Let us suppose that someone receives a lump sum settlement from a car accident (personal injury) case and would like to invest it for maximum long-term returns. We will say that the settlement amount is $100,000. We will assume that the receiver has a solid understanding of investing and initially plans to put the majority of the amount into mutual funds and commission-free ETFs. The latter will be used as part of a monthly auto-withdrawal for living expenses. Occasional trades for redistribution to maintain asset mix.
In determining the viability of this plan, what considerations need made regarding taxation in order to maximize long-term gain? To clarify the question, things that may come into play might be:
- Tax savings via Roth IRA
- Capital gains tax affects of redistribution trades
- ETFs tax advantages over other investment options
- Other unknowns
Essentially, like many, I am ignorant of much of the tax code around investment, other than the basics required for monthly retirement deposits, and do not want to make a mistake with this settlement. This question applies to the US tax code, specifically a resident of Pennsylvania.
I'd like to expand upon the above question with further assumptions and restrictions:
- Initial investment is $100,000, but a future larger settlement is possible and expected
- No other income source can reasonably be expected in the future
- Withdrawals will be expected to be less than appreciation
- For the purposes of this question assume that this money will be invested in stocks, bonds, ETFs, mutual funds, or similar
- This person has no other investment accounts
- Net income is/was $23k annually
- Investor is not married, but lives with a domestic partner and children and may one day marry