Tax efficient fund placement help

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mlombar
Posts: 9
Joined: Tue May 16, 2017 10:06 am

Tax efficient fund placement help

Post by mlombar » Wed Oct 11, 2017 12:05 pm

I received an inheritance this year and after paying off all debt and contributing to a Roth IRA that I opened this year(11k), I'm left with about 100k.

I'm 32, considered self employed with an income of about 48-50k this year. I really want to set up the simple 3 fund portfolio with the majority of what's left over. I ended up putting 10k of the Roth into VOO, which is with Merrill Edge. Now that I look back at it, i'm not sure if that was good or not. But moving forward I was conflicted of what to do in regards to setting up the 3 funds. Should I look into opening an Individual 401k and contribute/invest with that? Or do it in a taxable account? Both?
In regards to the Individual 401k, I planned on quitting my job at the end of this year and wasn't sure how that would effect things, would I still be able to contribute from the inheritance? Unsure of how that works. Would appreciate any help for this newbie so I can get on the right path :happy

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Tax efficient fund placement help

Post by grabiner » Wed Oct 11, 2017 5:28 pm

Investing in a Roth IRA is a good deal, and you can always change what you hold there. If you have a 3-fund portfolio, you probably want to change the VOO for VTI (Vanguard Total Stock Market Index), which can be held in either the Roth IRA or in another account.

Tax-deferred investment is better than taxable investment for any money you won't need until retirement. Thus, if you can set up a solo 401(k), that is a good way to do some of your investments. Money you expect to spend before retirement (such as a home down payment) should not be in a retirement account.

VTI and VXUS (Total International Index) are the two parts of the three-fund portfolio which are most tax-efficient. They can be held in a taxable account for long-term savings; for shorter-term goals, you would need to use CDs or bond funds to be sure that the money is still there when you need it.

A 401(k) is an employer plan; contributions can only be made from your salary. Thus, if you stop working, you would not have any way to make contributions to it, but you might get a new job and make contributions to that employer's plan instead.

IRA contributions are based on income for the whole year; as long as you have $5500 in earned income for 2017, you can contribute the $5500 to your IRA at any time through April 15, 2018.
David Grabiner

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