Author Topic: From a beginner: tax-advantaged way to invest a windfall?  (Read 1582 times)

jtwenty83

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From a beginner: tax-advantaged way to invest a windfall?
« on: January 24, 2018, 08:16:44 PM »
Hi all, have been reading with great interest but this is my first post!

I'm brand new to all this and excited to get started... so please forgive me if this is a basic question.

How should I invest a real estate windfall? More specifically, I want to index the money but am confused as to whether there is any tax advantaged way to do so.

I believe my income prohibits me from opening a Roth... and even if I could, I couldn't contribute that much in at once, right? Is there anything else? And if the answer is no, then is there a particular fund that's best suited for non-tax-advantaged accounts?

Some background, in case that's helpful:
-- $200k real estate windfall after taxes
-- Currently have $125k in 401k
-- $11k in VFIAX, non tax-advantaged account
-- hoping to FIRE in 10 years at 45

Thanks!!

wawot1

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #1 on: January 24, 2018, 10:10:16 PM »
Yes, you can do a Roth IRA ... the so-called "back door Roth IRA".  Basically, you open a non-deductible traditional IRA and then shortly thereafter convert it to a Roth IRA.

https://www.whitecoatinvestor.com/retirement-accounts/backdoor-roth-ira/
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

  If you haven't already contributed to your 2017 IRA, you could do contributions for 2017 up until April something 2018, as well as your 2018 contributions.   So there's $11k there.  Also, if you're married, your spouse could do the same. 

I'd also look into your company 401(k).  Some 401(k)s allow for the $18.5k pre-tax contributions, as well as matches and "after tax" contributions up to a total of  $55k/year. 

MDM

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #2 on: January 24, 2018, 10:30:24 PM »

MustacheAndaHalf

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #3 on: January 25, 2018, 04:42:36 AM »
Standard and backdoor Roths both have limits well below $200,000/year, so most of that money will need to be invested in taxable for now.

With your income being too high for Roth IRAs, you might be in a high enough tax bracket to consider tax-exempt bond funds (or ETFs).  These buy state and city bonds, which the Federal government doesn't tax, and then pays you interest.  If you live in a state with high taxes (CA, NY) there are bond funds that are exempt from those specific state taxes.

Index funds are tax efficient.  Right now dividends are about 2%, which means $100,000 invested in index funds will get roughly $2,000 of dividends/year.  And most people have a lower 15% tax bracket for those dividends, so you might have $100,000 investment only requiring you pay $300/year in taxes.  Unlike index funds, active funds (with no index / trying to beat the market) buy and sell more often, and have more taxes to pay as a result (and more costs).

Vanguard also has index funds that invest internationally, so you can put some fraction of your money there to diversify from US stock index funds.  And Vanguard has various tax-exempt bond funds as well.

radram

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #4 on: January 25, 2018, 06:19:43 AM »
Why are you paying taxes on a real estate sale?

Can you reinvest in another property using a 1031 exchange?

wawot1

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #5 on: January 25, 2018, 08:42:50 AM »
Standard and backdoor Roths both have limits well below $200,000/year, so most of that money will need to be invested in taxable for now.


Have to disagree with this - you CAN make a non-deductible traditional IRA contribution even with a high income and then do the backdoor Roth.

Good luck

Scortius

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #6 on: January 25, 2018, 01:15:54 PM »
Standard and backdoor Roths both have limits well below $200,000/year, so most of that money will need to be invested in taxable for now.


Have to disagree with this - you CAN make a non-deductible traditional IRA contribution even with a high income and then do the backdoor Roth.

Good luck

Correct, vanilla backdoor Roths have no income limit, but they still have the annual $5,500/person/year contribution limits.

jtwenty83

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #7 on: January 25, 2018, 09:52:21 PM »
Thanks everyone for all the great responses! I've read through the suggested links.

So it sounds like the first best step is to open and fund a tIRA (the full $200k?)... even though our joint income does not allow us to deduct any of the contributions. And then we'll quickly convert to Roth IRA and invest it in there. We have no other pre-tax IRA so no pro-rata rule to worry about.

QUESTIONS: I can still open a Roth account even if I make too much to fund it normally, right? Do I have to wait at all before converting? My wife gets $30k-$50k a year from non-qualified dividends that we plan to invest entirely... I'm assuming we should just follow the same steps each year when that money arrives?

And since it was asked, there were no taxes paid on the sale of the property, so good to go there!

Thanks everyone, great to be here learning from you all.

MDM

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Re: From a beginner: tax-advantaged way to invest a windfall?
« Reply #8 on: January 25, 2018, 10:10:14 PM »
So it sounds like the first best step is to open and fund a tIRA (the full $200k?)...
No, at most $5500 each if you are under age 50.

Quote
QUESTIONS: I can still open a Roth account even if I make too much to fund it normally, right? Do I have to wait at all before converting? My wife gets $30k-$50k a year from non-qualified dividends that we plan to invest entirely... I'm assuming we should just follow the same steps each year when that money arrives?
1) Yes.
2) Not really - maybe wait until you can see the contribution in the traditional account.
3) Yes - just make sure you have actual compensation to support the IRA contribution amount.