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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: littleturkey on December 09, 2019, 01:58:49 PM

Title: Windfall
Post by: littleturkey on December 09, 2019, 01:58:49 PM
Hello, a friend of mine needs advice.

She recently received a large amount of money that she wants to somehow save for retirement.  She is wondering where to put the money.

The background is that she doesn't have much saved for retirement because she stayed at home with her kids until about 7 years ago.  Now she is working.  Recently divorced.  This "windfall" was part of the divorce settlement.  She wants to put 100% of it into some kind of retirement account.

Assuming she already maxes a 401k and a Roth, what should she do with this big chunk?
Title: Re: Windfall
Post by: ixtap on December 09, 2019, 02:03:32 PM
Does her 401k plan allow for after tax contributions? If so, she could do a megabackdoor Roth.

Otherwise, there just aren't many tax sheltered options if the existing options are already being maxed out.
Title: Re: Windfall
Post by: littleturkey on December 09, 2019, 02:54:07 PM
What are the other options?

I googled about megabackdoor Roth and regular backdoor Roth and I admit I don't understand them much.

Are index funds a good idea?  She is in her early 50's.
Title: Re: Windfall
Post by: Kronsey on December 09, 2019, 03:27:16 PM
Title: Re: Windfall
Post by: Frankies Girl on December 09, 2019, 04:43:06 PM
Need more info:

is this cash money sitting in a saving account right now, or was it a QRDO that is sitting in a 401k/IRA (this is a court ordered split of any retirement accounts from the marriage type of thing).

If she has the holdings - cash or stocks/mutual funds/bonds -  ALREADY inside a tax deferred account (fingers crossed) then it's super easy: figure out an asset allocation, then invest accordingly). 401k/403b/rollover or traditional or Roth IRAs are all tax deferred (Roth is an after tax contibution account, but for her purposes, it's okay to sell/buy). Any of those types, then it doesn't matter what the holdings currently are, she can sell them with no taxable events generated and buy whatever fits her AA.

If it is cash or taxable investment account, then it gets a bit more fussy. You are limited by how much $ you can put into a tax deferred account if she has one or at least has the ability to open one. And the "fussy" part is in the details - taxable moves here - cash and investment accounts for instance - require looking at how the buy/sells might screw around with her overall taxable income generated and could cause some extra $ owed (or if there are losses, tax loss write offs!) due to dividends and capital gains generated and considered taxable. So always a good idea to proceed carefully, so you can minimize the tax hits here. It sounds scarier than it is, but it's really important to not go crazy with the buy sell thing in a taxable account. Buy and HOLD is a great thing, and making sure any holding in a taxable account are as tax efficient as can be is also smart.

If she is working, does she have access to retirement accounts? 401k/403b? Does her company match any %? If so, who with? Vanguard/Fidelity/T Rowe all good. American Funds or below? Not so much...

Review the investment order for help then:

So figuring out her asset allocation... that's a bit more complicated, but really just requires either some reading and pondering on her part, and it's fine to let things sit for a bit while she gets it figured out.
^this is the road map/blueprint for what she wants out of her life, for her future, what she'll do if X, Y Z happens... can be as simple or complicated as she wants.
^once she gets her IPS, then it's on to an AA. Definitely easy to set up a basic AA using a 2 or 3 fund portfolio and simple is always best.
^nice overview
Title: Re: Windfall
Post by: littleturkey on December 11, 2019, 09:43:10 AM
Thanks for the info!
Title: Re: Windfall
Post by: littleturkey on January 11, 2020, 12:09:15 PM
Right now the money is just in the bank.  She also gets spousal support for 8 years (it's more than her net paycheck).  I read that she won't have to pay income taxes on any of it.

I am trying to help her as best as I can.  :)  She is going to go slowly so she makes the right decisions.  Here are the steps we have planned out for now; I would appreciate feedback if there is any:

1. She is working on writing out a yearly budget.  Then (as I understand it), she will multiply that number by 25 to find out what her goal is for retirement.  I am familiar with the excel FV functions to find out how long that will take or tweak her contributions.

2. She will put 6k in a Roth for 2019 now, then "front-load" a 2020 Roth soon.  We will have to pick funds.  I like target date funds.  I had thought about suggesting the stock index funds, but someone said maybe she should get the bond index funds, since she is older than 50.

3. She will max out retirement through work.  She already contributes enough to get the match.  Our employer matches 8% of our previous year's income, so it's pretty good.  Unfortunately, they only match 8% of your net.  So the more you reduce your net, the less they will contribute next year.  Vanguard target date funds are an option (that's what I have mine in).

4. She does have one debt: a car.  I do not know the interest rate.  I thought the best thing to do would be to pay it off as usual and then roll the payments into a car replacement fund (sinking fund) and include that in her budget. 

After these things, it looks like she will want to find out what kind of taxable account to put the rest in.