I live in California and my income this year will be roughly 33k (my actual annual income is about 64k but I began by job in June). I have >12k in a brokerage account that is >1 year old. I have an $8500 loan at 6.8% that begins repayment on 12/24. I have $4000 in free cash.
My goal is to max out my roth IRA this year and pay off my loan asap. Would it be beneficial to sell off about 10k in stocks to do this? The other option I considered is selling enough in stock (maybe around 2k) to max my roth IRA and then devote most of my income to repaying the loan early next year. My concern is that selling more than around 6k in stocks will bump me to the next tax bracket, which may ameliorate any potential gains -- how do marginal taxes work with the capital gains brackets?
The stocks/ETFs/funds in question make roughly 5% when considering expenses so, barring taxes, repayment of the loan seems more favorable.
And for what it's worth, my income is expected to exceed roth limits in about 5 years time, which is why I'm trying to maximize savings now.
Hi Davin, It sounds like you are in a pretty good spot, financially speaking. A good job, low amounts of debt, and most importantly the awareness to start planning now. While it's difficult to speak on your specific scenario without all the details, I think it boils down to your personal preference. Do you want eliminate debt or save more? Do you want to pay down debt all at once or systematically? I will say this about your situation (disclaimer: not a tax expert) if you do decide to sell from your brokerage account to raise cash, based on the earned income you provided, your long term capital gains tax would be 0%. Most likely this year will be your last year in that tax bracket. Here's an article that I think has the type of information you're looking for: http://www.arkenstonefinancial.com/arkenstone-blog-posts/2015/2/5/vanguards-top-investment-tips?rq=vanguard Best of Luck! -Shayne
It's hard to give a blanket answer without knowing much more about situation including your age but a few thoughts: As between your stock holdings (which by the way, not clear how you can predict that they "make" 5% as stocks can be very volatile and impossible to predict their rate of return) and a guaranteed "rate of return" of 6.8% paying down the loan, the loan repayment would be the more attractive.
As to contributing to a Roth if it's only another $2k to max out, that sounds like a reasonable thing to do, though having only $4k in free cash is not much of an emergency fund so you might want to bolster that a bit before putting in a Roth.
As far as the tax impact of selling the stock, it's unlikely that the gain on that amount would put you into a higher tax bracket unless you are already right on the edge of the one you're currently in so I wouldnt factor that in.
To the extent that you are able to live on less than your current salary, you may also want to consider an automatic deduction each month to one of the above savings strategies. Hope that helps
Hi Davin, I agree with both Shayne and Robert. It makes the most sense to pay the debt down or off as soon as possible. It sounds like you have plenty of cash to pay the debt down and max out your Roth IRA. If everything is correct that would be $10,500 ($8,500 to loan+$2,000 to Roth IRA), thus leaving $1,500+ in your brokerage account and the $4,000 in free cash available to you. Following that strategy would allow you to pay off debt max your retirement savings and then provide a quick way for you to build up your reserves to a comfortable point and then continue to prepare for retirement. Sounds like to me that you are doing the right things financially. Good luck with the new career and I wish you the best. Chace
I agree with all of the advice thus far. You need someone that understands your whole picture in California. Potential tax implications affect every decision we make. You need an emergency fund that would cover 4 to 6 months of your expenses. Paying off the loan @ 6.8% is like earning a guaranteed 6.8% with no stock market risk. That would be hard to find. Most people's portfolios need some form of fixed income in them. Since bonds are kind of squirrelly right now I think paying off this loan would be a great idea. As soon as you pay it off start immediately putting the same amount as you were paying to this loan back in your emergency fund. A Roth IRA is a great idea as well. The last thing I will say is what I tell all of my clients. Academic truth is important but behavioral issues are important too. What I mean is there might be one answer that makes more academic sense that another but if you are uncomfortable with it then it is ok to modify it a little. You want to work within your comfort level as you grow and learn.
If you are not all ready working with a tax advisor, I'd find one in the next couple of days. Here's why. We don't know your total tax situation for this year, nor do we know how your portfolio stands considering paper gains and losses. Have you taken any gains or losses this year? As a Massachusetts advisor, I can't/won't make any recommendations regarding California tax issues. So finding a local personal tax expert would be your best source of information. You can get a local referral if you need one from the California Board of Certified Public Accountants at www.dca.ca.gov/cba/.
You have until the filing of your Federal taxes for 2015 to open and fund an IRA, either conventional or Roth so there is no looming deadline for that concern. Also, ask your brokerage firm if you all ready have a margin account with the. Many firms open all accounts as margin accounts. By having a margin capability on your account, you can borrow money from the brokerage account, paying the debit balance when you sell stock. You will incur interest charges as with any other loan should you opt to utilize that source of funds.
A good CPA will also be able to help you make other personal financial decisions in the future.
Hope this helps.
Looks like you've received copious help from the other advisors here but just wanted to say Hi and good luck from a fellow namesake!