?s re turning a small inheritence into an invested EF

[haapai]

Dear YM crowd,

I have recently been informed that an elderly relative's will includes a $20K bequest to myself.  The payment will not be made until a year after the death so that I have time to think about what to do with the money. 

So I've been doing that. 

I have no debt except my mortgage ($40K principal, 3.75% interest, .25% annual mortgage insurance).  I just can't get myself to pay down a 4% mortgage.  Also, it is quite likely that this mortgage will be refinanced prior to the receipt of the inheritance. 

The next best strategy for locking up the inheritance and letting it grow is putting it into a Roth IRA in increments of $7K, $7K, and $6K while simultaneously pushing my existing (cash) emergency and repair funds into my workplace IRA 401(k). The Roth IRA will then be used a bit like a piggy bank. 

Yeah, I want to make the big switch from cash reserves to invested reserves.

Why am I not considering an after-tax investment account?  The answer is quite simple, I don't know anything about them and am afraid to ask questions?  Do they kick out any taxable income at all?  If they kick out income, is it predictable?  How paperless can you go?  I'm really embarrassed to be asking such simple questions but not knowing the answers and being ashamed to ask them may be preventing me from considering an after-tax account. 

[souldoubt]

When you say putting it into a Roth IRA you'd be doing it over the next 3 years including 2019 if you haven't already made your contribution.  Do you want to leave some of the money out of the market for at least a year if you were doing contributions for 2019, 2020 and 2021 or two years if you're talking 2020, 2021 and 2022?  If you go for index funds you'll have dividends which can be reinvested and the tax liability isn't going to move the needle so to speak.  If you ever switch investments when you sell you're going to have a taxable event based on the cost/sale price and how long you've owned it will determine if it's short or long term.  I started my taxable account with Vanguard years back as I have my Roth IRA through them.  Everything is paperless and was extremely easy to set up.  If you already have an account with someone like Fidelity, Vanguard, etc you can set up a taxable account with a brief phone call or even do it all online.  If you don't have an account with a provider like that you can call them, have a packet sent to your house that you complete and get it back to them at least that's what I did with Vanguard years ago.  I'm guessing they've made it even easier to get up and running these days.    

[Deleted]

No need at all to be embarrassed about questions like these, we were all here at one point or another.  The education system doesn't teach much in this area and a lot of parents don't know about it either, this is essentially where I was in 2009.

Here are the steps I took over the past ten years:

1.  In 2009 I had a Mortgage and saved up a 3 month emergency fund at the highest rate I could find that was FDIC or equivalent insured.

2.  In 2010 I started maxing my 401k/Roth IRA.

3.  In 2011 I paid off my home and started a taxable investing account.

4.  In 2015 once I had a sizable taxable investing account I backed off my emergency fund to 2 months instead of 3.

You are making the decision to keep your mortgage which is totally fine, if you have maxed your retirement contributions you may want to consider a taxable account.  They have taxable income if what you are investing in is taxable, everyones tax situation is different.  For example, I am invested in Vanguard Total World Stock which kicks off 2 to 3% in taxable dividends for me each year. I am also invested in a Muni Bond fund that has no Federal taxable income but does get taxed by my state.  Through Vanguard it is totally paperless except for some initial setup forms.

This is what I have done and may not be optimal or work for you in your tax situation.

[haapai]

Oct 15, 2019 13:44:30 GMT -5 souldoubt said:

When you say putting it into a Roth IRA you'd be doing it over the next 3 years including 2019 if you haven't already made your contribution.  Do you want to leave some of the money out of the market for at least a year if you were doing contributions for 2019, 2020 and 2021 or two years if you're talking 2020, 2021 and 2022?  If you go for index funds you'll have dividends which can be reinvested and the tax liability isn't going to move the needle so to speak.  If you ever switch investments when you sell you're going to have a taxable event based on the cost/sale price and how long you've owned it will determine if it's short or long term.  I started my taxable account with Vanguard years back as I have my Roth IRA through them.  Everything is paperless and was extremely easy to set up.  If you already have an account with someone like Fidelity, Vanguard, etc you can set up a taxable account with a brief phone call or even do it all online.  If you don't have an account with a provider like that you can call them, have a packet sent to your house that you complete and get it back to them at least that's what I did with Vanguard years ago.  I'm guessing they've made it even easier to get up and running these days.    

Regarding the speed at which contributions can be made to a Roth IRA.  Yes, that is a problem.  While it is quite likely that it will be possible to contribute $14K almost immediately upon receiving the inheritance, there will be a significant lag after that.  I'm not keen on staying out of the market for that long.  That's one of the reasons why I am considering a taxable account. 

Could you elaborate a bit on this statement?  If you go for index funds you'll have dividends which can be reinvested and the tax liability isn't going to move the needle so to speak.  Please be a bit more plain.  Are the dividends taxable and if so, could you characterize their size and character a bit more.  I have a base compensation of $32K a year and I'm quite attached to getting my dinky little $200 a year Saver's tax credit.  Usually I have no problem getting my AGI low enough, but experience tells me that when a good OT year hits, it can be quite difficult to come up with sufficient cash to make the retirement contributions that will get you over the threshold.  I really need to know within a few hundred dollars how much taxable income I can expect from this account.  (This is a long-winded way of saying that what doesn't move your needle may move mine. ) 

I also like the idea of a taxable account because it may allow for better segregation of funds intended for different purposes.  I can be blithe about using a Roth IRA for purposes that it wasn't intended, but I don't like having retirement, emergency, and repair funds in the same account. 

I have an existing Roth IRA with Vanguard. 

[haapai]

Other info. 

No, I am not maxing my retirement contributions.  I am currently contributing about 20% of gross to a 401(k), maxing my HSA (single), and paying about $6000 a year in health insurance premiums. 

When a prior windfall of the same size hit, I squirreled away the money by maxing the 401(k) but I do not wish to do so again.  The fees in my 401(k) are much higher than what Vanguard asks for. 

No distribution date has been set.  The relative in question is still alive. 

[resolution]

Oct 15, 2019 13:22:59 GMT -5 haapai said:

Why am I not considering an after-tax investment account?  The answer is quite simple, I don't know anything about them and am afraid to ask questions?  Do they kick out any taxable income at all?  If they kick out income, is it predictable?  How paperless can you go?  I'm really embarrassed to be asking such simple questions but not knowing the answers and being ashamed to ask them may be preventing me from considering an after-tax account. 

If you set up a taxable investment account, there are typically two types of income that are generated: dividends and capital gains.

Dividends are typically paid quarterly, and you can get a rough idea of the amount by looking at the distribution history of the fund. In general, you will need to pay taxes on the dividends, even if you have them reinvested back into the fund. If you hold the investment longer than 60 days, they are called "qualified dividends" and they are taxed at a lower rate. Last year I received approximately $1200 of dividends on an 75k investment, and they were taxed at the lower capital gains rate of 15%, so my tax ran around $180 on the 75k investment.

Capital gains is the increase in the value of the investment. So if your stock price goes from $100 to $110, you have a capital gain of $10. That is not taxed until you sell the investment. On my $75k investment, I didn't pay any capital gains because I didn't sell anything. That is all deferred until I sell.

You will need to be aware that if you sell your investment, part of the sale price is going to go to taxes. Your brokerage will automatically keep track of your initial investment and the amount of reinvested dividends, so you won't be taxed on anything but gains. You can learn more about this by researching "cost basis." You can also fiddle with the order that you sell things to control your taxes, or you can just let the brokerage do its thing and go with their defaults.

[haapai]

FWIW, I'm also definitely considering taking 10% of the windfall and spending it on something totally frivolous -- like paying down the balance or the refinancing fees of a sub-4% mortgage. 

A girl just has to have a few indulgences. 

[souldoubt]

Oct 15, 2019 14:12:09 GMT -5 haapai said:

Oct 15, 2019 13:44:30 GMT -5 souldoubt said:

When you say putting it into a Roth IRA you'd be doing it over the next 3 years including 2019 if you haven't already made your contribution.  Do you want to leave some of the money out of the market for at least a year if you were doing contributions for 2019, 2020 and 2021 or two years if you're talking 2020, 2021 and 2022?  If you go for index funds you'll have dividends which can be reinvested and the tax liability isn't going to move the needle so to speak.  If you ever switch investments when you sell you're going to have a taxable event based on the cost/sale price and how long you've owned it will determine if it's short or long term.  I started my taxable account with Vanguard years back as I have my Roth IRA through them.  Everything is paperless and was extremely easy to set up.  If you already have an account with someone like Fidelity, Vanguard, etc you can set up a taxable account with a brief phone call or even do it all online.  If you don't have an account with a provider like that you can call them, have a packet sent to your house that you complete and get it back to them at least that's what I did with Vanguard years ago.  I'm guessing they've made it even easier to get up and running these days.    

Could you elaborate a bit on this statement?  If you go for index funds you'll have dividends which can be reinvested and the tax liability isn't going to move the needle so to speak.  Please be a bit more plain.  Are the dividends taxable and if so, could you characterize their size and character a bit more.  I have a base compensation of $32K a year and I'm quite attached to getting my dinky little $200 a year Saver's tax credit.  Usually I have no problem getting my AGI low enough, but experience tells me that when a good OT year hits, it can be quite difficult to come up with sufficient cash to make the retirement contributions that will get you over the threshold.  I really need to know within a few hundred dollars how much taxable income I can expect from this account.  (This is a long-winded way of saying that what doesn't move your needle may move mine. ) 

I also like the idea of a taxable account because it may allow for better segregation of funds intended for different purposes.  I can be blithe about using a Roth IRA for purposes that it wasn't intended, but I don't like having retirement, emergency, and repair funds in the same account. 

I have an existing Roth IRA with Vanguard.  

In 2018 the dividends on my taxable account were 2.4% of the ending balance of the account as of year-end.  The rate at which you're taxed depends on how long you've owned the funds and/or if they're considered qualified dividends.  Assuming they're not qualified less than a year is at your ordinary tax rate.  Qualified or less than a year is at the capital gains tax rate which can vary depending on your personal income tax bracket.  If you're in the 10 or 15% tax bracket then the rate is 0 and people in the 25-35% bracket it's 15% while it goes up for higher earners.  Based on your base compensation and the fact you get the savers credit I'm going to assume you're in a lower bracket.  Let's say you park all 20K in a taxable account on day 1 and earn 3% dividends that's $600 that in year 1 would be taxed at you're regular income tax rate.  If you were in the 22% bracket that's income of $600 and a tax liability of $132.  Some investments have more dividends it depends what you opt for.  Please note I'm definitely not a tax guy and someone else here can correct me if I'm wrong.

As to your comment about liking the idea of a taxable account that's exactly why I started one.  I wanted to diversify my investments and have my account that could allow me to walk away before I turn 59.5 and can take RMD's.  You can always take money contributed from your Roth IRA and there are ways to get money out before turning 59.5 but like you I don't like having all my money in one account.

[phil5185]

I would probably put it in a no-load index fund that historically doubles every 6 or 7 years. It grows tax deferred, $40k in 7y, $80k in 14y, $160k in 21y, $320k in 28y, and so on.

And if you can add a couple blocks of money to it over the years you can easily build a million during a 30 year working life. Definitely don't waste your wealth-building cash on prepaying 4% loans.

[haapai]

Phil, I'm 50.  If I am extremely fortunate, I will be able to delay taking social security until my full retirement age of 67.  If I am extraordinarily fortunate, I may be able to support myself through paid employment into my early seventies. 

Please drop  this talk of a thirty year working life.  I don't have any such thing.  I don't care how powerful or how interesting the math can be for someone in their mid-thirties or early forties. 

I'm really struggling not to tell you what I think that you should do with your 30-year plan.  About the politest thing that I can tell you to do with it is to find a 30 to 40 year old who might benefit from it. 

[dannylion]

How was Phil supposed to know how old you are?  

[haapai]

Oct 16, 2019 15:42:43 GMT -5 dannylion said:

How was Phil supposed to know how old you are?  

$7K says that I am 50 or older.  If I were younger, I'd only be able to put $6K a year in an IRA. 

[souldoubt]

I get that but Phil was just giving his standard investment response about the power of index investing, compounding and investing rather than prepaying a low interest mortgage.  Even if a 30 year work life doesn't apply to you based on historical returns his advice isn't terrible if you can afford to invest the money and are able to leave it there for the next 15+ years.  Even if 8% annualized returns with dividends reinvested are the new norm by the time you're 68 that 20K is 80K.    

[phil5185]

So you are 50 and you don't have a 30 year career in your future?? Ask yourself - how old will I be in 30 yrs if I DON'T add a million to my account in 30 yrs.

I retired over 20 yrs ago - I've added way more than a million to my account since retirement.

Your account will keep doubling every 7 years after you retire.

[CCL]

Agree with souldoubt above. You don't necessarily need to have a 30 year time-frame. I think 10-15 years is good enough, especially if you reinvest dividends and capital gains. Do you have any other emergency fund at all? If so, I'd put it all into your Roth, spread out over 3 years. I've never agreed with the idea of using a Roth as a piggy bank for myself. Just leave it there and let it grow tax-free.

I think now is a good time to be putting money into Roths since the tax rates are relatively low. I don't expect them to stay that way for long.

One thing that I think some people don't realize about dividends and capital gains in mutual funds is that they aren't "extra" money like interest on bank accounts. Once they are paid out the value of the fund drops by the same amount. You need to reinvest the dividends and capital gains or you will have less money in your fund until, hopefully, the share price appreciates again.

If you don't mind saying, why are you planning to refinance your mortgage? You've already got a good rate. Have you looked into dropping the mortgage insurance?

[haapai]

Oct 16, 2019 19:09:51 GMT -5 CCL said:

If you don't mind saying, why are you planning to refinance your mortgage? You've already got a good rate. Have you looked into dropping the mortgage insurance?

The mortgage is a USDA loan at 3.75%.  I bought at about 102.5% loan to value, so it will be about two years before I reach the 80% LTV ratio that will allow me to drop the mortgage insurance that works out to .25% of average principal balance annually.  The terms of my mortgage do not appear to allow me to have the house value assessed in order to drop MI.  I seem to have to get the balance down to 80% of the purchase price in order to get rid of MI. 

I bought the house pretty much at the trough of housing prices in late 2011.  There is absolutely no doubt in my mind that it has appreciated significantly. 

Refinancing the house allows me to drop the MI (around $9 a month).  It also gives me the option to extend out the payments for another 30 years instead of the 22 years that remain on the existing mortgage.  This will drop my mortgage payment by an additional $30 or $40 a month (depending on whether or not I roll the refinancing fees into the new mortgage), which I can invest. 

Refinancing may also be a cheap way of assessing the value of the house and this may make relatively inexpensive and long-term home equity and home improvement loans much cheaper in the future if I see the reason to use them.  Currently, I can't use these options without shelling out at least $350 for a home assessment, which definitely makes such loans unattractive, despite their low rates. 

My credit union is currently offering 30-year refinances at 3.875% and a $795 fee.  If rates drop another eighth of a point, I will have some interesting choices to make.  If mortgage rates drop a quarter of a point I will be lunging at a 3.625% 30-year like a starving carp.  I'm also keeping an eye on the 20-year rate. 

The dates of the October and December fed meetings are marked on the paper calendar next to my laptop. 

I don't know how relevant this is, but I really don't see or feel the urgency to have my mortgage note paid off prior to retirement.  My mortgage note, my escrow, and my repair costs are all around $225 a month, so paying off the note doesn't really change things much.  I also have a frozen, un-indexed pension of $222 a month heading my way at 65 or 67, which is possibly influencing my thinking in illogical ways.  I really like the idea of having one set amount offset the other and not having to think too much about how little $222 a month will be worth 14 or 16 years from now. 

[CCL]

Your housing costs are great! I don't think I would even refinance unless rates drop considerably. Even for only $795, it will take a while to recoup the costs.

The last time I had a home equity line, they were not charging for appraisals as long as you kept the loan for 3+ years. You might still be able to do that if you shop around.

It sounds like you don't have an emergency fund. If that's the case, I'd start building one. Even $50 a month will make a difference when you need it. For example, we had a plumbing issue at the house while we were on vacation. I was able to send my kid a couple hundred dollars and he had a plumber come out and fix it. I just paid for it and moved on with pretty much zero stress. If I didn't have the cash available a simple fix would have turned into a bigger problem.

[TheOtherMe]

My mortgage is a USDA loan and it was for more than 100% of cost.  It's at 3.125%  

I recently got a HELOC.  My credit union said my first mortgage didn't meet the parameters to get rid of the PMI.  It was the 80% of purchase price that isn't paid even though the house appraised much higher than that.

The credit union suggested because of my age to just keep the USDA loan.

[haapai]

Thanks YM crowd!  No matter how surly my responses have been, you have given me plenty to think about. 

I'm much more likely to open and fund a taxable brokerage account as a result of your input.  You've opened my eyes to a few angles that I had not considered before. 

FWIW, by the time that I receive this distribution, my mortgage will be within spitting distance of the magical 80/20 mark that lifts the .25% mortgage insurance requirement.  It's unlikely that I will be using any portion of this money to pay down or refinance my already cheap, cheap, cheap mortgage. 

I do have an emergency fund but it is held in the same (savings) account that I use to save for home repairs and vehicle replacement.  There's about $6K in there now but I cannot give you a breakdown on how much is supposedly allocated to what purpose.  About all that I can say is that the return is lousy (yeah, I edited that) and that I am heartily sick of having that much money, or that proportion of my annual take home, basically rotting away with inflation. 

I've got another eleven months to refine my plan for what to do with this inheritance.  My grandmother was a smart gal.  Her will required that her grandchildren be informed of her bequest but that distribution would not occur until a year after her death. 

I'm pretty sure that my plans regarding what to do with this bequest have improved tremendously in the two months since I learned of it. 

[thyme4change]

Dec 29, 2019 16:20:48 GMT -5 haapai said:

Thanks YM crowd!  No matter how surly my responses have been, you have given me plenty to think about. 

I'm much more likely to open and fund a taxable brokerage account as a result of your input. 

FWIW, by the time that I receive this distribution, my mortgage will be within spitting distance of the magical 80/20 mark that lifts the .25% mortgage insurance requirement.  It's unlikely that I will be using any portion of this money to pay down or refinance my already cheap, cheap, cheap mortgage. 

. 

Just keep spitting at the mortgage, slowly.

[phil5185]

Dec 29, 2019 16:20:48 GMT -5 haapai said:

Thanks YM crowd!  No matter how surly my responses have been, you have given me plenty to think about. 

I'm much more likely to open and fund a taxable brokerage account as a result of your input.  You've opened my eyes to a few angles that I had not considered before. 

FWIW, by the time that I receive this distribution, my mortgage will be within spitting distance of the magical 80/20 mark that lifts the .25% mortgage insurance requirement.  It's unlikely that I will be using any portion of this money to pay down or refinance my already cheap, cheap, cheap mortgage. 

I do have an emergency fund but it is held in the same (savings) account that I use to save for home repairs and vehicle replacement.  There's about $6K in there now but I cannot give you a breakdown on how much is supposedly allocated to what purpose.  About all that I can say is that the return is lousy (yeah, I edited that) and that I am heartily sick of having that much money, or that proportion of my annual take home, basically rotting away with inflation. 

I've got another eleven months to refine my plan for what to do with this inheritance.  My grandmother was a smart gal.  Her will required that her grandchildren be informed of her bequest but that distribution would not occur until a year after her death. 

I'm pretty sure that my plans regarding what to do with this bequest have improved tremendously in the two months since I learned of it. 

Sounds good!

'Cheap, cheap mortgage' - Ya, I wouldn't touch that loan, the USDA loan is definitely a keeper.

As for the $6000 EF - we have kept ours capped at about $5k for decades. Whenever we need something, I use borrowed money. The $5000 will replace small, common things - ie, washer, dryer, car repairs, water heater, etc.  For new cars, I make a zero down payment and pay for 60 months, I keep the loan full term. And I leave my own $40k in the market where it, on average, doubles to $80k in 6 or 8 years (roughly the time the car is paid off).

[TheOtherMe]

My USDA loan is not one where I can drop the PMI.  I have to refinance and I do not want to incur the costs to do that.  

When I originally bought the house, the PMI could have been dropped.  I refinanced it when interest rates dropped significantly and the rules had changed.  

[Tiny]

Dec 29, 2019 16:20:48 GMT -5 haapai said:

I do have an emergency fund but it is held in the same (savings) account that I use to save for home repairs and vehicle replacement.  There's about $6K in there now but I cannot give you a breakdown on how much is supposedly allocated to what purpose.  About all that I can say is that the return is lousy (yeah, I edited that) and that I am heartily sick of having that much money, or that proportion of my annual take home, basically rotting away with inflation.  

Have you thought about moving some of the 6K to a CD (or CDs)? Especially if you don't see yourself using the money in the short term. My local Savings and Loan offers "special rates" on 13 month and 19 month CDs. It's still a "pittance" but it's better than leaving the $$ long term in a savings account.

When I first moved EF money from a savings account to CDS - I kept 1K in savings (and continued to add to savings) and moved the rest (6K at the time) to short term CDs. Since I was constantly adding to the savings account - it worked OK when I needed $ for a car repair, etc. I've never had to "break" a CD (and loose interest.) Once a year I'd review the set up and either move $$ from the savings account to a CD or not.

(Eventually I had an EF of 4 months income sitting earning a pittance, and then acting on basic YM advise I took the plunge and I moved most of the accumulated CD money to Fidelity so I could invest it. That worked out well for me.  I keep 1 months income in savings/cds as an EF.  my spending plan (with sinking funds) handles the day to day - even though I have some very large amounts in the sinking funds - I can't invest that money as I WILL use the $$ within a 12 month timeframe.)

[haapai]

I've goofed around with CDs in the past, but found it very frustrating (I kept having three and six month CDs renew on me, which made building a ladder difficult and dismantling it time-consuming) and the returns were pretty low.  It made sense when the returns on my CDs were equal to the after-tax interest rate on my student loans, my discretionary income was low, and the memory of paying 12% interest on a credit card was fresh in my memory. 

I've moved on from that point.  My mortgage is my only debt now and my PITI is under $500 a month.  I'm contributing 20% of gross into a workplace 401(k).  My existing Roth, originally funded in 2007 with $4K, now contains an additional $6K.  I think that I am well positioned to handle a bit of market risk in pursuit of better returns. 

OTOH, you got me.  I probably should have been keeping some of that cash in CDs if I wasn't going to invest it. 

[resolution]

There are also high yield savings accounts and money market accounts, which wouldn't have penalties for withdrawal and don't have a limited term that creates a hassle.

I keep some sort term/medium term money in the Vanguard Money market, which currently pays around 1.7%. Its not the best I could do for that money, but its convenient since i keep most of our long term investments at Vanguard. When I want the money back it takes a few days and then it is deposited electronically into my checking account at the bank. I think any brokerage you went with for your longer term investments would have a similar option.

[Tiny]

Dec 30, 2019 11:44:06 GMT -5 haapai said:

I've goofed around with CDs in the past, but found it very frustrating (I kept having three and six month CDs renew on me, which made building a ladder difficult and dismantling it time-consuming) and the returns were pretty low.  It made sense when the returns on my CDs were equal to the after-tax interest rate on my student loans, my discretionary income was low, and the memory of paying 12% interest on a credit card was fresh in my memory. 

I've moved on from that point.  My mortgage is my only debt now and my PITI is under $500 a month.  I'm contributing 20% of gross into a workplace 401(k).  My existing Roth, originally funded in 2007 with $4K, now contains an additional $6K.  I think that I am well positioned to handle a bit of market risk in pursuit of better returns. 

OTOH, you got me.  I probably should have been keeping some of that cash in CDs if I wasn't going to invest it. 

FWIW:  I've never been able to ladder CDs or use the auto renew feature.    My local S&L always has "special rate" CDs that mature in 13 months (or 15 months or 19 or some other "off" schedule)  when it does renew it becomes a 12 month CD (or whatever other standard is close to the "special" time frame).   The special rate was always an attractive rate.  The 12 month CD rate (and other standard CD rates)  was always pretty meh.   So, when the CDs renew  it is always to my advantage to stop in the S&L and request a new "special rate" CD rather than to let it auto renew to a non-special rate CD.   I've only goofed up a time or two - and had a CD renew at the meh rate.  The renewal wasn't for a long time - so it was mostly inconvenient.  (would have sucked if they were long term CDs).    I usually had 2 to 4 CDs going at any time... I don't really care when they renew - I'm not planning to use the money.  If I have to break a CD, I'll suck it up and loose the minor amount of interest.  (the CDs were generally less than 5K each).      

If it's any consolation the CD interest rates for the last 10 years have been pretty pathetic.   You didn't miss out much.  My 6 or 7K in CDs at special rates didn't earn much at all... better than being in a savings account... but still pretty pathetic.  The cost for peace of mind. 

[haapai]

I woke up with a headache.  I had dreamt of the wash sales rule. 

My existing Roth IRA is in Vanguard S&P funds and I had planned on using the same (or something very similar) in a taxable account and also setting up an automatic monthly deposits.  I can see now that this could trigger the wash sales rule if I ever sell at a loss and then put money into either the taxable account or the IRA within 30 days. 

Am I overthinking this in order to find an excuse to put everything into a Roth or is it something easily avoided by suspending the automatic transfers for a month?  Do after-tax accounts have features that make suspending the automatic transfer easy or automatic flags when there is a possibility of triggering the rule?  (ETA:  Both the Roth and the after-tax account would be with Vanguard, not just in Vanguard funds.)

[tallguy]

Jan 1, 2020 11:45:34 GMT -5 haapai said:

I woke up with a headache.  I had dreamt of the wash sales rule. 

My existing Roth IRA is in Vanguard S&P funds and I had planned on using the same (or something very similar) in a taxable account and also setting up an automatic monthly deposits.  I can see now that this could trigger the wash sales rule if I ever sell at a loss and then put money into either the taxable account or the IRA within 30 days. 

Am I overthinking this in order to find an excuse to put everything into a Roth or is it something easily avoided by suspending the automatic transfers for a month?  Do after-tax accounts have features that make suspending the automatic transfer easy or automatic flags when there is a possibility of triggering the rule?  (ETA:  Both the Roth and the after-tax account would be with Vanguard, not just in Vanguard funds.)

I'm not sure I understand either the plan or the question.  Is the intent to do automatic deposits from the taxable account into the Roth?  Why?  And how?  Money going into my Roth was either new money contributions (previously uninvested in a savings account) or a conversion.  Why would you do otherwise?  

My understanding is that the wash sale rule exists to prevent someone from booking a false tax loss.  It would thus not apply to investments of new money into either account unless something had been sold at a loss out of the taxable account first, as you seem to note.  Unless you are actively trading out of the taxable account in addition to these automatic deposits of presumably new money into either account, I don't see an issue.  And if you think it necessary to sell out of the taxable account for whatever reason, why would you be continuing automatic deposits?  Either you sell because you need the money, in which case you stop the investments, or you sell because it is now a poor investment choice and you again stop the investments.  What am I missing?   

[haapai]

I'm not sure if you are missing anything that I have told you.  I might be doing a poor job of describing my situation and my desires. 

There's a head-banging simplicity to putting everything into a Roth as soon as possible.  I can withdraw contributions at any time, without penalty, and with minimal reporting requirements (I think that I will have to report them on my Form 880) and after I turn 59 and a half, I don't have to worry about touching the gains.  I am currently 51 and my current Roth IRA has about $10K in it, $4K of it is contributions.  So if I get the whole $20K of bequest moved into this account fairly quickly, there is a very low possibility of withdrawals from the Roth for cars, home repairs, or even drastic income fluctuations triggering tax consequences.or even increased account fees due to low balances. 

If I start an after-tax account, especially if I use an S&P 500 index fund as my investment choice, a lot of that simplicity disappears.  There are things that I will have to keep track of, wash rules that may apply or need to be avoided, and many scraps of paper that I will need to keep track of not just until I file that year's taxes but also in my death folder so that the poor fool who has to file my final return doesn't get a nasty-gram from the IRS. 

Can you blame me for wanting to skip the taxable account headache entirely?  Isn't my situation pretty similar to the situation of a person of extremely moderate means who has absolutely no likelihood of ever exceeding the lifetime gift exemption still refusing to gift a single person more than $14K a year because the gift tax reporting requirements, even when they generated no gift tax and had very little chance of ever triggering estate taxes, were just a PITA? 

ETA:  I got the form number wrong.  I should have referred to Form 8880. which has a name, which I can't remember, and has to do with the Savers' (or possibly Saver's) tax credit, which was once known as the retirement savings contributions credit. 

[tallguy]

My understanding is the money will be disbursed in over a year.  At that time you can fully fund one year and possibly two years of the Roth, depending on time of year received.  If not at the same time, you could just hold out the second $7000 until the new year begins.  That would take up $14,000 of the $20,000 to be received.  The other $6000 is not an issue at all.  Either use it as an increased EF until the new year, or invest it in taxable in a different way.  Maybe a Total Stock Market fund instead of an SP500 fund.  The idea of automatic deposits is silly, in my opinion.  Why bother?  For dollar-cost averaging?  That usually doesn't work anyway.  Lump-sum works out better two-thirds of the time.  For simplification of the process?  No, not that either.  If you want to get as much into your Roth as soon as possible, you could even use the excess from the inheritance to pay the taxes on a Roth conversion if you have an existing IRA.  There are many ways to proceed, depending on what you really want to do. 

Also, I'm not sure what headaches you are attributing to taxable accounts.  If you eventually sell, the cost basis is not that difficult to track, and the brokerage firm should have that information readily available to you.  If you don't sell and the stocks or funds get inherited, the heirs receive a stepped-up basis so your cost basis is irrelevant.  Yearly distributions and dividends are all summarized on a statement every year so again not difficult to track at all.