Dumping my extra cash into Taxable for next home/land down payment.

[Bold]

I'm ignorant on how some of this works (especially optimizing taxes), so I'm looking for pointers or links to good reading material.


Me:
- 36yo, single, no kids
- 100k gross income
- Living in a house worth ~225k, with 95k still owed
- Have emergency funds

Currently maxing out my accounts, but I did start late at 32yo:
- Simple IRA through work
- Roth IRA
- HSA


Last year I started a side LLC. If things go well, I'll make an extra 10-20k a year with very little input from me.

I'm here to make sure my compass is generally pointed in the right direction, and especially what I do with my extra cash:
In 2020 I put an extra 16k in two taxable accounts:
8k in VTWAX
8k in VTSAX

That 16k has grown to low 20s and my understanding is that if I withdraw I will be paying long-term gains of around 15%.

Yesterday I deposited another 15k in the VTSAX account.

My main goal with this "extra" money is to simply park it somewhere it will outperform inflation, and eventually use it as a downpayment when I move. I'm looking for acreage/possibly build a small home, and it would be nice to have 30-60k for a downpayment so that I am not forced to sell my current home contingent to move. (This way I can move out of my current house, make small repairs, and not be in a rush to sell the place)
Timeline for this move would ideally be this year or next, but that is heavily dependent on finding property I love. (So it could be 2+ years) Budget would be somewhere between 200-350k, whether that's an existing house with land or simply vacant land that I build on.

I know it's generally not advised to put money (which you will need soon) into the market, but I feel I don't "need" this money soon. I'm currently in a nice home, and if the market tanked right as I found my dream property it seems I still have other options and my back isn't against a wall.

But I welcome and appreciate any thoughts.

 

[skyking1]

congrats to you for having a compass @36
I don't see a problem with this, especially if you are not pressed to time a purchase.
Timing the market is generally a great way for other people to make money, mostly because it is a two transaction situation. When you are shopping around and settle on a property or two, timing the getting out is a one way deal. Take it out and don't look back.

 

[PaunchyPirate]

So, I don't think there's anything wrong with a single, 36yo person doing what you are doing. You seem to understand that since your 2 investments are both stock-based that they are subject to market volatility and could actually go down in value over a period of time (like the last couple months). In fact, ALL investments can do this. But, historically, they have tended to rise over the long term. Where the value will be when you decide to buy something will be a total guess.

Just to clear up some nomenclature... Do you really have 2 different taxable accounts for these two holdings? Usually, one would open one taxable account at a brokerage firm and then buy 2 investments in that same account. In other words, you have purchased 2 mutual fund investments. They can both be in the same brokerage account. But perhaps you decided to split them up between 2 different brokers for some reason.

 

[TheWizard]

You're doing well and I completely approve of stashing your excess money in stock index funds for this purpose.

That (tired old) recommendation for keeping money you will soon need in a bank account applies mostly to a lump sum, like a $50k gift from your parents for a house down payment.

But you are growing your taxable account each month or so, so continue as you've been doing...

 

[VanWinkle]

I'm just wondering if you couldn't set up an Individual 401K for your LLC and be able to tax defer much of your additional savings. The limit for an Individual 401K is much larger than the Simple IRA you currently use. You would need to study the tax laws to make sure it is legal to open the Individual 401K and have no other employees.

 

[pb4uski]

... I know it's generally not advised to put money (which you will need soon) into the market, but I feel I don't "need" this money soon. I'm currently in a nice home, and if the market tanked right as I found my dream property it seems I still have other options and my back isn't against a wall.

But I welcome and appreciate any thoughts.

You nailed it.

 

[Bold]

You all are awesome—thanks for taking the time to reply.

Timing the market is generally a great way for other people to make money, mostly because it is a two transaction situation. When you are shopping around and settle on a property or two, timing the getting out is a one way deal.

That's a great way of describing it, and is not a connection I've made before. Cheers!

Do you really have 2 different taxable accounts for these two holdings?

Yes
I'm not sure why I did this (and maybe there's an easy way to correct it), but all of my investments are through Vanguard. I knew when I started the taxable investments I wanted to do one Total US, and one international. But I guess I couldn't figure out how to invest in multiple different indexes within one account.

Over the years, I've gathered just enough information online to get myself into trouble but not too much, I hope.

I'm just wondering if you couldn't set up an Individual 401K for your LLC and be able to tax defer much of your additional savings. The limit for an Individual 401K is much larger than the Simple IRA you currently use. You would need to study the tax laws to make sure it is legal to open the Individual 401K and have no other employees.

This is a great point, and one I've been considering. It seems all sorts of in-the-know business people are doing fancy things to reduce their tax burden. My main gig is our family business (so I have quite a bit of influence over what we do and offer—hence starting the IRA's recently), but with this side hustle I've been wondering about having a second retirement account and what my options are. Because right now I'm limited to $13k a year if I remember correctly. And I believe 401k is closer to $19k.

Then there are things like company vehicles and company write-offs that people have seemed to figured out.
I'm all about simplicity in my life, so I'll have to learn more about these things and decide if it's worth the tradeoff of time and hassle.

 

[skyking1]

yeah, with your current home equity you could easily replace that investment money with a HELOC and wait to get out on an upswing. I'd use the emergency money to secure the right property under that scenario.

 

[mrfeh]

I'm gonna go with the stodgy, conservative advice: money you may need within the next 5 years should not be in equities.

 

[TheWizard]

...I'm not sure why I did this (and maybe there's an easy way to correct it), but all of my investments are through Vanguard. I knew when I started the taxable investments I wanted to do one Total US, and one international. But I guess I couldn't figure out how to invest in multiple different indexes within one account...

Quite simple to own multiple FUNDS within a single taxable ACCOUNT at Vanguard.

When you select Buy in the Vanguard app, it first asks you whether ETF or Mutual Fund.
After that, you select which Account, which would be your Brokerage Account. Then it shows you Funds you already own within that Account along with a Search Fund box where you can enter the name of a new Fund to buy, if desired.

If indeed you have two separate Brokerage Accounts with Vanguard, get in touch and have them merge them into a single account with a single Settlement Fund.
This will make things simpler going forward...

 

[38Chevy454]

I agree with your general plan. It sounds like you are good shape with understanding the market risks, but also understanding the timeframe concerns.


You should be able to consolidate the two accounts into one. It will make keeping track of things easier. There is no difference tax-wise, so reducing the number of accounts is good.


If you have built up your "house/land fund" in the taxable, then it could be a good idea to do the self employed IRA to boost pre-tax savings. BUt I would only do this after you have the money for house fund since the IRA puyts that money out of reach, except with the 10% early withdrawal penalty.

 

[PaunchyPirate]

Quite simple to own multiple FUNDS within a single taxable ACCOUNT at Vanguard.

When you select Buy in the Vanguard app, it first asks you whether ETF or Mutual Fund.
After that, you select which Account, which would be your Brokerage Account. Then it shows you Funds you already own within that Account along with a Search Fund box where you can enter the name of a new Fund to buy, if desired.

If indeed you have two separate Brokerage Accounts with Vanguard, get in touch and have them merge them into a single account with a single Settlement Fund.
This will make things simpler going forward...

I agree with this suggestion. Just don't let them SELL in one account and then transfer the money to the other account and then BUY in that account. The SELL would be a taxable event (assuming you have gains). Make sure they can TRANSFER the funds between accounts without selling/buying them. I have to believe they can do this for you.

My one-and-only taxable account at Vanguard has 3 Vanguard mutual funds in it and 1 non-Vanguard mutual fund. It also has 1 Vanguard ETF in it. And 3 non-Vanguard ETFs. It also has 3 individual stocks in it too. It's much easier to keep it all in one account.

 

[Bold]

Once again, I appreciate the advice!

I just called Vanguard up—they were great to deal with. In less then 10 minutes, we had the account "consolidation" process started.

38Chevy454: good plan. I'll keep socking away this land money until I get 50-80k, then I'll revisit how I can fully max the retirement options.