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Investment Advice Needed - Out of the Box
Posted on 8/20/18 at 2:33 pm
Posted on 8/20/18 at 2:33 pm
I have an out of the box question regarding a sum of money I’m about to receive and thought I’d start here. Long story short, last year I was injured in a freak accident at work in a vehicle crash. I didn’t take any workman’s comp salary benefits, I just worked from home while I recovered and kept my regular salary, but WC did pay my medical and they were great to deal with. Fast forward and the case is closing, doctor informs me I will have a small disability rating as a result of the accident, and WC will send me a percentage of my salary for a given number of weeks as recompense for the injury. I’m not interested in suing, my employer has been wonderful, and this isn’t a settlement, but it is something I get by law. I can burn the checks or cash them...you get the drift. The amount will be around $31k.
Here’s the rub, the benefits aren’t taxable, but what do I do with this money - I don’t particularly consider this a windfall? In my mind I believe it should be set aside for any kind of medical difficulties in the future, as remote a chance as that might be, but I hate the idea of paying capital gains. Leveraging tax advantaged accounts has been pounded into my head so long and we’ve moved our contributions up so much to keep our MAGI at a level to use Roth’s (wife and I both max out 401 and Roth accounts yearly) that I’m out of my element here. Should i just suck it up and invest it in bonds or a brokerage account and not worry about the taxes?
Here’s the rub, the benefits aren’t taxable, but what do I do with this money - I don’t particularly consider this a windfall? In my mind I believe it should be set aside for any kind of medical difficulties in the future, as remote a chance as that might be, but I hate the idea of paying capital gains. Leveraging tax advantaged accounts has been pounded into my head so long and we’ve moved our contributions up so much to keep our MAGI at a level to use Roth’s (wife and I both max out 401 and Roth accounts yearly) that I’m out of my element here. Should i just suck it up and invest it in bonds or a brokerage account and not worry about the taxes?
This post was edited on 8/20/18 at 2:35 pm
4
Posted on 8/20/18 at 2:47 pm to smelvis
Simple answer is yes, suck it up. Put the max amount on to the deferred accounts. Set up a small cash/cd emergent account if not already in place. Then invest the rest. Capital gains argument is short sighted. Yes. It would be nice to have it be tax deferred or tax free (Roth). But taxes are not inherently evil.
Posted on 8/20/18 at 3:09 pm to smelvis
Do both of you have a fully funded HSA? I would do that now and again on 1/1/19 and then invest within the HSA.
Do you have a 6 month emergency fund?
Do you have a 6 month emergency fund?
This post was edited on 8/20/18 at 3:11 pm
Posted on 8/20/18 at 3:13 pm to smelvis
Paying taxes on gains is better than not having any gains. 75% of money you make is better than making no money. Taking advantage of all the tax free or tax deferred accounts is what you should do, but at some point you exhaust though.
Posted on 8/20/18 at 3:37 pm to weagle99
quote:
Do both of you have a fully funded HSA? I would do that now and again on 1/1/19 and then invest within the HSA.
Do you have a 6 month emergency fund?
I have an HSA but wife does not. We keep a year’s worth of basic expenses (~$25k) in a quickly accessible savings account as an emergency fund. In the past, after our emergency fund was established, we funded our Roth’s out of this account and paid for vacations and furniture and things here and there, but always kept our 6-12 months of emergency money. We don’t have any debt outside of mortgage and her car and we play the credit card rewards game and pay off our balances at the end of the month. We also use debt to our advantage (planned purchases, low and 0% financing offers, etc) to keep from depleting cash reserves and keep our credit scores high. I feel like we’ve covered the bases and have followed the rules pretty well.
I believe we are moving beyond the basics of “max your 401 and Roth and save your money and listen to Dave Ramsey” though. And that’s where I’m not as comfortable.
Posted on 8/20/18 at 3:42 pm to smelvis
quote:
Should i just suck it up and invest it in bonds or a brokerage account and not worry about the taxes?
They're are plenty of ETFs or even actively managed funds that are tax efficient. Start looking there.
Posted on 8/20/18 at 6:04 pm to smelvis
Cool. You might start investing the money in your HSA into various funds. I keep enough ‘cash’ in there for my out of pocket max and the rest is invested in 9 different funds offered by the HSA. It has netted me a nice return so far and I re-invest all dividends.
This post was edited on 8/20/18 at 6:05 pm
Posted on 8/20/18 at 8:03 pm to weagle99
I honestly didn’t know that contributions could be made to an HSA after tax - meaning I could go and contribute to my account out of pocket (though I knew I could invest through the HSA). I’ve been contributing enough to cover my deductible and getting the match from my employer (which isn’t much). I’ll probably follow your suggestion, and that of others, and contribute the rest of the $3450 limit this year. Max out contribution for 2019 in January in the HSA again, and then put the rest of the money into a brokerage account. I’m probably overthinking this tax thing.
This post was edited on 8/20/18 at 8:05 pm
Posted on 8/20/18 at 9:44 pm to smelvis
quote:
If you contribute to your HSA with after-tax dollars, you may deduct the contribution amount, subject to the maximum annual contribution limits from your taxes at filing time. Above the line means you will reduce your taxable income regardless of whether you itemize or use the standard deduction on your income tax form.
Another option: If you can do after tax contributions to your 401k you can then do a Roth conversion with that money and get around the annual limit. In theory you could get the entire $31k into a Roth this year.
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