Small windfall, would like some advice

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smalliebigs
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Small windfall, would like some advice

Post by smalliebigs » Mon Mar 12, 2018 6:31 am

Hi all, through a combination of company bonus, tax refund, and family gifts, I will receive a small windfall of about US$70,000. My question is how best should I spread it around?

My situation:

Married w/ 1 kid under 1 yo. Wife and I 30yo. I am the sole breadwinner of the house and live in Michigan.

Stable salary of $100k/yr. Saving 10% 401k to get max match of 8%. Currently at $33k in 401k with 80/20 equity:bond split. Also maxing HSA account.

We have Roth IRAs totalling $24k which doubles as an emergency fund. This is all in the VFFVX TDF.

We have $10k in a 529.

House worth 350k, still owe 190k @ 3.25% in a 15-year loan. That's $2,000 a month in payments.

Only other debt is a car lease with $4k remaining.

Bank has $5k in checking.

And that's about it for our finances.

So with the $70k I think the first step is to max out our 2018 IRA, which brings the funds to $60k. Then I want to allocate $10k as "fun" money for my wife and I.

This is when I'm not so sure what to do with the remaining $50k. I could pay down the principal of the mortgage, but at 3.25%, it's pretty much free money at this point. So the incentive isn't that high. I could take $10,000 and set up a true emergency fund in a savings account. Should I put another $10k in the 529? Though that's pretty low priority too. Maybe I should just throw the rest in a taxable brokerage fund and just wait and see?

What are the best options for my family and I?

rkhusky
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Re: Small windfall, would like some advice

Post by rkhusky » Mon Mar 12, 2018 6:35 am

If you have decent choices in your 401k, you could max it out. Maxing Roth IRA is good. Usual advice is to max all retirement accounts before contributing to a 529. Putting 10k in a savings account, CD, short term bond fund, or in a money market account (Vanguard's Prime MM is paying more than 1.5%) seems reasonable.
Last edited by rkhusky on Mon Mar 12, 2018 6:58 am, edited 1 time in total.

gotester2000
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Re: Small windfall, would like some advice

Post by gotester2000 » Mon Mar 12, 2018 6:37 am

10k fun money...mortgage pretty much free money???
Pay down the mortgage - the early you pay it the more fun you will get early!!!

TwstdSista
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Re: Small windfall, would like some advice

Post by TwstdSista » Mon Mar 12, 2018 6:37 am

See: https://www.bogleheads.org/wiki/Priorit ... nvestments

I would certainly beef up your emergency fund and fund Roth IRAs (for 2017 as well if not yet done). Keep some money aside for the end of that car lease (assuming you are buying the car?)

Consider increasing your 401k contributions and using the remaining money to live on, if needed.

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Watty
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Re: Small windfall, would like some advice

Post by Watty » Mon Mar 12, 2018 7:22 am

rkhusky wrote:
Mon Mar 12, 2018 6:35 am
If you have decent choices in your 401k, you could max it out.
+1

You would have to do something like increase your payroll withholdings by $1,000 a month and then use about $800 a month from the windfall to live on. The difference is assuming that you are in a combined 20% tax bracket but you would need to calculate your rate. That would also help lower your income so you might also be eligible to make a deductible IRA contribution too.

https://www.irs.gov/retirement-plans/ir ... ion-limits
TwstdSista wrote:
Mon Mar 12, 2018 6:37 am
Keep some money aside for the end of that car lease (assuming you are buying the car?)
+1 on having a car fund to pay cash for future cars. Unless you can deduct the lease as a business expense it is rarely a good choice to lease a car. Once you have a paid off car then save a couple of hundred dollars a month "car payment" into a seperate account so you will always have enough to pay cash for future cars. I don't know enough about leases to know if it would make sense to buy that car before the end of the lease.
smalliebigs wrote:
Mon Mar 12, 2018 6:31 am
I could pay down the principal of the mortgage, but at 3.25%, it's pretty much free money at this point. So the incentive isn't that high.
I would guess that you only have about seven years left on the mortgage so any money you pay on the mortgage is like buying a risk free 3.25% CD. With the tax law changes it is likely that you are not able to itemize your deductions so that is a tax free 3.25% which is pretty good. Once the mortgage is paid off you could then use your "mortgage payment" for college savings and you would still have about ten years until your kid starts college.
TwstdSista wrote:
Mon Mar 12, 2018 6:37 am
I would certainly beef up your emergency fund....
+1 In addition to the Roth it would be good to have a couple of months expensed in more liquid investments. Once you become more financially secure many things that would have been emergencies in your 20's are now just unpredictable expenses and true emergencies would only be things like being laid off or a major medical problem.

Powerfultools
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Re: Small windfall, would like some advice

Post by Powerfultools » Mon Mar 12, 2018 7:42 am

If I was in this position, I would max out 401k, then max out IRA for you and spouse (traditional or Roth- which ever is best for your situation) for 2017 and 2018. That is about 30k, the left over 20k, I would split 10k to EM and 10k to mortgage.

aristotelian
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Re: Small windfall, would like some advice

Post by aristotelian » Mon Mar 12, 2018 7:54 am

Interest rates are increasing and you don't have a ton of liquidity. I would keep that mortgage.

Definitely max the Roth's.

If you have no other income, you are just barely in the 12% tax bracket. I would say based on your savings rate it probably makes sense to increase your 401k contributions but it's less of a premium than if you were in a higher tax bracket.

For now, I think I would keep it in a brokerage account and use it as a) tiered emergency fund and b) fund future Roth contributions.

As your salary increases, save any income in the 22% bracket in your 401k.

radiowave
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Re: Small windfall, would like some advice

Post by radiowave » Mon Mar 12, 2018 8:18 am

Start a high yield savings account, Ally, AMEX, Discover, etc., savings rates are 1.4 to 1.5% right now. Convert some of that money to 1 yr CDs (currently 2.0% at Ally). I wouldn't pay down the mortgage early at this point. Max out 401k and IRA.
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soccerrules
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Re: Small windfall, would like some advice

Post by soccerrules » Mon Mar 12, 2018 8:35 am

I think the suggestions of increasing your 401K to max, confirm Roth's funded for 2018, then start a taxable account - sound appropriate

I find it interesting the different responses based on one's age. Not to hijack the thread but it "seems" that the more advanced in age one is the advice is slanted toward save/save/save, where as the closer to 25 the advice has an allocation for "go play".

I was having a conversation with a college student that is about to graduate in 2 months. This individual has no money in the bank, and really no support system (Family) to help them get started in life, kind of on there own. Surprisingly they are going to be able to graduate with a degree with less than $30K in debt. They received a tax refund for 2017 and spent it on a new hobby (no experience) that they hope will turn into a side hustle.

They old guy in me is saying in my head
1) You have debts to pay ?
2) No EF
3) Old Car
4) Will need money to find housing, start a career
5) Other expenses
6) Save Save Save while you are young
7) What in the world are you doing spending money on an expensive item when you have no experience in this field because you think you can turn it into a side hustle.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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ruralavalon
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Re: Small windfall, would like some advice

Post by ruralavalon » Mon Mar 12, 2018 9:44 am

1) $11k, max the IRAs for 2018.
2) $10k for something fun, like vacation?
3) savings account for a 3 month emergency fund.
4) $4k to buy the leased car.
5) $8.5k more to max the 401k for 2018. Increase contributions to the 401k so you will hit $18.5k for the year, and use this windfall money to pay living expenses you would otherwise have covered from your paycheck.
6) repeat for 2019.
Last edited by ruralavalon on Mon Mar 12, 2018 9:49 am, edited 1 time in total.
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Goal33
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Re: Small windfall, would like some advice

Post by Goal33 » Mon Mar 12, 2018 9:49 am

I’d max the 401k, start a Roth for you and the wife. After that I’d determine if I wanted to do taxable investing. If yes, do it using a boglehead approach, if no, throw it to the mortgage.

Personally, I’d do the taxable investing after maxing the 401k and Roth’s because you have very little liquidity and a low mortgage rate.
A man with one watch always knows what time it is; a man with two watches is never sure.

Goal33
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Re: Small windfall, would like some advice

Post by Goal33 » Mon Mar 12, 2018 9:49 am

I’d max the 401k, start a Roth for you and the wife. After that I’d determine if I wanted to do taxable investing. If yes, do it using a boglehead approach, if no, throw it to the mortgage.

Personally, I’d do the taxable investing after maxing the 401k and Roth’s because you have very little liquidity and a low mortgage rate.
A man with one watch always knows what time it is; a man with two watches is never sure.

nimo956
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Re: Small windfall, would like some advice

Post by nimo956 » Mon Mar 12, 2018 9:53 am

1. Max out 401k at $18.5k
2. Max out IRAs for both you and your wife (for 2017 and 2018)
3. Pay off car loan
4. Increase emergency fund to 6 months expenses
5. Look into mega backdoor Roth IRA
6. Only add to 529 after meeting retirement saving goals
7. $10k seems like a lot to spend on a vacation (it's over 7% of your liquid assets); maybe limit this to $5k

Edit: I wouldn't pay down the mortgage, since it doesn't change your cash flow. Invest in a taxable account until the balance is large enough to pay it off entirely. Then you can make the decision whether or not to pay it off. This preserves your liquidity.
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crit
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Re: Small windfall, would like some advice

Post by crit » Mon Mar 12, 2018 11:10 am

If your tax return is five digits, you need to change your withholdings. You could be using that money all year, and you're not earning interest on it while the IRS is holding it for you.

smalliebigs
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Re: Small windfall, would like some advice

Post by smalliebigs » Mon Mar 12, 2018 1:33 pm

Thank you all very much for the replies.

After reading the messages, I have changed my 401K allocation from 10 % to 20 %. As far as the expense ratio goes, the funds are mostly index funds with an overall expense ratio of 0.14 %. This is slightly on the high side due to my 3 % allocation (of total 401K $) into an international developing markets fund that is not passive. This makes my 401K savings effectively 28% of my salary, including company match.

I would also then like to clarify some things regarding my situation:
1. My wife and I have already maxed our 2017 Roth IRAs.
2. We just closed the house in the middle of last year, so we have around 14+ years left on the loan. This is due to a substantial initial down payment of around $150k.
3. I am definitely using $10k for fun money. Happy wife happy life.
4. The car lease still has about 1+ years on it. It's a relatively good deal due to me getting some employee discounts. I will definitely move back to buying a used car after the lease ends. It's just not worth it. However, I do NOT want to pre-pay the remainder of the lease even though it's only $4k, as if it gets totaled, the money will be wasted.
5. I don't think with my salary, I will be eligible for the backdoor Roth.
6. My wife does not work, so for 2018, we are in the 12 % tax bracket.

So $10k for 2018 Roth IRA, $10k for emergency fund, $10k for fun money, and I guess $10k to 'pay' for my increased 401K. That leaves $30k left over.

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ruralavalon
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Re: Small windfall, would like some advice

Post by ruralavalon » Mon Mar 12, 2018 1:51 pm

smalliebigs wrote:
Mon Mar 12, 2018 1:33 pm
Thank you all very much for the replies.

After reading the messages, I have changed my 401K allocation from 10 % to 20 %. As far as the expense ratio goes, the funds are mostly index funds with an overall expense ratio of 0.14 %. This is slightly on the high side due to my 3 % allocation (of total 401K $) into an international developing markets fund that is not passive. This makes my 401K savings effectively 28% of my salary, including company match.

I would also then like to clarify some things regarding my situation:
1. My wife and I have already maxed our 2017 Roth IRAs.
2. We just closed the house in the middle of last year, so we have around 14+ years left on the loan. This is due to a substantial initial down payment of around $150k.
3. I am definitely using $10k for fun money. Happy wife happy life.
4. The car lease still has about 1+ years on it. It's a relatively good deal due to me getting some employee discounts. I will definitely move back to buying a used car after the lease ends. It's just not worth it. However, I do NOT want to pre-pay the remainder of the lease even though it's only $4k, as if it gets totaled, the money will be wasted.
5. I don't think with my salary, I will be eligible for the backdoor Roth.
6. My wife does not work, so for 2018, we are in the 12 % tax bracket.

So $10k for 2018 Roth IRA, $10k for emergency fund, $10k for fun money, and I guess $10k to 'pay' for my increased 401K. That leaves $30k left over.
For the remaining $30k you could:

1) set aside an amount large enough ($10-20k??) to let you max the IRAs and 401k in 2019, until then storing that money in a taxable account at Vanguard using Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 1.56%; and

2) invest any remaining money ($10-20k??) in a taxable account at Vanguard invested in a very tax-efficient stock index fund, such as Vanguard Total Stock Market Index Fund or Vanguard Total International Stock Index Fund. Please see the wiki article "Tax-efficient Fund Placement".
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Duckie
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Re: Small windfall, would like some advice

Post by Duckie » Mon Mar 12, 2018 4:56 pm

smalliebigs wrote:I don't think with my salary, I will be eligible for the backdoor Roth.
You are eligible, but at your income you don't need to use it.

smalliebigs
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Re: Small windfall, would like some advice

Post by smalliebigs » Mon Mar 12, 2018 6:39 pm

ruralavalon wrote:
Mon Mar 12, 2018 1:51 pm
2) invest any remaining money ($10-20k??) in a taxable account at Vanguard invested in a very tax-efficient stock index fund, such as Vanguard Total Stock Market Index Fund or Vanguard Total International Stock Index Fund. Please see the wiki article "Tax-efficient Fund Placement".
Can I buy TDFs like VFFVX in a tax-efficient investment account, or would that be unwise?

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Re: Small windfall, would like some advice

Post by youngpleb » Mon Mar 12, 2018 6:51 pm

It might just be me, but burning $10,000 when you only have ~$60,000 saved up between your IRAs and 401k seems a bit too extravagant in my opinion. If you invested that instead, it could easily grow to $100,000+ by the time you're ready to retire. Ten grand is a bit over 14% of the amount that you're getting. I'd celebrate with a smaller amount (<$5,000) and then stash the rest in a taxable.
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smalliebigs
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Re: Small windfall, would like some advice

Post by smalliebigs » Mon Mar 12, 2018 8:22 pm

youngpleb wrote:
Mon Mar 12, 2018 6:51 pm
It might just be me, but burning $10,000 when you only have ~$60,000 saved up between your IRAs and 401k seems a bit too extravagant in my opinion. If you invested that instead, it could easily grow to $100,000+ by the time you're ready to retire. Ten grand is a bit over 14% of the amount that you're getting. I'd celebrate with a smaller amount (<$5,000) and then stash the rest in a taxable.
Yes, I could do that. And I could also just sell my house and invest that down payment too. And so on ...

What's the point of saving everything and then only having the 'mindset' to go on vacations and enjoy life when I'm 65? I want to make sure that my wife and kid enjoys life too.

I just started working 1.5 years ago, so if I'm as objective as I can be, I think ~$60,000 is a decent saving rate for now. Thanks for the advice, though. I will consider it.

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Re: Small windfall, would like some advice

Post by youngpleb » Mon Mar 12, 2018 8:34 pm

smalliebigs wrote:
Mon Mar 12, 2018 8:22 pm
youngpleb wrote:
Mon Mar 12, 2018 6:51 pm
It might just be me, but burning $10,000 when you only have ~$60,000 saved up between your IRAs and 401k seems a bit too extravagant in my opinion. If you invested that instead, it could easily grow to $100,000+ by the time you're ready to retire. Ten grand is a bit over 14% of the amount that you're getting. I'd celebrate with a smaller amount (<$5,000) and then stash the rest in a taxable.
Yes, I could do that. And I could also just sell my house and invest that down payment too. And so on ...

What's the point of saving everything and then only having the 'mindset' to go on vacations and enjoy life when I'm 65? I want to make sure that my wife and kid enjoys life too.

I just started working 1.5 years ago, so if I'm as objective as I can be, I think ~$60,000 is a decent saving rate for now. Thanks for the advice, though. I will consider it.
Didn't mean to step on any toes. You asked, and I answered with the best of intentions. I just wanted to show the power of time in the market and encourage you to think long-term. Congratulations on the excellent savings rate. Keep it up.
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Toons
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Re: Small windfall, would like some advice

Post by Toons » Mon Mar 12, 2018 8:40 pm

Pay down the mortgage/





:D
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czr
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Re: Small windfall, would like some advice

Post by czr » Mon Mar 12, 2018 8:45 pm

I also think $10k is a lot for one year's worth of vacation. I also would not be comfortable with your emergency fund or retirement accounts especially with a non-working spouse and only a borrowed car. The other danger here is getting used to this windfall this year and not being able to save the max amounts next year with just your income.

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Re: Small windfall, would like some advice

Post by noco-hawkeye » Mon Mar 12, 2018 8:56 pm

My order would be:

1. I'd max out tax deferred space (401k + Roth), at least for this year (if not multiple years).

2. I think maybe another 5-15k or so in emergency savings would be good (if not more).

3. Get rid of car payments.

4. Your fun money at 10k seems a bit high, looking at your total picture. It wouldn't be the end of the world if you had fun with 10k, but not the most BH thing to do with it either.

5. or 6. 529 / Mortgage flip a coin

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arcticpineapplecorp.
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Re: Small windfall, would like some advice

Post by arcticpineapplecorp. » Mon Mar 12, 2018 9:00 pm

read all about managing a windfall here:

https://www.bogleheads.org/wiki/Managing_a_windfall
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badbreath
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Re: Small windfall, would like some advice

Post by badbreath » Mon Mar 12, 2018 9:10 pm

you asked what i would do so thats what you get

I would put 60-70% in VTSAX total stock index the the other 40-30% in total international and forget about it till you turn 60.

you will have done very well by then
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

smalliebigs
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Re: Small windfall, would like some advice

Post by smalliebigs » Tue Mar 13, 2018 5:50 am

czr wrote:
Mon Mar 12, 2018 8:45 pm
I also think $10k is a lot for one year's worth of vacation. I also would not be comfortable with your emergency fund or retirement accounts especially with a non-working spouse and only a borrowed car. The other danger here is getting used to this windfall this year and not being able to save the max amounts next year with just your income.
I forgot to mention that we have a 2017 Cherokee that's fully paid for.

Perhaps, $10k is too much for just 1 vacation. I just want to reward back to my wife who's stuck with me and was always too hard on herself. I'll let her decide what to do with it.

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ruralavalon
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Re: Small windfall, would like some advice

Post by ruralavalon » Tue Mar 13, 2018 7:38 am

I think that it is reasonable in your situation to use $10k from the $70k windfall for enjoying life with your wife and child. You have no consumer debt, no student loans, you have not splurged on a hot car, you are investing the other $60k for the future.
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ruralavalon
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Re: Small windfall, would like some advice

Post by ruralavalon » Tue Mar 13, 2018 7:51 am

smalliebigs wrote:
Mon Mar 12, 2018 6:39 pm
ruralavalon wrote:
Mon Mar 12, 2018 1:51 pm
2) invest any remaining money ($10-20k??) in a taxable account at Vanguard invested in a very tax-efficient stock index fund, such as Vanguard Total Stock Market Index Fund or Vanguard Total International Stock Index Fund. Please see the wiki article "Tax-efficient Fund Placement".
Can I buy TDFs like VFFVX in a tax-efficient investment account, or would that be unwise?
I suggested a money market fund for safety, to make sure than in a few months from now you still have this money available to contribute to your tax-advantaged accounts.

Vanguard Target Retirement (VFFVX) is 90% stocks, you could lose a lot of principle if there is a crash and so not have the money next year to contribute to your tax-advantaged accounts.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

smalliebigs
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Re: Small windfall, would like some advice

Post by smalliebigs » Tue Mar 13, 2018 11:30 am

ruralavalon wrote:
Tue Mar 13, 2018 7:51 am
smalliebigs wrote:
Mon Mar 12, 2018 6:39 pm
ruralavalon wrote:
Mon Mar 12, 2018 1:51 pm
2) invest any remaining money ($10-20k??) in a taxable account at Vanguard invested in a very tax-efficient stock index fund, such as Vanguard Total Stock Market Index Fund or Vanguard Total International Stock Index Fund. Please see the wiki article "Tax-efficient Fund Placement".
Can I buy TDFs like VFFVX in a tax-efficient investment account, or would that be unwise?
I suggested a money market fund for safety, to make sure than in a few months from now you still have this money available to contribute to your tax-advantaged accounts.

Vanguard Target Retirement (VFFVX) is 90% stocks, you could lose a lot of principle if there is a crash and so not have the money next year to contribute to your tax-advantaged accounts.
I'm a bit confused. In the very initial quote, you mentioned index stock funds. So that's why I asked about TDF.

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ruralavalon
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Re: Small windfall, would like some advice

Post by ruralavalon » Tue Mar 13, 2018 11:40 am

smalliebigs wrote:
Tue Mar 13, 2018 11:30 am
ruralavalon wrote:
Tue Mar 13, 2018 7:51 am
smalliebigs wrote:
Mon Mar 12, 2018 6:39 pm
ruralavalon wrote:
Mon Mar 12, 2018 1:51 pm
2) invest any remaining money ($10-20k??) in a taxable account at Vanguard invested in a very tax-efficient stock index fund, such as Vanguard Total Stock Market Index Fund or Vanguard Total International Stock Index Fund. Please see the wiki article "Tax-efficient Fund Placement".
Can I buy TDFs like VFFVX in a tax-efficient investment account, or would that be unwise?
I suggested a money market fund for safety, to make sure than in a few months from now you still have this money available to contribute to your tax-advantaged accounts.

Vanguard Target Retirement (VFFVX) is 90% stocks, you could lose a lot of principle if there is a crash and so not have the money next year to contribute to your tax-advantaged accounts.
I'm a bit confused. In the very initial quote, you mentioned index stock funds. So that's why I asked about TDF.
Sorry, my mistake, I somehow misread your question as being about how to temporarily hold the money to invest in 2019.

For the money to investor this now in a taxable account, the two total market stock index funds which I mentioned would be more tax-efficient than a balanced fund like a target date fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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