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.

Further Information

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
  • 1
    What is the person's age? When do they plan to retire? Are you saying they will use none of the money to live on in the short term?
    – Pete B.
    Jun 2, 2014 at 13:12
  • Good questions. Assume the age is mid 30s. Assume that they will not be able to work in the foreseeable future and will pull out a monthly sum for living expenses.
    – Nicholas
    Jun 2, 2014 at 13:28
  • 2
    @Nicholas - adding some remaining missing bits would help. Do they have any other savings? About how much is their income now? From what I read so far, taxes are the least of my concern. Jun 2, 2014 at 13:54

2 Answers 2


Well this is not the best situation. Sorry to your friend.

First off ROTHs are out, you need earned income. Secondly, I don't think the focus should be on retirement planning until there is again an earned income. Thirdly, this person is just in a bad spot.

Lets assume that you can find some really good mutual funds, that consistently return 10% per year. At best this person can only pull out 10K per year without touching principle. At that income level, taxes are not much of a concern; not as much as surviving. If this person knows anything about investing, they know funds don't work like this. They could be down 5%, down 5%, up ~40% in three years to give an average of 10% return. Which of course further complicates matters.

This person (IMO) should seek to start a different career. One that can cater to any long term issues this person has with pain/disability. The money could be used toward training/education in order to get money flowing again. That is not to say the full amount should be used for a BA in Russian Folk Literature, but some minimum training to get a career that starts earning real money.

  • 2
    I wonder how well your first sentence translates for our non English speakers. Jun 2, 2014 at 16:36

the $5500 Roth IRA is not restricted to earned income, you can put whatever money you have tax free and gains free.

  • Hey Kevmolio, I believe this statement is wrong. Can you provide a link to back it up?
    – Bishop
    Jun 13, 2016 at 17:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.