Author Topic: About to get 130K windfall from sale of my first home, would appreciate feedback  (Read 1369 times)

Keith Miller

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Iíll be selling my first home and moving to Montana in June, and will receive around 130K from the sale. This is my first time selling a home, and would like feedback on my plan for what to do with the money.

In a nutshell, Iíd like to deposit all of the money into my tax-advantaged retirement accounts, but Iím wondering about the best way to do that. My draft plan is this: Live off of this 130K for living expenses for 3-4 years, while depositing my entire teacherís salary into tax advantaged accounts like a 457, 403b, and IRA. My wife and I will probably buy a home within the next year, but want to rent for a while while we get out feet under us. My questions are these:

1. Any feedback on this plan? Do you have another suggestion?

2. For these 3-4 years while Iím slowly drawing down the 130K, should the money be invested in a taxed account, like VTSAX? Iím only 28, so would like to be aggressively tilted towards stock index funds, but am not sure if I should be more conservative since Iím living off of the money.

FINate

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What's your reason for wanting to move 130k into retirement accounts?

Unless you're high income the tax advantages of the retirement accounts vs. low cost index funds (which are fairly tax efficient) are not significant. You can park that nest egg in VTSAX forever and only have a tax liability for the dividends, yet even this can be quite low or depending on your specific situation. And then you pay cap gains as you draw down in retirement, but this is also quite small if living on little and no different from a traditional IRA/403b, etc.

If I were you, I would just put the entire sum in VTSAX, live off your teacher salary while contributing the normal amount to your retirement accounts (esp. if you get any kind of match). Oh, and save and invest aggressively adding to your stash in VTSAX.

radram

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If you are committed to spending down this money within 4 years, exactly 0% of it should be in the stock market. The only exception would be if you could change your mind and leave the money invested if the market were to tank.

Isn't your 457 max $18,000, plus $5,500 Roth for a total of $23,500 max per year? How are you going to covert it all to retirement accounts in 3-4 years?

I would not put any of it into the market until after your move/ house purchase.

Choose the best guarantee short term location, like Ally or a 3 month CD.

MrUpwardlyMobile

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If you are committed to spending down this money within 4 years, exactly 0% of it should be in the stock market. The only exception would be if you could change your mind and leave the money invested if the market were to tank.

Isn't your 457 max $18,000, plus $5,500 Roth for a total of $23,500 max per year? How are you going to covert it all to retirement accounts in 3-4 years?

I would not put any of it into the market until after your move/ house purchase.

Choose the best guarantee short term location, like Ally or a 3 month CD.

If they have access to 457 and 403b, then thatís probably what theyíre talking about.

radram

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If you are committed to spending down this money within 4 years, exactly 0% of it should be in the stock market. The only exception would be if you could change your mind and leave the money invested if the market were to tank.

Isn't your 457 max $18,000, plus $5,500 Roth for a total of $23,500 max per year? How are you going to covert it all to retirement accounts in 3-4 years?

I would not put any of it into the market until after your move/ house purchase.

Choose the best guarantee short term location, like Ally or a 3 month CD.

If they have access to 457 and 403b, then thatís probably what theyíre talking about.

Ah... I see. Now that I look, I also see you can contribute all the max from the past 3 years into a 457 that you have not used to date.

That could add up fast.


afox

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What's your reason for wanting to move 130k into retirement accounts?

Unless you're high income the tax advantages of the retirement accounts vs. low cost index funds (which are fairly tax efficient) are not significant. You can park that nest egg in VTSAX forever and only have a tax liability for the dividends, yet even this can be quite low or depending on your specific situation. And then you pay cap gains as you draw down in retirement, but this is also quite small if living on little and no different from a traditional IRA/403b, etc.

If I were you, I would just put the entire sum in VTSAX, live off your teacher salary while contributing the normal amount to your retirement accounts (esp. if you get any kind of match). Oh, and save and invest aggressively adding to your stash in VTSAX.

HUH?  The retirement funds hold VTSAX or whatever index fund you want and is available in the fund.  The money invested does not count as income, are there really any better ways to save on taxes other than credits? 

Also, many retirement accounts let you take a "loan" on your own money for  a downpayment on a house so no need to wait.  Id be surprised to learn the math could get any better than max out IRA, 403b as fast as possible every year and keep the rest in a taxed investment account, funneling as much money into the retirement accounts as you can as soon as possible.
 

BiggerFishToFI

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I think this is a good idea as long as you have decent investment choices with minimal expenses in your retirement portfolio. Especially so if you plan to work at the same place for a long time and wont be rolling it over to an IRA that you manage within the next 5-10 years or less.

If you can get 150k in retirement accounts by the time you are 35 you have pretty won the traditional retirement game and should be left with about 1.2M  by age 65 (in today's dollars, future dollars could be ~2.6M).

afox

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are there really plans that make you roll over if you leave the organization?  All of the ones I have experience with let u keep your money in their system.  Of course you're not getting employer contributions once you leave the organization.

Are there really employer that dont have basic index funds with relatively low fees offered in their retirement accounts? 


SeattleCPA

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What's your reason for wanting to move 130k into retirement accounts?

Unless you're high income the tax advantages of the retirement accounts vs. low cost index funds (which are fairly tax efficient) are not significant. You can park that nest egg in VTSAX forever and only have a tax liability for the dividends, yet even this can be quite low or depending on your specific situation. And then you pay cap gains as you draw down in retirement, but this is also quite small if living on little and no different from a traditional IRA/403b, etc.

If I were you, I would just put the entire sum in VTSAX, live off your teacher salary while contributing the normal amount to your retirement accounts (esp. if you get any kind of match). Oh, and save and invest aggressively adding to your stash in VTSAX.

HUH?  The retirement funds hold VTSAX or whatever index fund you want and is available in the fund.  The money invested does not count as income, are there really any better ways to save on taxes other than credits? 

Also, many retirement accounts let you take a "loan" on your own money for  a downpayment on a house so no need to wait.  Id be surprised to learn the math could get any better than max out IRA, 403b as fast as possible every year and keep the rest in a taxed investment account, funneling as much money into the retirement accounts as you can as soon as possible.

I agree with FINate's reasoning. For a typical investor, moving $130K from taxable to tax-deferred seems pretty uninteresting.

It's quite possible the income earned on the $130K will be tax-free if you're investing in stock index funds, earning qualified dividends and long-term capital gains and you're in the 10% or 12% tax bracket.

Whatever income isn't tax free will be pretty modestly taxed.

Using a taxable account might actually give you additional tax benefits (like tax loss harvesting, foreign income tax credits or way down the road a Sec. 1014 step-up).

And then with easier access to the money, you might be able at some point to do some other investment that generates a high rate of return, like buy a house again (because it is a massively good deal) or invest in rental property.

FWIW, I think tax deferred accounts are great. You always want to take the match. Further, you will want to use tax deferred accounts for your additional savings.

But like I said, FINate's reasoning makes a lot of sense to me.

afox

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I agree with FINate's reasoning. For a typical investor, moving $130K from taxable to tax-deferred seems pretty uninteresting.

It's quite possible the income earned on the $130K will be tax-free if you're investing in stock index funds, earning qualified dividends and long-term capital gains and you're in the 10% or 12% tax bracket.

Whatever income isn't tax free will be pretty modestly taxed.

Using a taxable account might actually give you additional tax benefits (like tax loss harvesting, foreign income tax credits or way down the road a Sec. 1014 step-up).

And then with easier access to the money, you might be able at some point to do some other investment that generates a high rate of return, like buy a house again (because it is a massively good deal) or invest in rental property.

FWIW, I think tax deferred accounts are great. You always want to take the match. Further, you will want to use tax deferred accounts for your additional savings.

But like I said, FINate's reasoning makes a lot of sense to me.

Please educate me.  The tax deferred account allow you to add $24,000 (403b+IRA) pre-tax to the account and divedends are not taxed.  If your effective tax rate is 12% the tax savings on a $ 24,000 contribution would be $2,880.  Is my math right here?  Mathematically how can the non tax deferred account leave you with more money than the taxable account?

And, did you know that if your plan allows it and most seem to, you can use the money in the tax deferred account for a downpayment?

SeattleCPA

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We don't know what an MT teacher makes, but if the household's taxable income is in either of the first two tax brackets, the qualified dividends and the long-term capital gains tax rates won't equal 10% or 12% but rather 0%.

Oblivious investor provides more commentary here: https://obliviousinvestor.com/2018-tax-brackets/

afox

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We don't know what an MT teacher makes, but if the household's taxable income is in either of the first two tax brackets, the qualified dividends and the long-term capital gains tax rates won't equal 10% or 12% but rather 0%.

Oblivious investor provides more commentary here: https://obliviousinvestor.com/2018-tax-brackets/

Okay, so if in the first two tax brackets its possible to not pay taxes on the dividends or long term capital gains?  Does he need to be in those tax brackets every year to not pay taxes on the dividends or long term capital gains?

So, how does that benefit compare to the reduction in taxes at present by lowering his taxable income by investing in the tax deferred accounts?  With the tax deferred accounts he is not paying taxes on dividends or long-term capital gains either.  He is just paying regular income tax on distributions as he withdraws them after age 55.5.  Wouldn't he rather get the tax benefit now so that he can do something with the savings between now and retirement?

I appreciate the lesson!



 

SeattleCPA

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Okay, so if in the first two tax brackets its possible to not pay taxes on the dividends or long term capital gains?  Does he need to be in those tax brackets every year to not pay taxes on the dividends or long term capital gains?


Yes, he needs to be in 10% or 12% bracket. Note though that this might mean a higher income that you guess. Someone married taking the standard deduction would need to be into six figures of earnings to move beyond the 12% tax rate bracket.

Also note that if there are years when this happens, those are maybe years to use tax-deferred investment options like 401(k) to push income back down out of the 22% rate.


So, how does that benefit compare to the reduction in taxes at present by lowering his taxable income by investing in the tax deferred accounts?  With the tax deferred accounts he is not paying taxes on dividends or long-term capital gains either.  He is just paying regular income tax on distributions as he withdraws them after age 55.5.  Wouldn't he rather get the tax benefit now so that he can do something with the savings between now and retirement?


You'd probably want to carefully do the tax accounting and the Excel spreadsheet calculations to test all your assumptions, but I think this is going to work the way the economics of a Roth IRA work... it's all about the marginal tax rates.

See this blog post for a description of how the tax deferral math really works: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

robartsd

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are there really plans that make you roll over if you leave the organization?  All of the ones I have experience with let u keep your money in their system.  Of course you're not getting employer contributions once you leave the organization.

Are there really employer that dont have basic index funds with relatively low fees offered in their retirement accounts?
Sometimes if you only participated in the plan for a short time they might make you roll over just to avoid the hassle of accounting for a small account. Nearly all have some low cost index fund option, but some don't and low cost can be relative.

afox

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You'd probably want to carefully do the tax accounting and the Excel spreadsheet calculations to test all your assumptions, but I think this is going to work the way the economics of a Roth IRA work... it's all about the marginal tax rates.

See this blog post for a description of how the tax deferral math really works: Are Roth-IRAs and Roth-401(k)s Really a Good Deal?

what you are describing sounds like a roth with less restrictions.

even with the advantages you mentioned (i didnt know about those before, thanks!), I cant imagine too many situations in which the taxed account could result in more money than the IRA,403b,401k. 

I was thinking that what you were describing is similar to a roth (with less restrictions) too.

That's really shitty of an employer if they cant offer low cost index funds in their retirement plans.  Probably not somewhere anyone with brains would work very long. 

robartsd

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That's really shitty of an employer if they cant offer low cost index funds in their retirement plans.  Probably not somewhere anyone with brains would work very long.
It's just a matter of how easy it is to sell a lucrative plan to the person responsible for selecting it. Usually enough complaints from the smart people who want low cost index funds is enough to get something reasonable added.