Super confused... feeling DEVASTATED & hopeless... need advice on my plan?

[Tropical]

Your thoughts/advice on below "plan" would be SUPER appreciated...

Let's say someone has 300k they want to invest into their (3 fund) portfolio at Vanguard (person got this money by selling their primary residence (worth 600k with no mortgage) and moved into a smaller/cheaper house so they now have about 300k left over they can invest into their Vanguard portfolio). The 300k this person got after selling their house was 100% NOT taxable to the owner (300K was NOT gains... house was bought all cash and actually sold at a loss).

This is one of the things I am confused about... both Traditional IRA and Roth IRA limits the amount you can contribute annually to about 6k. Person NEEDS that 300k to GROW!!! So cannot invest it into money market account and it seems cannot invest it into IRA account either since those IRA accounts "limit" the amount of money you can put in it??

1. ... so if if someone wants to invest a lump sum of 300k... what type of an account would they invest it in at Vanguard so that they can take advantage of compounding interest?

2.It also seems that my TAX FREE 300k... would then suddenly become TAXABLE but I hope NOT the PRINCIPAL amount (being 300K) but rather only taxable on any GAINS on top of that 300k principal amount? If the 300K is immediately TAXED then I am screwed... I will be losing my TAX FREE 300k. I really need to clear this question up because I am very worried about this.... I recently had that 300k in CASH... and I used it to pay off the mortgage on my house... now I feel that was VERY STUPID thing to do!!!

I am studying like CRAZY, reading the Boglehead book etc etc and learning a LOT but have long way to go but my full time job now is to learn much as possible because I need a plan!

Thanks!!

PS: I am 44yrs old (in 3 months). ZERO savings, ZERO assets and living in a 600k house that is holding my equity HOSTAGE!! Feeling DEVASTATED and SICK TO MY STOMACH (this is literally making me physically ill. I was supposed to be retired by age 40!!). I always told myself I would start investing "once I make a lot of money" that was my plan the ENTIRE time!! HUGE HUGE HUGE mistake! I just opened Vanguard account yesterday. My 600k house is holding me HOSTAGE. I have 50k mortgage left on it... so almost fully paid off... but this house is NOT my dream home... it was bought as a very long term 10-15 year investment. I have lived in house for for ONLY 2 years. I need to sell this 600k house (I can EASILY get much cheaper house for 200k to live in).

I sold my car several months ago... I am being frugal as possible. I ride my bicycle everywhere and eat rice and beans.

This house is keeping me POOR because it is holding my equity HOSTAGE... equity that could be earning me compounding interest. I feel I need to invest, like my life depends on it... into my portfolio at vanguard so that in 20 years I will be OK.

My thoughts are... if I can invest 300k into 3 fund portfolio (asset allocation not yet determined)... that in 20 years my 300K might be worth at least 2.5M?? I would be contributing at LEAST $500-$2000/month into my portfolio to help it grow... I will be 65yrs old in 20 years... so my portfolio MUST reflect 20 yrs from now... NOT 30 yrs from now... my life will be over in 30 yrs!!! What is IMPORTANT is what will my portfolio be 15 or 20yrs from now when I can actually still ENJOY life and not be on my death bed!

Plan is to have VTSAX, VTIAX and (no junk) Bonds as my 3 fund portfolio. NOT sure what asset allocation yet...

I need to get my business to profit insane amount each year so I can contribute to portfolio like crazy and MAKE UP FOR LOST TIME!

 

[Aerides]

Not sure what research you are doing but..

Yes, 401k non-taxable contributions have had limits since they started, always have, always will. Otherwise ppl would simply put everything in there, and then we'd all have much larger RMD's down the road.

So...

You open a taxable brokerage account (and can invest it in pretty much the same stuff as an IRA)
No, your principal is still not taxable, only gains.

As far as what it will be worth in the future, no one can give you that answer, of course.

 

[Tropical]

Not sure what research you are doing but..

Yes, 401k non-taxable contributions have had limits since they started, always have, always will. Otherwise ppl would simply put everything in there, and then we'd all have much larger RMD's down the road.

So...

You open a taxable brokerage account.
No, your principal is still not taxable, only gains.

As far as what it will be worth in the future, no one can give you that answer, of course.

Thanks! I have never had a job... I have always been self employed so I am not familiar with 401Ks.


I'm finishing the boglehead book and have been watching videos like crazy on youtube and reading posts on bodglehead forum etc. Have lots to learn.

If I put my 300k cash into the taxable brokerage account... will that 300k be taxed immediately... or I HOPE only on gains? Whoops so sorry I see you answered that question. Thank goodness. I was very very worried the principal amount would be taxed!

 

[pb4uski]

You would invest the $300k in a taxable brokerage account. Interest, dividends and capital gains MAY be taxable. Interest and short-term capital gains would be taxable income to you. Qualified dividends and long-term capital gains on investment held over 12 months would typically be taxed at 0% or at 15% depending on your income.

Your original $300k of principal would not be taxed.

The house isn't holding you hostage as much as you fear. You have a nice place to live and in most areas houses appreciate over time... like your 10-15 year time frame... and best of all, gains up to $250k are tax free if it was your personal residence... so the appreciation is tax-free unless it exceeds the $250k exemption. So if your $600k house appreciates 3% annually for 15 years then it would be worth $907k and most of the gain on sale would be tax free and the remainder would be taxed at preferrential tax rates (all under current tax code).

For your $300k to grow to $2.5m in 20 years would be 11.18% annual growth for 20 years, pretty unlikely so set your expectations accordingly. The growth of VTIAX for the last 20 years, with dividends reinvested was 9.75%, generaly consistent with the 10% long-term total return of domestic equities with dividends reinvested.

What is your current tax bracket? If you are not in the range of 0% for qualified dividends and LTCG and despise paying taxes you can invest in tax-free municipal bonds but it is hard to know what is best with more information.

But above all, take a chill pill!

 

[Fermion]

You can only put earned income into a IRA or 401K or Roth, not income from your $300k money pile.

I would invest it in short term treasuries if I were you. The economy is very uncertain right now and you can get a guaranteed 5% to 5.5% on that 300k which is $15,000 to $16,500 each year and is much more satisfying than watching the $300k turn into $200k in a market downturn. Later you can decide how much risk you want to take.

 

[aja8888]

I sold my big house and bought a smaller one this year, but I am 30+ years older than you. You have a LONG way to go. Small houses are nice and could be very inexpensive if you know what you are doing and pick the right area.

Yes, IRAs and 401ks are designed for people to get wealthy slowly.

Settle yourself down, plan carefully, and maybe get some help in determining where to go from here.

 

[Tropical]

Thanks so much for the replies so far it is REALLY appreciated!

Sorry for my ignorant question... but I am trying to figure out what is the advantage of a "taxable brokerage account" over a ROTH or Traditional IRA account?

I see that one advantage is that there is NO LIMIT to how much you can contribute to a taxable brokerage account... but are there any other advantages or disadvantage?

I also forgot to note that my house has not yet been sold... I am just trying to figure out whether I SHOULD or should NOT sell my house. My house is NOT my dream house. My dream is to live off grid like I used to when I lived in Hungary. I only need 200k possibly 300k for housing... I do NOT need to live in 600k house (which is a 600k liability... NOT an asset). House was bought as a very long term investment... but if it is going to rob me off my ability retire then I need to sell it ASAP and invest the money elsewhere.

 

[Al18]

I would probably pay a CFP and make a good plan you can stick to, before making any rash decisions.

 

[Sunset]

OP - Lets talk about other things, since you self employed.

Roughly what is your gross income ?
What is your net income. ?

Are you paying SS taxes so you can qualify for medicare and SS when you are old. ?

If you sell your house, you can put the $ into a taxable brokerage account, like other's have said. You income in total determines if you would pay any taxes and how much, but we can't tell you that without knowing your net income.

As self employed you could open a self-401K at Vanguard, frankly I found it FANTASTIC for piling in saving, which I had found it earlier, they upper limit of contributions is much higher than employee 401K's.

 

[Tropical]

You can only put earned income into a IRA or 401K or Roth, not income from your $300k money pile.

I would invest it in short term treasuries if I were you. The economy is very uncertain right now and you can get a guaranteed 5% to 5.5% on that 300k which is $15,000 to $16,500 each year and is much more satisfying than watching the $300k turn into $200k in a market downturn. Later you can decide how much risk you want to take.

Thanks for your advice! My HUGE woyry with that though is that I would be losing out on compounding interest? Can I in that case structure my asset allocation in VTSAX, VTIAX and (no junk) Bonds as my 3 fund portfolio to be more servatative? Perhaps rather than a 90/10 split a 60/40 split?

I should maybe talk to financial advisor but ONLY one that is FLAT FEE? The more research I do the more confused and uncertain of what to do I become... I feel physically ill.. I am almost 50 years old and have NOTHING in place for retirement. I need whatever money I invest to GROW into something large within the next 15 or 20 years. That is imperative.

 

[cathy63]

...Sorry for my ignorant question... but I am trying to figure out what is the advantage of a "taxable brokerage account" over a ROTH or Traditional IRA account?

I see that one advantage is that there is NO LIMIT to how much you can contribute to a taxable brokerage account... but are there any other advantages or disadvantage?...

This is kind of like asking is it better to have a checking account or a savings account? You can have an IRA and a Roth IRA and a 401k and a taxable brokerage account all at the same time. Each type of account has rules about how much you can contribute and when you can take the money out.

For 2023, you can contribute a maximum of $6500 total in earned income (from your self-employment work reported on a Sched C or F in your tax return) to your IRA and Roth IRA.

You can contribute a maximum of $22,500 from your self-employment income to a 401k. Your business can also contribute 25% of its business income for a total of $66,000.

You generally pay a penalty if you take money out of your IRA, Roth IRA or 401k before age 59 1/2, though there are some arrangements you can make to touch it sooner, and you do pay income tax on it whenever you withdraw it.

You can put as much money as you want in a taxable brokerage account and you can withdraw it whenever you want to. You pay income taxes in the year that the income is earned, whether that's from interest, dividends, or gains (not principal, aka "basis") when you sell one of your investments. The money you deposit in the account is also taxed if it's income.

Selling your home for less than you paid for it is not a taxable event, and depositing this money in a brokerage account does not cause it to become taxable.

 

[pb4uski]

Thanks for your advice! My HUGE woyry with that though is that I would be losing out on compounding interest? Can I in that case structure my asset allocation in VTSAX, VTIAX and (no junk) Bonds as my 3 fund portfolio to be more servatative? Perhaps rather than a 90/10 split a 60/40 split?

I should maybe talk to financial advisor but ONLY one that is FLAT FEE? The more research I do the more confused and uncertain of what to do I become... I feel physically ill.. I am almost 50 years old and have NOTHING in place for retirement. I need whatever money I invest to GROW into something large within the next 15 or 20 years. That is imperative.

No matter what you invest in, short-term treasuries, stock ETFs or whatever your growth will compound. Interest earned on maturing short term treasuries would be reinvested in more short term treasuries. Dividends from a stock ETF could be reinvested in that same stock ETF, giving you more shares. So put that worry behind you.

Short-term treasuries would be more conservative than a 3-fund portfolio.

Do you currently have any accounts with Vanguard, Fidelity or Schwab? Do you have a Fidelity or Schwab office nearby?

 

[athena53]

Take a deep breath and calm down. You're not retired but at age 45 a net worth of $600K (even if it's in only a single asset) is nothing to sneeze at.

As others have said, the proceeds from your house are not taxable (especially if you're selling it at a loss), so you don't need to shelter it from taxation by putting it onto an IRA (which you can't do with that much $$, anyway).

After-tax vs. IRA? About half my retirement assets are in IRAs because that was the only way I could get the company 401(k) match during my career (they didn't match after-tax contributions). Now the disadvantages are coming home to roost. Everything withdrawn form the IRAs/401(k)s (other than Roth) is ordinary income- no preferential treatment for dividends or long-term gains. These withdrawals can trigger addition "stealth taxes" such as IRMAA surcharges to Medicare premiums. You can put off withdrawing for your IRA and withdraw from after-tax accounts first but eventually (age 73) you're forced to start making withdrawals from the IRA.

So first, don't do anything hasty. Get the money and stash it in a plain old after-tax brokerage account. Fidelity, Schwab or Vanguard- your choice. They'll offer you plans to manage your assets that will cost you a % of your assets every year. Tell them to go away. I am not an investment advisor (but have managed my own for 50 years) so this is not iron-clad advice but choose an asset allocation (% stocks vs. fixed income, % in various ETFs covering those investments such as S&P 500, Dow, NASDAQ, Bond ETFs) and then invest- maybe 1/12 each month for a year. This is where a one-time meeting with a flat-fee advisor might be useful. Re-balance every quarter.

And don't do anything hasty. If you want to put it all in one-year CDs at 5% for a year while you figure it out, that's cool, too.

Finally, have a little fun with a tiny bit of it. Life should not be all rice and beans and the number of years we have left is not guaranteed.

 

[copyright1997reloaded]

Thanks for your advice! My HUGE woyry with that though is that I would be losing out on compounding interest? Can I in that case structure my asset allocation in VTSAX, VTIAX and (no junk) Bonds as my 3 fund portfolio to be more servatative? Perhaps rather than a 90/10 split a 60/40 split?

I should maybe talk to financial advisor but ONLY one that is FLAT FEE? The more research I do the more confused and uncertain of what to do I become... I feel physically ill.. I am almost 50 years old and have NOTHING in place for retirement. I need whatever money I invest to GROW into something large within the next 15 or 20 years. That is imperative.

Again, take a deep breath and relax (a bit).

Some of the answers depend on other financial information that you have not yet provided!

The money you deposit in a taxable brokerage account isn't taxed, only the gains and then how much and when "depends".

If your income is low enough, long term capital gains (gains in an equity or mutual fund held over a year) might be taxed at 0%. For example, for 2023 single you can have up to $41,675 in income before LT capital gains would be at the 15% rate, and much much higher (over 450K) before it would reach the 20% rate.

So "we" need more information, e.g. what is your estimated income, single?, etc.

 

[pb4uski]

Take a deep breath and calm down. You're not retired but at age 45 a net worth of $600K (even if it's in only a single asset) is nothing to sneeze at.

As others have said, the proceeds from your house are not taxable (especially if you're selling it at a loss), so you don't need to shelter it from taxation by putting it onto an IRA (which you can't do with that much $$, anyway). ...

So first, don't do anything hasty. Get the money and stash it in a plain old after-tax brokerage account. Fidelity, Schwab or Vanguard- your choice. They'll offer you plans to manage your assets that will cost you a % of your assets every year. Tell them to go away. I am not an investment advisor (but have managed my own for 50 years) so this is not iron-clad advice but choose an asset allocation (% stocks vs. fixed income, % in various ETFs covering those investments such as S&P 500, Dow, NASDAQ, Bond ETFs) and then invest- maybe 1/12 each month for a year. This is where a one-time meeting with a flat-fee advisor might be useful. Re-balance every quarter.

And don't do anything hasty. If you want to put it all in one-year CDs at 5% for a year while you figure it out, that's cool, too.

Finally, have a little fun with a tiny bit of it. Life should not be all rice and beans and the number of years we have left is not guaranteed.

+1 Actually, all the big 3 brokerage money market funds are currently paying above 5% so the OP could just park the $300k there for a bit until the OP decides the way forward.... that would be over $15k in interest if he left it there for a year.

A target date retirement fund might be a good choice for the OP. My son is in a 2050 fund that has yielded 7.75% over the last 10 years, a little better than a 60/40 mix.

 

[Tropical]

OP - Lets talk about other things, since you self employed.

Roughly what is your gross income ?
What is your net income. ?

Are you paying SS taxes so you can qualify for medicare and SS when you are old. ?

If you sell your house, you can put the $ into a taxable brokerage account, like other's have said. You income in total determines if you would pay any taxes and how much, but we can't tell you that without knowing your net income.

As self employed you could open a self-401K at Vanguard, frankly I found it FANTASTIC for piling in saving, which I had found it earlier, they upper limit of contributions is much higher than employee 401K's.

Thanks for your reply!

Roughly what is your gross income? I file as a SINGLE status. My gross income last year for 2022 was 90k (but after legal business/medical write offs etc my taxable net income was only about 35k… I am actually doing my 2022 taxes late now and can have more accurate number after I meet with my CPA next week).

GOAL: I am going to be buying existing business that is already profiting to beef things up with my existing business… my goal is netting at LEAST 100k/year after tax. My living expenses right now are $1,500/month (let’s round that up to 25k/year (incase I have to get a car again etc). I always like to round up expenses to be on the safe side and have a big cushion. So when I have 100k/year net profit… that will enable me to invest 75k/year into my portfolio at Vanguard for a late FIRE... I consider age 50 to be very late… I was supposed to have retired by age 40. Life is insanely very very very short. I do not agree with retiring at age 65. I do not agree with it at all!!! ☹

I need to do whatever is necessary to a LEAST have 3k/month cash flow from coming in from ASSETS… then I can build upon that. That is an EMERGENCY to me. I cannot take 20 years to accomplish that. There is noway.


What is your net income? My gross income last year for 2022 was over 90+k (but after legal business/medical write offs etc my taxable net income was only about 35-40k (I will have exact number soon after meeting with CPA). I don't have exact numbers for 2022 yet I am embarrassed to say.

Are you paying SS taxes so you can qualify for medicare and SS when you are old? I only have 8 FICA credits so far. I have several citizenships… I have not been in the US my entire life. I will not have 35 years of work to base social security benefits off of. If I stop working (sell my business at age 66) then I will only have 20 years of work… NOT 35 years of work for social security to base itself on. So I am not hopeful that social security benefits will ever be of huge help? It is crucial that I can be OK without social security being in the equation. I still plan to have a 30k salary through my s corp so that I contribute enough towards FICA… but seeing that I will only have 20 years of work rather than 35yrs… I’m worried this is not enough...?

If you sell your house, you can put the $ into a taxable brokerage account, like other's have said. You income in total determines if you would pay any taxes and how much, but we can't tell you that without knowing your net income.

As self employed you could open a self-401K at Vanguard, frankly I found it FANTASTIC for piling in saving, which I had found it earlier, they upper limit of contributions is much higher than employee 401K's.


self-401K at Vanguard,? Interesting. I feel SUPER confused the more I learn the more confused I am! =(
The only thing I am not confused about it is… I NEED to get my profit up a LOT so that I can invest, invest, invest and invest like crazy so that I can be OK in life and live off of my assets!

Should I sell my house... is it BAD idea to keep it it? I mean it is holding all this equity hostage? I do not know what to do!!

PS: If I were to rent it out the ROI I would get for it is SUPER low. I will post here the ROI in few minutes... this is not a good rental property. The property is simply too expensive... it nowhere near meets the "1% rule in real estate"... but beside that point... the ROI is really awful if I were to rent out this house even with NO mortgage... the compounding interest invested would be superior. I fear this house will rob me of my ability to retire!?

 

[Tropical]

No matter what you invest in, short-term treasuries, stock ETFs or whatever your growth will compound. Interest earned on maturing short term treasuries would be reinvested in more short term treasuries. Dividends from a stock ETF could be reinvested in that same stock ETF, giving you more shares. So put that worry behind you.

Short-term treasuries would be more conservative than a 3-fund portfolio.

Do you currently have any accounts with Vanguard, Fidelity or Schwab? Do you have a Fidelity or Schwab office nearby?

I just opened a Roth IRA and Traditional IRA account online the Vanguard website yesterday. I have ZERO dollars in both accounts. Now it seems I should also at least open a "taxable brokerage account" at vanguard so that at least its open? S I should search to see if Vanguard has office near me to visit in person?

Thanks!!

 

[pb4uski]

If you are self employed then you are contributing to SS each year through the unemployment taxes that you pay. You only need 40 quarters of paying in to receive benefits. Benefits are based on 35 years and if you have less than 35 years then they will fill the gaps with zeros. You should register with ssa.gov and downoad your social security statement to see where you stand.

 

[Texas Proud]

I am not as kind as others here....


How were you planning on retiring at 40 without any savings? Without any plan at all? Wishes and hope is not a plan...


If you are serious you can get good advice here but it is not a quick thing.. most here saved from when they were in their 20s.. it also takes time for your nest egg to grow..


Do not go 'all in' like it appears that you have... selling your car and using a bike etc... you have to live your current life and plan for your future life... do not live like a hermit now hoping for a better life in the future... enjoy today (frugally) and enjoy tomorrow when you meet your goal...

 

[pb4uski]

I just opened a Roth IRA and Traditional IRA account online the Vanguard website yesterday. I have ZERO dollars in both accounts. Now it seems I should also at least open a "taxable brokerage account" at vanguard so that at least its open? S I should search to see if Vanguard has office near me to visit in person?

Thanks!!

Vanguard doesn't have physical offices that you can go to so that isn't going to work. IF there is a Schwab or Fidelity office near to you then I would abandon the Vanguard accounts and set up accouns with one of the others so you'll have face-to-face support available to you nearby.

From what you wrote you are probably in the 12% tax bracket, so I would stick with the taxable account or perhaps put the 2023 contribution into a Roth IRA until you are in the 22% tax bracket once your business and income grows to the next level. Then you can consider contributing to a deductible traditional IRA. The reason is that if your plan happens then you'll be in a higher tax bracket in retirement than you are now so there is no sense in contributing to a deductible tIRA now for a 12% tax benefit to pay 22% later.

 

[pb4uski]

... Do not go 'all in' like it appears that you have... selling your car and using a bike etc... you have to live your current life and plan for your future life... do not live like a hermit now hoping for a better life in the future... enjoy today (frugally) and enjoy tomorrow when you meet your goal...

+1 extreme frugality might grow your wealth but make your current life miserable. Balance saving for tomorrow with living for today.

Slow and steady wins the race.

If you were to invest your $300k and add to it $6,500 annually for each of the next 20 years and it earned 8% then you would have almost $1.7 million at the end of 20 years.

 

[Tropical]

I am not as kind as others here....


How were you planning on retiring at 40 without any savings? Without any plan at all? Wishes and hope is not a plan...


If you are serious you can get good advice here but it is not a quick thing.. most here saved from when they were in their 20s.. it also takes time for your nest egg to grow..


Do not go 'all in' like it appears that you have... selling your car and using a bike etc... you have to live your current life and plan for your future life... do not live like a hermit now hoping for a better life in the future... enjoy today (frugally) and enjoy tomorrow when you meet your goal...

I agree with what you say 100%. I have left out a TON of details. I had opportunity, one which most people will never have in their lifetime.. and it didn't work out the way it was supposed to. I have left out a ton of details... but this opportunity would have had me easily retire by age 40.

Because of this opportunity which was 100% supposed to work out but didn't) I did NOTHING to protect myself just incase it did not work out.

I am here today 100% because of my own doing. When the you know what hit the fan... it has left me in devastation. ALWAYS have a plan B. I did not. I feel physically ill.

 

[Aerides]

In your shoes you would be well served to map out a high level plan of your financial future goals, current income and expenses, assets, etc., then find a fee based fiduciary for a consultation for a plan you can self manage with investments at fido, vanguard, etc.

 

[marko]

I would probably pay a CFP and make a good plan you can stick to, before making any rash decisions.

Take a deep breath and calm down.

+1 on both. OP, you seem a little frantic; some professional financial help should go a long way for you IMO.

There's lots to learn on this forum and some fantastic, knowledgeable people, but sitting F2F with someone for an hour or two will be well worth the money.

 

[Tropical]

If you are self employed then you are contributing to SS each year through the unemployment taxes that you pay. You only need 40 quarters of paying in to receive benefits. Benefits are based on 35 years and if you have less than 35 years then they will fill the gaps with zeros. You should register with ssa.gov and downoad your social security statement to see where you stand.

Thanks! I was playing around with the calculator and when I enter only 2 years or work... it shows person would still receive a rather high amount of social security benefits. I am confused... it seems that calculator is not accurate at all? If you enter only one or two years of work.. you will see what I mean...

I was using this calculator: https://www.ssa.gov/OACT/anypia/index.html

... this leads me to believe that calculator is not accurate!?