up to $5800 per parent per child for 529 contributions so with two children, I opt for the 529 plan and take a $23,200 deduction on my taxes. Anything after that goes into my taxable account.

[new2bogle2]

Option 2) I have a few young children and one is 8 years away from college so opening a 529 could help as I’ll be paying for school or paying off their loans for them.

Option 3) I can open a taxable account and can use this extra money to help max Traditional/Roth/HSA in future years if this 1099 income expires.

It’s possible to do a combination also but how would the BH community set the priority list?

After paying for my retirement and paying the bills, I would go for Option 2 or 3 depending on your state. My state gives a tax deduction up to $5800 per parent per child for 529 contributions so with two children, I opt for the 529 plan and take a $23,200 deduction on my taxes. Anything after that goes into my taxable account.

Thank you for that tip. I’m in PA, by chance do you know their rules with the 529 tax deductions? If not I’ll try to find it.

[dknightd]

Option 2) I have a few young children and one is 8 years away from college so opening a 529 could help as I’ll be paying for school or paying off their loans for them.

Option 3) I can open a taxable account and can use this extra money to help max Traditional/Roth/HSA in future years if this 1099 income expires.

I'd do option 3 for now. Then consider option 2.

[lthenderson]

After paying for my retirement and paying the bills, I would go for Option 2 or 3 depending on your state. My state gives a tax deduction up to $5800 per parent per child for 529 contributions so with two children, I opt for the 529 plan and take a $23,200 deduction on my taxes. Anything after that goes into my taxable account.

Thank you for that tip. I’m in PA, by chance do you know their rules with the 529 tax deductions? If not I’ll try to find it.

According to this site: https://www.pa529.com/faqs/

Pennsylvania taxpayers can deduct up to $18,000 in contributions per beneficiary per year ($36,000 if married filing jointly, assuming each spouse had income of at least $18,000) from their Pennsylvania taxable income for the purposes of determining their state income taxes.

[new2bogle2]

Thank you for that tip. I’m in PA, by chance do you know their rules with the 529 tax deductions? If not I’ll try to find it.

According to this site: https://www.pa529.com/faqs/

Pennsylvania taxpayers can deduct up to $18,000 in contributions per beneficiary per year ($36,000 if married filing jointly, assuming each spouse had income of at least $18,000) from their Pennsylvania taxable income for the purposes of determining their state income taxes.

Thank you for that helpful link.
And are you ranking this as the best option because it’s a 3% state tax savings plus tax free growth inside the 529?

[retiredjg]

Unless you are behind on your tax-deferred savings, I would not put the money there (in a Solo 401k). Taxable or 529 or paying debt would be my choice.

[new2bogle2]

Unless you are behind on your tax-deferred savings, I would not put the money there (in a Solo 401k). Taxable or 529 or paying debt would be my choice.

We have never saved less than 15% of annual income and often in the 20%+ range. So based on savings rates I read about i wouldn’t say we are behind in tax deferred savings.

Thank you.

[CaptainT]

Welcome to Personal finance. A lot depends on what you are currently doing and what your personal goals and wants are.
1. Make sure basic bills are covered home food health care ect. I assume this is true I would also add a few extra luxuries each step completed
2. I would next get any 401k match from employment
3. Roth max
4. Other retirement funding
5. Fund kids education
6. Boat

[new2bogle2]

Welcome to Personal finance. A lot depends on what you are currently doing and what your personal goals and wants are.
1. Make sure basic bills are covered home food health care ect. I assume this is true I would also add a few extra luxuries each step completed
2. I would next get any 401k match from employment
3. Roth max
4. Other retirement funding
5. Fund kids education
6. Boat

Thank you for the helpful words. But,

6. Beach House
7. Boat

Haha

[new2bogle2]

Unless you are behind on your tax-deferred savings, I would not put the money there (in a Solo 401k). Taxable or 529 or paying debt would be my choice.

If I elect for taxable would you just hold in a money market or would you invest in TSM?

And why taxable over a solo 401k or SEP IRA?

[retiredjg]

Unless you are behind on your tax-deferred savings, I would not put the money there (in a Solo 401k). Taxable or 529 or paying debt would be my choice.

If I elect for taxable would you just hold in a money market or would you invest in TSM?

It depends on what you are saving for - education, retirement, or beach house and boat.

And why taxable over a solo 401k or SEP IRA?

Because you said you were not behind in tax-deferred savings.