Help w/ Windfalls...

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Help w/ Windfalls...

Postby fcox85 » Thu Jan 10, 2013 4:30 pm

My wife and I have recently received a gift of $10,000, and we are expecting a large windfall/inheritance later this year from the death of her grandfather. In light of this, I am debating the best immediate use for the $10k, and wanted some advice. Below is what I consider the relevant information about our situation:

Age: 28/24
Student Loans: ~ 155k:
Group 1 - ~ $145,000 @ 6.625%
Group 2 - ~ $9,200 @ 3.325%

Emergency Fund: ~ 6 months.
Investments:
My 401(k): ~$9,100 in VG TR 2030. I'm expecting employer match of ~ $2,700 for 2012. Starting with my first paycheck, maxing out for 2013, and expecting the same employer match.
NO ROTH IRA'S

While we are not entirely sure of all the details, my wife was discussing the inheritance with her grandfather several months ago, and was informed it should be mid-six figures. Normally, I would take this with a grain of salt, but her grandfather ran/owned a bank for the better part of 50 years, and was always on top of his estate/finance matters. Regardless, it is highly likely that the inheritance will be at least enough to pay off all of the student loans, probably significantly more. However, as with anything, I guess I could always be mistaken, and I want to make the best decision. Given the amount of time it can take to settle an estate, it may be a while before we know anything for sure.

Our main focus this year has been aggressively paying off debt (Studen Loans, CC's which are now gone, etc.). All that remains currently is the bulk of my student loans. Because of this, our default decision would be to immediately pay off Group 2, to free up cash flow and further allow us to "snowball" our payments to the remaining debt. However, given that we may be able to pay off all loans soon anyway, I'm conflicted. So, here are my questions:


1) Should I just go ahead and keep with the pattern of aggressively paying off my debt, and send the 10K directly to student loans?

This result obviously keeps things simple, and frees up extra cash flow to continue our aggressive debt payments. It could obviously completely wipe out the smaller group of loans, and leave us with one less monthly obligation in the event that the inheritance is not as big as we were led to believe. Also, it helps us make significant progress toward our goal of being debt free. However, if the inheritance is large, the benefit we gain from putting the $10k toward loans is negligible, as we will be able to pay it off soon anyway.

OR

2) Should I max out 2012 Roth IRA's for both of us??

This would open up some more tax-advantaged space that we may need later this year. As you can see from my current investments, we don't have a huge amount of tax-advantaged space to use for the bonds portion of our AA, in the event our portfolio significantly increases in size. If the inheritance is large, we would likely have to initially buy a fair amount of something like VG Intermediate Term Tax Exempt in a taxable account to make up our desired Stocks/Bonds AA. However, the bonds element of our AA could be transitioned to tax-advantaged accounts through the use of my 401(k) and 2013 Roths, so I'm not sure how big of a problem this is.

Any guidance is welcome!
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Re: Help w/ Windfalls...

Postby ResNullius » Thu Jan 10, 2013 4:38 pm

If the inheritance is truly mid-6 figures (around $500K), then I would certainly pay off the student loans, then max all tax-deferred options, then invest the rest in a taxable account of index funds (equity funds and some in bond funds). At your age, this is a once in a lifetime chance to really take advantage of long-term investment gain on a significant amount of money, which would make you multi-millionaires by your mid-50s. If you want to increase your spending, you can do it out of newly earned income during future years, but your portfolio would be off to a nuclear start. Good luck.
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Re: Help w/ Windfalls...

Postby fcox85 » Thu Jan 10, 2013 4:47 pm

ResNullius wrote:If the inheritance is truly mid-6 figures (around $500K), then I would certainly pay off the student loans, then max all tax-deferred options, then invest the rest in a taxable account of index funds (equity funds and some in bond funds). At your age, this is a once in a lifetime chance to really take advantage of long-term investment gain on a significant amount of money, which would make you multi-millionaires by your mid-50s. If you want to increase your spending, you can do it out of newly earned income during future years, but your portfolio would be off to a nuclear start. Good luck.


Thanks for the reply. This is definitely our overall plan.

I guess what I'm really asking is this: does the extra $10k in 2012 tax advantaged space really make an important difference in the grand scheme of things? Presumably, the estate will not settle until after the 2012 Roth contribution deadline, and that would limit the immediately available amount of tax advantaged space I would have to shelter the bonds portion of our AA when I invest whatever is left over after paying off the loans. Obviously, I could just buy Tax Exempt Intermediate in the interim, and transition to tax-advantaged as my 401(k) and Roths grow in the future. Maybe I'm over-thinking this..............and I should just get rid of some loans tomorrow?
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Re: Help w/ Windfalls...

Postby Ozonewanderer » Thu Jan 10, 2013 4:50 pm

fcox85 wrote: However, as with anything, I guess I could always be mistaken, and I want to make the best decision. Given the amount of time it can take to settle an estate, it may be a while before we know anything for sure.

You are right, it can take a year or two or more to settle the estate. During this period, Uncle Sam could come along and claim some of it. I have inherited large amounts of money over the past few years and the process is maddeningly slow and complex. I would not do anything until you have the money in your accounts and the estate is settled including receipt of a letter from the IRS to that effect (if relevant). My father passed away a year ago and I will probably have to wait another 18 months before receiving the "All settled" letter from the IRS.

Good luck and good fortune!
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Re: Help w/ Windfalls...

Postby Watty » Thu Jan 10, 2013 5:51 pm

One consideration is that in fairness this is your wife's money and if you end up getting divorced then either out of fairness or by law then she should likely get most if not all of it in a divorce settlement.

It would be a good idea if she talked to a lawyer to see what the lawyer would recommend to protect her interests.

Paying off the student loans makes sense but then one option for the rest would be to buy a modest house for cash with the money if you are ready to settle down. From a financial standpoint that could be "her house" if you ever get divorced but you would still get the benefit of not having a mortgage payment so that would be a huge plus for you too.

if you will likely have kids, then some people set aside some inherited money for the kids college, which would also help you if you do not need to plan for college expenses.
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Re: Help w/ Windfalls...

Postby ResNullius » Thu Jan 10, 2013 6:35 pm

Watty wrote:One consideration is that in fairness this is your wife's money and if you end up getting divorced then either out of fairness or by law then she should likely get most if not all of it in a divorce settlement.

It would be a good idea if she talked to a lawyer to see what the lawyer would recommend to protect her interests.

Paying off the student loans makes sense but then one option for the rest would be to buy a modest house for cash with the money if you are ready to settle down. From a financial standpoint that could be "her house" if you ever get divorced but you would still get the benefit of not having a mortgage payment so that would be a huge plus for you too.

if you will likely have kids, then some people set aside some inherited money for the kids college, which would also help you if you do not need to plan for college expenses.


In fairness, if you put it in a joint investment account (plus pay off loans), then this would guarantee that you get 50% of the benefit in the event of a divorce down the road. I would most certainly put the money into a joint account, which automatically makes half of it your money.
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