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Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 11:50 am
by jason54321
Happy holidays!

My wife and I are going to be the recipients of a 6 figure windfall and are curious if it would be best to establish a taxable account to invest it in. We have never had a taxable account, so I am looking for guidance.

We do not need to use this money right now as our current income covers our living expenses.

Both plan to retire in 20 years. Upon retirement, we will both have pensions.

We each maximize or annual contributions to Trad 401(k) ($19,500). The AA is 80% equities and 20% bonds.

We also maximize our annual contributions to Roth IRA ($6,000). The AA is 100% VTWAX.

We have an emergency fund in CDs equal to 3 years living expenses.

The only debt we have is our mortgage with 20 years remaining but we do not want to pay it off early at this time.

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 11:54 am
by tashnewbie
I assume it was a typo that you contribute $19.5k per year to Trad IRA. I assume you meant Trad 401k.

What options would there be other than paying down the mortgage, taxable brokerage, or spending it?

If you don't want to pay down the mortgage or spend, then I'd say invest in low-cost index funds in a taxable account. A total stock market (US and/or international) fund at your brokerage house of choice, perhaps?

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 11:56 am
by Quirkz
tashnewbie wrote: Fri Nov 20, 2020 11:54 am I assume it was a typo that you contribute $19.5k per year to Trad IRA. I assume you meant Trad 401k.

What options would there be other than paying down the mortgage, taxable brokerage, or spending it?

If you don't want to pay down the mortgage or spend, then I'd say invest in low-cost index funds in a taxable account. A total stock market (US and/or international) fund at your brokerage house of choice, perhaps?
+1. Was going to say the same thing.

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 11:58 am
by sailaway
Like others, I am assuming that you meant trad 401k. If so, does either plan allow for mega backdoor Roth (aka non Roth after tax contributions)?

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 12:03 pm
by ruralavalon
Do not tell anyone about your windfall.

jason54321 wrote: Fri Nov 20, 2020 11:50 am Happy holidays!

My wife and I are going to be the recipients of a 6 figure windfall and are curious if it would be best to establish a taxable account to invest it in. We have never had a taxable account, so I am looking for guidance.

We do not need to use this money right now as our current income covers our living expenses.

Both plan to retire in 20 years. Upon retirement, we will both have pensions.

We each maximize or annual contributions to Trad IRA ($19,500). The AA is 80% equities and 20% bonds.

We also maximize our annual contributions to Roth IRA ($6,000). The AA is 100% VTWAX.

We have an emergency fund in CDs equal to 3 years living expenses.

The only debt we have is our mortgage with 20 years remaining but we do not want to pay it off early at this time.
What is the interest rate on your mortgage note? What is the remaining balance?

Do you have children who may be going to college?

Are your pensions in addition to Social Security?

Do your employer plans permit Roth contributions?

Here is some more general advice on dealing with a windfall:

1) take your time, there is no rush;

2) temporarily park the money for a short time in a very safe place, such as federally insured savings accounts or federally insured short term CDs. A good resource for comparing rates is http://www.bankrate.com ;

3) educate yourself first. Here is a wiki article you could read to start educating yourself: "Bogleheads® investment philosophy. For a quick overview of investing basics read Dr. Bernstein's short book, "If You Can". I suggest reading one or two books on general investing. Wiki article, "Books: recommendations and reviews";

4) beware of anyone (family, friend, neighbor, co-worker, broker, banker, insurance salesperson, anyone at all) trying to sell anything (real estate, stocks, bonds, insurance, annuity, CDs, mutual fund, ETF, anything at all); and

5) make a plan first, then act.

Please see the wiki article, "Managing a Windfall".

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 12:06 pm
by rkhusky
If you are maxing tax-advantaged accounts, then the windfall will need to go into a taxable account, whether in a CD, bank account, or at a brokerage like Fidelity, Schwab or Vanguard.

Sticking with your current AA is fine. You could invest it all in Total Stock Market and/or Total International (Total World is a little less tax efficient in taxable, due to sometimes/frequently not getting the Foreign Tax Credit). Adjust your 401k balance to include the amount of bonds that you want.

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 12:20 pm
by jason54321
I appreciate all of the responses.

Yes, it was a typo :oops: . Corrected to 401(k).

Unfortunately, a mega backdoor roth is not an option for us.

The pensions are in addition to social security.

Based on the feedback, it sounds like a taxable at 80/20 or 100% VTSAX would be a good approach?

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 3:47 pm
by ZapRowsdower
jason54321 wrote: Fri Nov 20, 2020 12:20 pm I appreciate all of the responses.

Yes, it was a typo :oops: . Corrected to 401(k).

Unfortunately, a mega backdoor roth is not an option for us.

The pensions are in addition to social security.

Based on the feedback, it sounds like a taxable at 80/20 or 100% VTSAX would be a good approach?
I'd go 100% VTSAX in the taxable account. If you'd like to adjust your portfolio to keep the 20% bond level across all accounts, add additional bonds into your 401(k) instead.

Re: Input needed-Should I open a taxable account?

Posted: Fri Nov 20, 2020 3:53 pm
by lessismore22
ZapRowsdower wrote: Fri Nov 20, 2020 3:47 pm I'd go 100% VTSAX in the taxable account. If you'd like to adjust your portfolio to keep the 20% bond level across all accounts, add additional bonds into your 401(k) instead.
This. Keep taxable @ 100% VTSAX.

Re: Input needed-Should I open a taxable account?

Posted: Sat Nov 21, 2020 5:43 am
by boomer_techie
jason54321 wrote: Fri Nov 20, 2020 11:50 am My wife and I are going to be the recipients of a 6 figure windfall and are curious if it would be best to establish a taxable account to invest it in. We have never had a taxable account, so I am looking for guidance.
If you don't have a "taxable account," then how are you going to be able to receive the windfall? A "taxable account" is not a specific type of account. Instead, it is any account that isn't tax advantaged. A savings account is a "taxable account." An interest paying checking account is a "taxable account." An old cigar box filled with great grandpa's silver dollars is a "taxable account" - you may have to pay capital gains if you sell those coins.

If you've outgrown a bank savings account and the products that the bank can sell you - and you probably have if you're getting a 6 figure windfall - then it is time to open a brokerage account.

Re: Input needed-Should I open a taxable account?

Posted: Sat Nov 21, 2020 9:07 pm
by grabiner
It's probably best to leave the windfall in cash (such as a bank savings account) for a few months while you decide what to do with it. You might later decide that the best investment is taxable stock, or paying down the mortgage (which becomes more attractive when the IRS takes a share of any investment returns), or buying rental real estate (if you want to be a landlord). But any of these could be costly to undo if they are wrong for your situation, which is part of the reason for leaving the money in cash temporarily.