Investing or savings account for the short term

[Chuck1]

 

I am moonlighting as an independent contractor and will be paying my taxes at the end of the year in a lump sum. I am going to be saving some of the income from each check for the eventual tax bill. Would you recommend just putting that into a savings account or adding it to my portfolio which is in index funds?  I am wondering if it makes sense to take the risk of investing short term while also considering the fact that I would have a tax impact by doing so when I withdraw those funds within the year.  Expected income during this time period would be $50-70k.

I feel like I am asking a lot of questions and look forward to when I can actually be the person giving the answers!

Thank you for your help!

[jfoxcpacfp]

Chuck1 wrote:

I am moonlighting as an independent contractor and will be paying my taxes at the end of the year in a lump sum. I am going to be saving some of the income from each check for the eventual tax bill. Would you recommend just putting that into a savings account or adding it to my portfolio which is in index funds?  I am wondering if it makes sense to take the risk of investing short term while also considering the fact that I would have a tax impact by doing so when I withdraw those funds within the year.  Expected income during this time period would be $50-70k.

I feel like I am asking a lot of questions and look forward to when I can actually be the person giving the answers!

Thank you for your help!

Click to expand...

Never invest in the short term (which I define as less than 5 years). This post from our blog may be helpful: When Low Interest Rates Are OK.

[G]

Agree with Johanna.  Too risky.  Keep the portion that you need in a cash/money market.

Why aren't you paying quarterly taxes?

[RyanHampel]

G is correct here. There is an underpayment penalty assessed during tax season if you underpay by a certain amount. you should make quarterly payments to avoid this.

In the meantime, try a high-interest savings account. It won't make you much, but 1% is better than nothing.

[Zaphod]

If its your first year having to pay SE taxes there will be no penalty. Since its likely the moonlighting money is irregular there is also a form that can negate any penalty due to that aspect.

Also the penalty is pretty paltry and even a savings account might be able to make up the majority of it, which might be totally worth the liquidity, etc...benefit. I dont pay my quarterlies either, penalty is not enough for me to be concerned with.

[The White Coat Investor]

My unpaid tax money sits in a high yield bank savings account paying 1%. Whether you want to call that "investing" or not is semantics. But placing money you will need within the next year into something like stocks is just gambling. You might win, but I wouldn't risk it. You definitely do not want to owe the IRS money.

[Zaphod]

You cant get better than 1% anymore? There has to be something better than that without investing it.

[Chuck1]

To be honest, I asked the older residents who said they didnt file quarterly (they also have not filed taxes yet so I am not sure if they would be recommending something different if they get hit with a penalty). So to be on the safe side I will file quarterly for this next year and keep the additional funds that I plan to need in the next year just in a savings account.

Thank you for your input!

[Zaphod]

Chuck1 wrote:

To be honest, I asked the older residents who said they didnt file quarterly (they also have not filed taxes yet so I am not sure if they would be recommending something different if they get hit with a penalty). So to be on the safe side I will file quarterly for this next year and keep the additional funds that I plan to need in the next year just in a savings account.

Thank you for your input!

Click to expand...

The penalty is tiny, especially considering the amount you would owe. I think my penalty was barely over 1k last year on over 100k in taxes, its tiny and for all the benefits totally worth it even if you can only get 1% in these crummy savings accounts.

Like I said, there wont be a penalty if first time, and since you're a resident you arent in a high tax bracket anyway, the penalty will be even smaller.

Have you opened up a solo 401k/SEP IRA to contribute the max and also max out whatever you get from work and a Roth if eligible? I would do that first and minimize taxes up front, then worry about the best way to position for a negligible penalty.

[Chuck1]

This is my first year having an income so its all pretty new/over my head. I currently do not have a solo 401k or SEP IRA.  I did not form an LLC (not sure if I would have to do that to open a solo 401k).

I made a Roth IRA and have contributed the maximum to that.

[BetweenTwoElephants]

I just opened a savings account at popular direct with a 1.15% rate. It's the best I've found recently. I guess if it is your first year you could open a one year CD. There are some of those around with decent rates but that would only work your first year.

[Zaphod]

Chuck1 wrote:

This is my first year having an income so its all pretty new/over my head. I currently do not have a solo 401k or SEP IRA.  I did not form an LLC (not sure if I would have to do that to open a solo 401k).

I made a Roth IRA and have contributed the maximum to that.

Click to expand...

Then definitely open up a individual 401k, etc...and contribute the max, you may have hardly any tax bill whatsoever. How are you moonlighting in your first year?

[Chuck1]

I am actually a dental resident so it is a little different in our programs. I will definitely look into that. However, my program has tuition (not paid) so they get ya two ways. I am planning on figuring out what I will need to live off of and putting some of my income towards my loans or just taking less out less loans next year. I'm assuming you thought I was a medical resident and this was an additional income source, sorry I should have clarified that.

[Zaphod]

Ah, that is different. Definitely use it for living and taking out less loans then. If there is anything left over than you can think about a Roth or something but I dont think you'll have any tax issues if 50-70k will be your total income.

[childay]

It might still be worth opening a solo 401k with a small contribution just so you have something to roll into in the future