How to move $100,000 in taxable to Tax advantaged

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How to move $100,000 in taxable to Tax advantaged

Postby Tortoise Banker » Mon Jan 28, 2013 7:08 pm

Bogleheads,

My grandma left me $100,000 that is currently in a taxable account at vanguard invested 70%/30% between total stock mkt index admiral/total intl index admiral. The account is held in title of my grandma's irrevocable trust of which I am 100% beneficiary and recieve at 30 (in 2 years.)

My question is, should I move this into my 401k/Roth IRA over time? I currently max my IRA annually, but only use 6000/17500 of my 401k allowance.

I will recieve this money in 2 years, and I'm wondering what the best way to handle it would be. Sell the funds, and max my 401k/ROTH over the next 5-8 years using the proceeds for living expenses?

The funds were purchased for 86,000 earlier this year, and are now worth 100,000. I guess I don't know if it is beneficial to liquidate the taxable account and increase payroll deduction to get the funds into tax advantaged accounts, or just leave it as it is.

Thanks so much for the advice!

Here's my rundown:

No debt
6 months living expenses
Income: 50k
paid off condo (170,000)
roth IRA w/ Vanguard: 19000
401k w/ Vanguard: 14000
25% Bond Index/50% Domestic Stock Index/25% Int'l Stock Index (3 fund portfolio)
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Re: How to move $100,000 in taxable to Tax advantaged

Postby statsguy » Mon Jan 28, 2013 7:43 pm

Increase the funding to your 401k/403b/457 to the maximum and use the 100K to reimburse you for the lost income. This has the effect of lowering your income and taxes. Also, make sure to fund your ROTH each year.

That will eat up about $20K per year. In five years you will have your taxable moved over to tax-advantaged. The hard part will be to follow this plan and not spend some of the money on chips and dip, or a vacation, or a new car, or well you get the idea.

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Re: How to move $100,000 in taxable to Tax advantaged

Postby MN Finance » Mon Jan 28, 2013 9:59 pm

If your company offers a Roth 401K I would consider that for some portion of the savings when the time comes. You'll be reducing your taxable income by increasing the 401K contributions and living off savings, but if they have a Roth 401K you may be just as well there so you can take advantage of your lower tax rates (potentially). I would also favor Roth for someone whos 28 and presumably going to earn higher income in later years

I think it would be pretty easy to put a simple spreadsheet together for the next 10 years and make some assumptions about income and taxes and see if you can maintain a steady taxable income by adjusting what you contribute to 401k/roth/etc starting now and then in the inheritance years.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby dratkinson » Tue Jan 29, 2013 2:49 am

Tax advantaged accounts are funded from earned income. Your inheritance is not earned income, so you can not put it directly into a tax-advantaged account.

Statsguy and MN Finance's idea seems to a be logic around the problem---max out your annual tax-advantaged accounts and fund any living expense shortfall from the trust.

Fully fund your 401k, IRA, I bonds (*$15K/year), EE bonds ($10/year).
    *$5K with fed tax return.
If you are planning for children, **maybe set up the tax-advantaged education plan for them.
    **Don't know if you can set up a 529 plan for unborn child.

Could convert a portion of the trust to tax-exempt bonds. No annual limit on that.
d.r.a, not dr.a.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby Bob's not my name » Tue Jan 29, 2013 6:06 am

It depends on how the numbers look in two years, but you may want to use traditional 401k contributions to reduce your taxable income into the 15% bracket, with headroom, and then use the headroom to sell appreciated assets at 0% LTCG rate (and also absorb any qualified dividends thrown off by the investments, as these are also taxed at 0% in the 15% bracket).

$50,000 of gross income with a maximum 401k contribution, standard deduction, and personal exemption, and assuming some pre-tax insurance premiums withheld from your pay, would make your taxable income about $20,000, which gives you about $16,000 of headroom in the 15% bracket. That should be more than enough to move all of the trust assets into your tax-advantaged accounts over five years or so without having to pay gains tax on the sales. The $50,000 number is probably incorrect, though, because you will also have the investment income from the $100,000 of assets.

Do also consider your state tax, if any.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby nydad » Tue Jan 29, 2013 8:51 am

Can I just say, what a nice grandma to have left a nice, clean, boglehead-esque portfolio like that for you!
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Re: How to move $100,000 in taxable to Tax advantaged

Postby dickenjb » Tue Jan 29, 2013 9:05 am

Bob's not my name wrote:It depends on how the numbers look in two years, but you may want to use traditional 401k contributions to reduce your taxable income into the 15% bracket, with headroom, and then use the headroom to sell appreciated assets at 0% LTCG rate (and also absorb any qualified dividends thrown off by the investments, as these are also taxed at 0% in the 15% bracket).


+1

Best. Suggestion. Yet.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby bdpb » Tue Jan 29, 2013 11:17 am

CptnNdx wrote:Bogleheads,
My question is, should I move this into my 401k/Roth IRA over time? I currently max my IRA annually, but only use 6000/17500 of my 401k allowance.

paid off condo (170,000)


Go out and borrow 20k against your condo today and use it to fully fund your 401k for the next two years. Pay the debt back when you receive your inheritance.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby investor1 » Tue Jan 29, 2013 11:50 am

Don't forget about your HSA space.
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Re: How to move $100,000 in taxable to Tax advantaged

Postby YDNAL » Tue Jan 29, 2013 12:15 pm

CptnNdx wrote:My grandma left me $100,000 that is currently in a taxable account at vanguard invested 70%/30% between total stock mkt index admiral/total intl index admiral. The account is held in title of my grandma's irrevocable trust of which I am 100% beneficiary and recieve at 30 (in 2 years.)

I will recieve this money in 2 years, and I'm wondering what the best way to handle it would be. Sell the funds, and max my 401k/ROTH over the next 5-8 years using the proceeds for living expenses?

Yes. I would use Taxable money to pay bills while increasing contributions to the 401K to the maximum $17,500 allowed.
  • Since you already contribute $6,000 currently to 401K, it would take a while to use $100,000.
    CptnNdx wrote:I currently max my IRA annually, but only use 6000/17500 of my 401k allowance.
  • Maximum 401K contributions will reduce your tax bill and perhaps also reduce your tax bracket - depending how much $11,500 reduction in taxable income represents to your personal circumstances.
  • Also contribute to a Health Savings Account.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: How to move $100,000 in taxable to Tax advantaged

Postby Tortoise Banker » Tue Jan 29, 2013 2:09 pm

This is why I love this forum!!!

Great advice on bringing income levels into 15% tax bracket with headroom. I'm confident I'll have plenty of space to sell the 100k over 1 or 2 years at 0% LTCG rate. I'll likely be able to reinvest the funds into a similar allocation (70 ttl stk mkt ind/30 int'l), and sell as needed over 5 to 10 years as it will likely take me this long to "move" the funds via paycheck deduction into 401k.

I learn something new everytime I visit the bogleheads, great tip on enjoying 0% LTCG in 15% tax bracket. :sharebeer
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