Author Topic: No job/ER, no 401k/Roth/Trad IRA +$1M windfall... Any tax advantaged solutions?  (Read 3884 times)

Holyoak

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So yeah, you receive a million $ cash inheritance, you never had a 401k, trad or Roth IRA prior, you now want to ER at 40 and you wonder if there are any ways to save on tax cost/tax deferred investment options w/o a job.  Of course I would think placing a lot of it in low turnover, low cost index funds (VTSAX) would be a great start, what else can be done to have something similar to a 401k, Roth or Traditional IRA...  Yeah, I know, get a job, but in lieu of that, what/are there tax advantaged investment vehicles for the above situation, similar to a 401k/Roth/trad IRA?  Thanks.

pzxc

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If you receive a million dollars in a single year, you're going to pay a lot of it in taxes and there's very little you can do about it.  No tax deferrment or loophole is designed to shield a million dollars at once.  It's going to be taxed.

You can shield some of it by gifting it to your spouse, I think (a few tens of thousand)
You can shield some of it using the normal tax-deferred methods (solo 401k etc, a few tens of thousand)
If it's something like lottery winnings, you may be able to take an annual payout instead of a lump sum, making it much easier to shield the money over many years or decades.

If it's inheritance as stated, then the best bet would have been for your uncle (or whomever) to shield the money in advance, by placing it into a trust and making you the beneficiary and/or executor, so then you just take the money as you need it but it's all under your control.  The delays the "taxable event" of distributing the money to you.

If your uncle just died and had a million extra dollar in his estate that passes to you, you're going to pay tax. A LOT of tax.  (inheritance tax instead of income tax, but the result is the same, Uncle Sam wants his cut)

Allen

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I'm pretty sure you can gift up to $5 million in your lifetime without paying any gift tax (from the giver) and the recipients to not treat gifts as income so they wouldn't have to pay tax either.

mxt0133

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No taxes need to be paid the the recipient of an inheritance, if any taxes incurred they are taken before the assets are distributed.

"Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 - 2005; $2,000,000 in 2006 - 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent's dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012, $5,250,000 in 2013, $5,340,000 in 2014 and $5,430,000 in 2015."

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax


As for the OP's original question most tax deferred accounts require earned income to be able to contribute.  The only other way to get tax deferred growth if to put it in an annuity, but they are inefficient.  If you have no income then I would not worry about putting assets in tax deferred accounts.  You can realize up to $48,000 in long-term capital gains an only pay $143 in taxes.  Play around with a tax forecast like the one below to see how much interest, long and short term capital gains you can realize before you have to pay any taxes.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

Holyoak

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Thank you everyone.  I had intended to say in my OP, that the Million is after any tax, ramifications whatever...  You now have $1M cash, how can it be best be tax advantaged/any tax deferred investments w/o a job.  Thanks.

GizmoTX

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The previous posters are correct -- the beneficiary will not be taxed on the inheritance received, as the estate takes care of that.

The $1M should be parked in tax efficient no-load low-fee index funds that are well diversified. You want growth appreciation that will ultimately be taxed at the capital gains rate, not dividends or interest which is taxed at the ordinary income rate. However, with no job, your tax bracket will be the lowest either way.

seattlecyclone

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A couple of options I can think of:
  • HSA. If you sign up for the right health plan, you can shield $3,350 per year (or $6,650 if you have any other family members on your health plan).
  • 529 plan. If you plan to use part of your inheritance to pay for your kids to go to college, this can help you shield the gains from taxes. You can also open a 529 plan for yourself. If you take classes at least "half time" you can withdraw the official "room and board" figure published by the college tax-free. For example, the community college closest to my house publishes a room and board cost of $9,492 per year. Half-time enrollment at that college is defined as six credits per quarter, which costs about $2k per year. So if you think it would be fun to spend part of your retirement learning new things (languages, photography, carpentry, truck driving, exercise classes, etc.), the 529 could be a way to allow you to withdraw $12k tax free while spending $2k of it on classes.

Beyond these things, remember also that the tax rates around dividends and capital gains are extremely favorable for those in lower tax brackets. If all of your income comes from investments, the first $47k (for a single person) or $94k (for a married couple) is tax free.

ClaycordJCA

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You might consider municipal bonds or municipal bond index funds to generate some tax-free income.

mxt0133

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You might consider municipal bonds or municipal bond index funds to generate some tax-free income.

Municipal bond are ideal for people in high tax brackets or people that live in states with high income taxes.  If the individual has not job then they are close or in the zero tax bracket which defeats the purpose of investing in municipal bonds to avoid taxable income.


boarder42

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well if you have no money and you want that to last and you can live on sub 40k a year you're all set.  Put it into low cost low fee funds like VTSAX etc. with vanguard and then all LT capital gains and qualifying dividends assuming you're married will be tax free.  If you're not married keep it under 34k per year spending and you'll never pay taxes again.

johnny847

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well if you have no money and you want that to last and you can live on sub 40k a year you're all set.  Put it into low cost low fee funds like VTSAX etc. with vanguard and then all LT capital gains and qualifying dividends assuming you're married will be tax free.  If you're not married keep it under 34k per year spending and you'll never pay taxes again.
Yup! Case in point of paying zero in taxes (it's a good read - pour through the details OP) http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

You might consider municipal bonds or municipal bond index funds to generate some tax-free income.
Municipal bond are ideal for people in high tax brackets or people that live in states with high income taxes.  If the individual has not job then they are close or in the zero tax bracket which defeats the purpose of investing in municipal bonds to avoid taxable income.
I mostly agree with this logic. For the 2014 tax year, the first $10150 of income is tax free (standard deduction + exemption). Which means that if your only income is bond interest, LT capital gains, and qualifying dividends, that leaves you with a lot of room to hold bonds, depending on how much you expect bonds to return. If you expect 2% returns on bonds, then you could hold $507k in bonds and not pay any taxes on this. If you expect 4% returns, $254k. If you expect 6% returns (closer to VBMFX's rate of return since inception), $169k.
It all varies based on what assumption you make. In the past year, VBMFX returned 3.77%.

Depending on how much you want to allocate to bonds, it may be wise to hold some municipals. I say some, because munis do have an increased risk compared to VBMFX.