Nereo,

What if my time horizon is 30 years (which it is)? I know you could probably find 30 years stretches where the market returned less than 4.45%, but is it likely enough to worry about?

In the end it's what you are most comfortable with. Personally, any time period longer than about 5 years I'd choose to put it in the market. historically, 30 year time frames have always returned more than 4.45%(real adjusted returns) - in fact 4.7% is the lowest. The mean has been just above 7%.

Otherwise, what's the point of a tax shelter (like a traditional IRA or a 401k) on money that wasn't taxed? I wouldn't take up space in a non-Roth retirement account with tax-free money if you can put some taxed income in there instead. If, at the end of the year, you find that your 401k or traditional IRAs are not maxed, fill in the gap with the $40k that's been invested in the meantime (particularly the yields, which will be taxed!).

The reason is that money is fungible - it doesn't matter that his salary is taxable and his gift isn't; it's all one pot of money to spend and invest. The OP makes $70k of taxable income and recieved $40k of (presumably) untaxed money. So he has $110k to spend an invest - it doesn't matter where it comes from.

Here's an example. Let's assume he files jointly and puts all his $40k in taxable accounts - $70k of taxable income yields $59k (assuming standard deductions and 1 dependent).

** That means he has $99k to spend an invest**. He's paid $11k in taxes.

But now let's assume he uses this $40k to max out all his tax-advantaged accounts. He puts $11k into t-IRAs for him and his spouse, he contributes $17,500 to his 401(k) (for this example his employer contributes nothing) and he puts another $3600 into a HSA. Then his tax bill is on $70k - ($11k + 17,500 + 3600) = $33,175 of earned income. After taxes he will have $32,125 of his salary + the $40k windfall + his $36,128 that he put into tax-advantaged accounts.

**He has just over $108k to spend and save. **He's paid just under $2k in taxes. With a few more deductions (mortgage interest, for example) it's likely he will be untaxed on all $70k salary in my rough example.

EDIT: The above is just an example to illustrate how the fungibility of money means that it doesn't matter that the $40k is tax free - he should still maximize all tax-advantaged accounts first before putting them into taxable accounts.