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Windfall Advice

Posted: Mon Jun 12, 2017 11:29 am
by MWKXJ
My wife came into a 200k windfall and we'd like advice on how to invest it in a tax efficient manner. The money is inheritance from a recently deceased grandmother and will presumably be held in a taxable account.

We're considering opening a brokerage account, however, we're not experienced in managing taxes outside of a tax-deferred account. I'd prefer this PP be independent and not spread across multiple accounts, however, we've read warnings about placing bonds in taxable and suggestions that this asset class should be sheltered. As we already have a fully funded cash emergency fund, I take it we don't need to worry about purchasing the maximum allowed I-Bonds to skirt taxes each year, correct? Off the top of my head, I'm thinking we should open a Schwab brokerage account and purchase a standard PP tilted toward prosperity (butterfly), but again, I have the hunch I should be reaching out to a tax professional given the size of this influx. Perhaps I'm being overly cautious. Any suggestions appreciated, particularly experiences receiving large lump sums such as this.

Background information:

My wife has 10 years until pension/retirement and I have 12. Current tax bracket is 15% and not likely to change. Again, we already have a properly sized cash emergency fund, a couple hundred K between Roth and 457b accounts, and our pensions in a reasonably financially-stable state (AZ). This influx came as a surprise and we don't have any immediate debt or pressing need for the cash. We have one healthy three month old, so we would like the option to access the investment should a major unforeseen event take place. God willing, we'd like to grow the windfall safely and untouched until, or perhaps even after, our pensions kick in.

Advice/opinions appreciated.

Re: Windfall Advice

Posted: Mon Jun 12, 2017 12:48 pm
by ochotona
Cash pays low interest now, so no fear about tax for that asset. Go for an FDIC bank that pay high interest, like Ally Bank.

If you buy and hold a stock index mutual fund or ETF, that's tax efficient.

Gold sits there, so it doesn't create tax issues year to year until you sell it.

If you're worried about tax from US Treasury bonds, maybe buy some really highly rated municipal bonds.

Re: Windfall Advice

Posted: Mon Jun 12, 2017 1:36 pm
by Tyler
While I understand that many people like to get into the tax optimization weeds by splitting different assets into different accounts, I find it helpful to discuss taxes in absolute terms.

The PP is already very tax efficient compared to most other options. Your stock dividends will all be qualified after a year and they'll be tax-free in your current tax bracket. Gold has no dividends and will only incur capital gains taxes when you sell. Cash has very low rates right now so taxes are negligible. The biggest worry is bonds, but at current yields the taxable income of 25% of $200k is only about $1500. Taxed at 15%, we're talking ~$225 in annual taxes when you're not rebalancing. It will be even smaller if you split it 5 ways in a GB portfolio.

If the maximum possible tax savings from juggling a portfolio across multiple accounts is less than the fee of someone you'd pay to manage your taxes every year, maybe that's a good sign to just invest simply and move on. ;)

All that said, if you have concerns then consulting a tax adviser one time up-front is probably a wise choice. They will be able to cater advice to your specific financial situation.

Re: Windfall Advice

Posted: Mon Jun 12, 2017 3:04 pm
by ochotona
I retract my municipal bond advice. Just pay the taxes on US Treasury Bonds in your 15% bracket. I'm in 28%, it makes a difference to me, that's why I mentioned it. Taxes means you're making money, be glad about that. Fate can take that problem away from you in a bad way.

Re: Windfall Advice

Posted: Tue Jun 13, 2017 7:50 am
by MWKXJ
Thanks for the advice, all. Seems I was overthinking things. Having worked decades for every dollar now in my savings, it seems somehow wrong to receive this much free and clear ...like the Feds or state are poised to give it an imminent haircut.

Guess I wouldn't be invested in the PP if I didn't have a cautious mindset bordering on paranoid.

Re: Windfall Advice

Posted: Tue Jun 13, 2017 9:01 am
by sophie
If I were you, I would just buy $50K each of Treasury bills in Treasury direct or at a brokerage with autoroll, long bonds also at a brokerage, physical gold or similar, and a total market stock fund. You have the option of putting $20K of the cash into I bonds, which will defer taxes on the interest. I would NOT buy gold or bond ETFs. For bonds, buy the lowest interest-rate option you can find, e.g. pick a 2.5% bond over a 3.25%.

If your PP includes money in tax-advantaged accounts already, you could consider swapping some taxable bonds or cash with stocks or gold ETFs in the retirement accounts. A spread-out PP is easy to track with a spreadsheet and lets you optimize tax efficiency, which you may find worthwhile.

Good luck and let us know what you end up doing. Tyler is correct that the PP is already very tax-efficient, so don't be afraid of that aspect of it, especially in your tax bracket.

Re: Windfall Advice

Posted: Tue Jun 13, 2017 9:43 am
by Tyler
MWKXJ wrote:Thanks for the advice, all. Seems I was overthinking things. Having worked decades for every dollar now in my savings, it seems somehow wrong to receive this much free and clear ...like the Feds or state are poised to give it an imminent haircut.
Well, considering the money is an inheritance I understand the concern. I only know about the tax side once the money is set up. I personally have no experience with tax law around inheritances so I can definitely see talking to an expert about that. Maybe others here can comment on that part.

Re: Windfall Advice

Posted: Tue Jun 13, 2017 11:27 am
by ochotona
Is your wife inheriting money from a retirement account, or after tax money?

Re: Windfall Advice

Posted: Tue Jun 13, 2017 12:23 pm
by mukramesh
sophie wrote:For bonds, buy the lowest interest-rate option you can find, e.g. pick a 2.5% bond over a 3.25%.
Sophie, can you please explain this statement in a bit more detail? I am not sure I understand why one would rather have a 2.5% bond over 3.25%.

Re: Windfall Advice

Posted: Tue Jun 13, 2017 12:58 pm
by stuper1
ochotona wrote:Is your wife inheriting money from a retirement account, or after tax money?
This is a very important question. If the money is coming from a tax-deferred retirement account, you may be able to roll some or all of it into a new tax-deferred account and let it continue to grow without paying taxes.

Re: Windfall Advice

Posted: Wed Jun 14, 2017 12:48 pm
by sophie
mukramesh wrote:
sophie wrote:For bonds, buy the lowest interest-rate option you can find, e.g. pick a 2.5% bond over a 3.25%.
Sophie, can you please explain this statement in a bit more detail? I am not sure I understand why one would rather have a 2.5% bond over 3.25%.
In general, the 2.5% bond will be more volatile than the 3.25%, and its interest yield will be a bit lower relative to the invested amount. So you'll have more capital gains (or losses to harvest) than interest, thus better tax treatment.

I was assuming that the $200K was net of taxes, but if that's not completely resolved then absolutely OP needs to be talking to a tax attorney. I thought the issue was investing the $200K as a lump sum, which is quite daunting enough. It's almost axiomatic that the PP will have a downswing the moment the money is invested, but it will come back up eventually.

OP, you can also consider adding your savings to the PP at the same time...the 1/4 in cash will serve nicely as your emergency fund.

Re: Windfall Advice

Posted: Wed Jun 14, 2017 8:56 pm
by dualstow
mukramesh-
Duration: Other factors
Besides the movement of time and the payment of coupons, there are other factors that affect a bond's duration: the coupon rate and its yield. Bonds with high coupon rates and, in turn, high yields will tend to have lower durations than bonds that pay low coupon rates or offer low yields. This makes empirical sense, because when a bond pays a higher coupon rate or has a high yield, the holder of the security receives repayment for the security at a faster rate. The diagram below summarizes how duration changes with coupon rate and yield.
from: Advanced Bond Concepts: Duration http://www.investopedia.com/university/ ... dbond5.asp