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Options for $100k windfall

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  • #16
    Originally posted by Cubicle View Post
    Don't collar cost average. (Time in the market.)

    Don't time the market. (Nobody knows nothing.)

    Your mortgage interest rate doesn't sound high. I personally wouldn't pay down that mortgage.

    I'd load the 529 plans. Even without their ages, 4 children going to school sounds like lots of money. Worst case scenario you pay income tax & penalties to pull it out. Like a taxable account with a penalty. So all hope isn't lost, & you did skip taxes along the way.

    Otherwise, dump/lump sum into a taxable account. Depending on your risk tolerance for funds.
    I agree with all of your post but I very much agree with the bold parts.


    OP AA is the amount of stocks/bonds/cash/ alternative investments that you have. If you do not have a IPS I would start with that. Not that a 100K windfall is trivial but it would probably not be a life changing amount and most people with an IPS would just be able to follow their protocol.
    Every investor should have a written Investing Policy Statement. Here are a few pieces out of mine and ideas for what you ought to consider including in yours.

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    • #17
      Originally posted by CordMcNally View Post

      As an aside, what’s your marginal tax rate? If you’re a physician or other high earning professional (you mention having to do backdoor Roths) then the Roth 403b probably isn’t the best choice in your situation.
      I'm in the 24% tax bracket currently. I anticipate I would be in the 22% bracket in retirement at current rates. I assumed if interest rates rise even a little in the next 20 years before retirement it would be a wash. But now I'm wondering if my thinking is flawed?

      If I make $200k now I have $100k or so that is taxed 22% or higher.
      If I can live off $100k in retirement with standard deduction the highest tax rate I would pay is 12%

      But how do I assess the taxes on the growth of the retirement account? If I contribute $19,500 roth this year, sure I pay the full 24% on those contributions, but I pay zero interest on the growth. Over 20 years that $19,500 could become $60,000 ….. $40k of which I would pay zero taxes on.

      In this case I would pay $4,680 on the contributions now and save $4,800 on taxes later assuming 5% growth on $19,500.

      I guess it all depends on what returns I can get. But I'm thinking contributing to roth for the next few years while I'm still in my 30s is worth it.

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      • #18
        Originally posted by jjustinw View Post

        I'm in the 24% tax bracket currently. I anticipate I would be in the 22% bracket in retirement at current rates. I assumed if interest rates rise even a little in the next 20 years before retirement it would be a wash. But now I'm wondering if my thinking is flawed?

        If I make $200k now I have $100k or so that is taxed 22% or higher.
        If I can live off $100k in retirement with standard deduction the highest tax rate I would pay is 12%

        But how do I assess the taxes on the growth of the retirement account? If I contribute $19,500 roth this year, sure I pay the full 24% on those contributions, but I pay zero interest on the growth. Over 20 years that $19,500 could become $60,000 ….. $40k of which I would pay zero taxes on.

        In this case I would pay $4,680 on the contributions now and save $4,800 on taxes later assuming 5% growth on $19,500.

        I guess it all depends on what returns I can get. But I'm thinking contributing to roth for the next few years while I'm still in my 30s is worth it.
        It's just a math equation but you don't know one of the variables...the tax rate for withdrawal (I guess technically you don't know the growth rate but assuming you'd invest the money the same either way, that variable will cancel out). Neither a Roth 403b or regular 403b are taxed on growth. The big difference is mainly when you are taxed...upon contribution or upon withdrawal. There has been a lot of discussion about that topic here but I think a majority would probably recommend the regular 403b at your current rates.

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        • #19
          Originally posted by CordMcNally View Post

          It's just a math equation but you don't know one of the variables...the tax rate for withdrawal (I guess technically you don't know the growth rate but assuming you'd invest the money the same either way, that variable will cancel out). Neither a Roth 403b or regular 403b are taxed on growth. The big difference is mainly when you are taxed...upon contribution or upon withdrawal. There has been a lot of discussion about that topic here but I think a majority would probably recommend the regular 403b at your current rates.
          But isn't the growth taxed on withdrawal for the pre-tax contribution? In my scenario I would be taxed on all $60k when I withdrew it even though only $19,500 was earned incomed. Whereas with roth I'm only taxed on the $19,500, albeit at the higher rate.

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          • #20
            Originally posted by Larry Ragman View Post
            In a similar situation we took a vacation and put the rest in the Vanguard intermediate muni fund. This had two purposes. First, it balanced my overall AA, which was heavy stocks; second, it is most of my “next house” fund for retirement. I admit, I would not be adverse to taking advantage of a significant drop in the stock market but that would just be icing on the cake. I’m good with the money in bonds.
            The description for this fund says that the returns are federally tax exempt!? So lower returns compared to other funds, but keep it all. Seems like a great way to effectively make a taxable account a tax favored account?

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            • #21
              Originally posted by jjustinw View Post

              But isn't the growth taxed on withdrawal for the pre-tax contribution? In my scenario I would be taxed on all $60k when I withdrew it even though only $19,500 was earned incomed. Whereas with roth I'm only taxed on the $19,500, albeit at the higher rate.
              Yes there is a breakeven point. Paying tax now on the amount (net of tax) with tax free growth vs
              pretax investment and tax upon withdrawal.
              It is a math problem. It will take many years for a Roth tax free gains to overcome the early payment off high tax rates.
              Tax at zero - use the Roth , earnings are free
              Tax at 100% - pretax , zero to invest in Roth
              Extreme, but persuasive.

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              • #22
                Originally posted by jjustinw View Post

                But isn't the growth taxed on withdrawal for the pre-tax contribution? In my scenario I would be taxed on all $60k when I withdrew it even though only $19,500 was earned incomed. Whereas with roth I'm only taxed on the $19,500, albeit at the higher rate.
                Yes, but the contribution is taxed. Again, it's just a matter of WHEN you're paying the tax and what your marginal rate is at that time. Sorry, I didn't mean to derail your thread but just another thing to think about. It's certainly usually not a cut and dry answer. Both options are going to be right but one will be more right than the other but you won't know until it's too late. Here is some further reading if you wish to delve deeper:

                Should You Make Roth or Traditional 401k Contributions

                Some More Thoughts on Roth 401k Contributions

                Choosing Between Roth and Traditional 401k Contributions

                Traditional Vs. Roth Misconceptions

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                • #23
                  Originally posted by jjustinw View Post

                  The description for this fund says that the returns are federally tax exempt!? So lower returns compared to other funds, but keep it all. Seems like a great way to effectively make a taxable account a tax favored account?
                  Math problem again.
                  Taxable return - tax = net returns
                  Tax exempt= net returns
                  Which one is better?
                  By the way, bond fund selection is more than tax and rate. Duration and credit risk count too.

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                  • #24
                    Originally posted by jjustinw View Post

                    I'm in the 24% tax bracket currently. I anticipate I would be in the 22% bracket in retirement at current rates.
                    Keep in mind the only thing you know for sure is you are in the 24% tax bracket today. The current tax cuts are set to expire in 2026, so in 5 years your set to return back to that 25%-28% tax bracket... Just ones man opinion but I wouldn't count on taxes going down for the rich even if you plan on spending less...

                    Id take the Roth, tax free path while you can.

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                    • #25
                      Originally posted by jjustinw View Post

                      The description for this fund says that the returns are federally tax exempt!? So lower returns compared to other funds, but keep it all. Seems like a great way to effectively make a taxable account a tax favored account?
                      Yes. The general advice is to keep your bond allocation in your tax deferred accounts. I do that primarily with the Total Bond Market Index Fund. But since that was not an option in this case, I chose the intermediate muni bond index for exactly the reason you described.

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                      • #26
                        If you don’t itemize, pay down mortgage. Take the monthly cash flow that was being used for servicing mortgage and invest in taxable.

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                        • #27
                          Originally posted by jjustinw View Post
                          So lower returns compared to other funds, but keep it all.
                          The returns on tax exempt funds generally are lower than taxable funds. For obvious reasons. Typically this is only worth it for the highest of tax brackets. Otherwise its likely more advantageous to use the equivalent taxable funds & pay your regular tax bracket rates on the gains. (Don't let the tax tail wag the dog.)
                          "Oh look another bajillion point declin-Ooooh!!! A coupon for pizza!!!!" <--- This is what everyone's IPS should be. ✓✓✓

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