What to do with inheritance

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Robinwantsacracker
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Joined: Thu May 04, 2017 6:44 pm

What to do with inheritance

Post by Robinwantsacracker » Thu May 04, 2017 7:29 pm

My sweet mother passed away last month. I am completely heartbroken.

I will be receiving an inheritance that will dramatically change our family's financial outlook, and I am hoping you all can offer some advice. I am fairly naive to financial planning/investing - I've never really had any money to invest - I had planned to start considering investment ideas after our family was out of debt. I feel like I'm having a financial identity crisis because I have been extremely devoted to paying off our massive student loan debt for the last 4 years.

Here is some information about our situation.

I am 30, my husband is 34
3 kids: 10, 4, 6 months

Current gross income: 120 K
Current debt snowball: 3 K/month - has all been going to student loans
I work 2 days a week, he works 7 on/7 off
Low cost of living
We are both fulfilled in our work and plan to continue working

Debt:
Student loans (various interest rates ~ 6%): 90 K
Mortgage: 110 K (home currently valued at 150 K) 3% interest

Savings:
10 K emergency fund + 2K in various sinking funds

Retirement:
I don't know that balances, but both of us have been contributing a total of 15% including match for the last 4 years

Financial goals:
Retire ~ 60/62 at 50/60% current income level
Help kids with reasonable college expenses (in state tuition and live at home - expect kids to work part time/summers - no ivy league)
Larger house (400 K range) - Would like to pay off by retirement

We naturally aren't big spenders, and I'm not too worried about lifestyle creep. We are not concerned with extravagant travel/ name brands/ status etc.

My mother used Merryl Lynch, and, of course, her financial planner is pressuring me to retain her for my own financial planning. I am wondering if I can handle this myself. I have just read the boglehead books about investing and retirement planning, but I am still unsure about how to move forward.


The inheritance will be 400K with no state/federal taxes

My initial simplified plan.

Pay off 90 K student loans

Fully fund 6 month emergency fund: 25 K

529's (or alternatives?) for kids' college: 100 K total

Lump-sum retirement contribution: ~ 100 K?

We might take a modest vacation < 5K

The rest towards house?

My questions:

Does anyone have guidance about how make a lump sum contribution towards college for kids? should I consider something other than a 529?

Retirement: is there a way to make a lump-sum tax-deferred retirement contribution? Should I keep the money liquid and contribute the annual max to a roth IRA? We plan to continue to contribute to get the max employee match on our 401K's, but should we be doing something different here?

I feel overwhelmed. I am temped to pay for financial advice, however, I also see the benefit of managing this myself. This amount of money will really speed up our financial goals, and will provide so much security for us. I want to use it wisely.
I would appreciate any input.

Please let me know if there is any other information I can provide that would help.

Iorek
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Joined: Fri Mar 08, 2013 9:38 am

Re: What to do with inheritance

Post by Iorek » Thu May 04, 2017 8:15 pm

First I am truly sorry for your loss. It sounds like you had a great mom and you lost her too soon.

Second, the wiki has a good section on windfalls (including inheritances)-- https://www.bogleheads.org/wiki/Managing_a_windfall
The basic advice is to put aside 6-12 months in a bank account and the rest in another bank account or CDs and not make any big decisions about how to invest or spend the money for 6-12 months.

That said, if you wanted to take half and spend it on your student loans and 529s for your kids, that seems reasonable to me. You might decide to use some for Roth IRAs, or to enable you to up your 401k contributions, but I think you could certainly take your time deciding.

Best wishes

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CAsage
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Re: What to do with inheritance

Post by CAsage » Thu May 04, 2017 8:29 pm

Take your time sorting this out - park the money in a savings account or short term bond fund while you learn. There are a couple pointers you could act on now...
1) Pay off the student loans - that's a win/win with no downside.
2) If you have any retirement options available (401k, IRA) begin funding them now. I don't think there are any 'lump sum' things available, but you can certainly put the full amount towards an IRA for each of you (which one depends on tax bracket...) and increasing a 401k to the max this year and from now on.
3) Hardly worth paying off a 3% mortgage - take your time on that one.
4) Avoid paying a financial manager a percentage for what they call "Assets under management" or AUM a flat fee, as it drains a big chunk of your future returns ... When you are ready, choose index funds that are cheap! A three fund portfolio is not a bad choice...
5) Putting $100K divided across your three children in 529 accounts is not a bad idea, but take your time, no rush....
Read the Wiki on windfalls and asset diversification. Yes, you can do this.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

lhl12
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Re: What to do with inheritance

Post by lhl12 » Thu May 04, 2017 9:32 pm

A 529 is a great option for college savings for your kids.

You and your husband may each contribute $14,000 per child per year to a 529 for that child and you are allowed to front-end load five years of contributions into a single year. So, if you wanted to you could theoretically immediately contribute up to $140,000 per child ($14,000 x 2 x 5) into a 529 for that child (or a total of $420,000). I am not recommending you do this, but it is worth being aware of the constraint in case you want to do more later.

Some sort of retirement plan -- 401K or IRA -- also makes excellent sense. You will probably need to do this gradually over time. There is no way to front-end load a retirement plan in the way you can front-end load a 529. You and your husband will each want to make the maximum contribution annually over a number of years until all of the taxable assets have been migrated into a tax-advantaged plan.

So, when you are done you will have paid off all your student loans, front-end loaded 529's for your kids, and transferred all your spare cash (other than your emergency fund) into your IRA or 401K. At that point you will be living off your joint incomes and will have a fantastic start on retirement and education for your kids.

radiowave
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Re: What to do with inheritance

Post by radiowave » Thu May 04, 2017 9:54 pm

Hi, welcome to the forum and my condolences for your mom passing away.

Can you give us a little more information about the inheritance, whether this is in a taxable account or retirement account (401k/403b, IRA etc.), or both. If some or all is in a taxable account, the cost basis of the funds was set to 0 on you mom's passing so there will not be as big an issue with taxes on long term capital gains if you cash in the assets in a taxable account. If an IRA, you can move those funds to another brokerage, e.g. Vanguard, Fidelity, etc. but you'll have to start paying required minimum distributions if you mom was 70.5 or older (or when that would have occurred).

I agree with the posts above, take your time, consider getting out from under the advisor as that will needlessly chip away at the assets, and start asking questions here for input. I also strongly recommend when you are ready, to spend some time looking through the Boglehead Wiki to help gain some basic knowledge about personal investing. https://www.bogleheads.org/wiki/Main_Page
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

delamer
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Re: What to do with inheritance

Post by delamer » Thu May 04, 2017 10:06 pm

So the inheritance is not in an IRA? That would make a difference in the recommendations.

One thing I'd suggest is that you inform Merrill Lynch, in writing, that you don't want any trading done on the account until further notice. Better safe than sorry.

I wouldn't pay down your mortgage, with such a low interest rate. The rest of your plans make sense, although you can't lump sum into a tax-deferred account. If your 401(k)'s have good options, you could up your contributions. A Roth is a good idea too.

You might find this 16-pager useful: http://www.etf.com/docs/IfYouCan.pdf

I am sorry about your mother.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: What to do with inheritance

Post by aristotelian » Thu May 04, 2017 10:22 pm

Paying off the student loans is a no brainer. 529s are great for college saving, as the money stays in your name and doesn't go to the child until they have qualified expenses to reimburse. However, I would hold off on funding them aggressively. It is important to take care of your own financial security first, and even with $400K you still have a long way to go.

You cannot make a lump sum contribution to tax deferred or Roth accounts, there are annual limits ($5,500 for IRAs, $18,000 plus employer match for 401ks). You cannot contribute cash to a 401k, it must be deducted from you paycheck, but you could use the funds to supplement your income while maxing out your 401K. You could also use the funds to contribute to his and her IRAs.

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BL
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Re: What to do with inheritance

Post by BL » Fri May 05, 2017 12:45 am

EDITED: Below advice was based on it not being retirement accounts. I will try to do some changes based on that.

Both of you could increase your 401k contributions up to 18,000 each, and use up to that amount from the IRAs/401Ks which you will pay tax on inheritance. Doing this and paying off student loans should be done fairly soon considered carefully. Set up your emergency fund as well, and set aside the amount needed to max your 401ks. You can use what would have been going to the student loans to off-set much of this contribution. Student loan payoffs would come from sale of property or cash. Perhaps only pay highest % rate loans soon and delay some since you will only have ~ $130k available tax-free. To consider for later:
you could withdraw some money from inherited retirement account and put the same amount to fill your 401k and the result might be the same tax-wise (pay on the withdrawal, not pay on the 401k contribution).


Put the money in a FDIC insured bank account and/or in a money market at Vanguard while you take your time to deal with your loss and windfall. Look up the windfall page in the Wiki here. You don't want to make any mistakes, so take your time for 6-12 months as needed. You have until next April to do Roth IRAs for this year.

Try using a 2016 tax program to try "what-ifs" on maxing trad 401k, or Roth 401k, if available. The AGI and income from work are used to consider some credits (child tax credit, dependent care credit, etc.), so it is hard to know if maxing the trad has other benefits than just the 15% tax deferment. Essentially transferring some of your inherited retirement money to your retirement money lets you reduce current RMDs so you can defer your money longer. You can withdraw (and pay taxes on) your inherited money anytime, but there is an added penalty on withdrawing your own retirement money until you are ~60. Thus there are advantages either way and it may be good to have some of both.

Is there an IRA or 401k in the inheritance? Setting up the correct inherited title and RMDs would be involved there.

Be very careful about spending much right away as it could easily be squandered if not very careful. Setting up your retirement is more important than children's college investment, because you can't borrow for retirement. Agree that planning a small trip with 5k makes sense.

Perhaps doing a single years' investing for college will make sense later on this year.
Saving some for a house and some for investing might be a good idea later on as well. Some use Ally Bank online for 1% savings and CD accounts. 250k should be the max held in one bank for FDIC insurance coverage.


Vanguard is a good place for investments. The 3-fund portfolio is good. A balanced fund is good, also. Check into PAS management service for 0.3%/year if you don't feel confident on your own. You could discontinue after a year or two if preferred.

People are going to want to "help" you spend this money if you let it be known. So put on your armor and don't let them suggest expensive insurance or investment products, or anything else that transfers your money to them!
Last edited by BL on Fri May 05, 2017 7:41 am, edited 2 times in total.

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celia
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Re: What to do with inheritance

Post by celia » Fri May 05, 2017 1:26 am

radiowave wrote:Can you give us a little more information about the inheritance, whether this is in a taxable account or retirement account (401k/403b, IRA etc.), or both. If some or all is in a taxable account, the cost basis of the funds was set to 0 on you mom's passing so there will not be as big an issue with taxes on long term capital gains if you cash in the assets in a taxable account. If an IRA, you can move those funds to another brokerage, e.g. Vanguard, Fidelity, etc. but you'll have to start paying required minimum distributions if you mom was 70.5 or older (or when that would have occurred).
We need a few clarifications to go with the above.

Retirement accounts (401K, 403b, IRAs, etc) need special handling so that you don't mess up the taxes and the "stretch" on them. They also have Required Minimum Distributions (RMDs) starting in the year after death. These RMDs are calculated differently than if you (or your spouse) had made the contributions to the account. They will be based on your age, instead of the deceased's age.

Money in a taxable account will get a stepped-up value equal to the fair market value on date of death. So anything you sell at this time will have only a small gain or loss (which is the difference between the price on date of death and price received when sold). But the selling does not have to be done at ML. (The sooner you can get the money away from them, the sooner they will start leaving you alone.) If you want to move the money to Vanguard, Vanguard can do that for you and you won't even have to talk to ML. Call Vanguard or whichever company you want to move to.

Robinwantsacracker
Posts: 7
Joined: Thu May 04, 2017 6:44 pm

Re: What to do with inheritance

Post by Robinwantsacracker » Fri May 05, 2017 3:28 am

Thank you everyone for such practical and thoughtful advice.

I'm sure it is obvious that I am just getting my feet wet in this area. I will not be making any investment decisions for at least 6 months with the exception of student loans. I will notify ML to stop all trading. While I'm learning I will likely take the advice to put the money in a vanguard account.

At least 200 k of the inheritance will come from an ira. I have been researching what the implications are - about minimmm distributions and all - and it seems a little complicated.

Another 100 k from a 401k

100k from the sale of property

30 k or so in cash

Thanks again everyone for your advise. Everyone's input has been consistent with my own values and goals, and you are so very helpful.

Take care

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Bogle_Feet
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Re: What to do with inheritance

Post by Bogle_Feet » Fri May 05, 2017 3:46 am

Robinwantsacracker wrote:My mother used Merryl Lynch, and, of course, her financial planner is pressuring me to retain her for my own financial planning. I am wondering if I can handle this myself.
Investing is simple and easy. Pick 2 index funds like SPY and BND. Done. Do not work with ML. Too expensive. Open an account with E Trade or AmeriTrade and DIY.

kmurp
Posts: 251
Joined: Fri Jun 01, 2007 1:53 pm

Re: What to do with inheritance

Post by kmurp » Fri May 05, 2017 4:09 am

I'm no expert but I believe that it's important to re title an inherited IRA with specific language to allow withdrawals to be spread out in a maximum time frame. Google that but I believe it goes something like "John Smith, IRA (deceased on May 21, 2007) F/B/O John Smith Jr., beneficiary".
Schwab has a section regarding some other rules here: http://www.schwab.com/public/schwab/inv ... awal_rules
Sorry about the formatting but I think you can just cut and paste the link. In general, you want to use the life expectancy method in that link to allow you to spread out the withdrawals which are taxable income.

Longdog
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Location: Philadelphia

Re: What to do with inheritance

Post by Longdog » Fri May 05, 2017 4:15 am

Robinwantsacracker wrote:Thank you everyone for such practical and thoughtful advice.

I'm sure it is obvious that I am just getting my feet wet in this area. I will not be making any investment decisions for at least 6 months with the exception of student loans. I will notify ML to stop all trading. While I'm learning I will likely take the advice to put the money in a vanguard account.

At least 200 k of the inheritance will come from an ira. I have been researching what the implications are - about minimmm distributions and all - and it seems a little complicated.

Another 100 k from a 401k

100k from the sale of property

30 k or so in cash

Thanks again everyone for your advise. Everyone's input has been consistent with my own values and goals, and you are so very helpful.

Take care
I'm so sorry for the loss of your mother. It sounds like she was a wonderful person who passed much too soon.

The fact that about 3/4 of the amount is in retirement accounts changes things considerably. Is the IRA a Roth or traditional IRA? If it is a traditional IRA, then any withdrawals will be subject to income tax at your marginal tax rate. The most flexibility will come from the property sale and cash. So you'll have about $130k to do something with in the short term, and the rest more gradually, to minimize the tax bill.
Steve

kmurp
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Re: What to do with inheritance

Post by kmurp » Fri May 05, 2017 4:16 am

kmurp wrote:I'm no expert but I believe that it's important to re title an inherited IRA with specific language to allow withdrawals to be spread out in a maximum time frame. Google that but I believe it goes something like "John Smith, IRA (deceased on May 21, 2007) F/B/O John Smith Jr., beneficiary".
Schwab has a section regarding some other rules here: http://www.schwab.com/public/schwab/inv ... awal_rules
Sorry about the formatting but I think you can just cut and paste the link. In general, you want to use the life expectancy method in that link to allow you to spread out the withdrawals which are taxable income.
Perhaps others can chime in on the inherited 401k rules. Hopefully, that money could also be rolled into the inherited IRA where you could "stretch" the withdrawals over your lifetime to minimize your tax on the withdrawals.

Dyloot
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Re: What to do with inheritance

Post by Dyloot » Fri May 05, 2017 4:18 am

Robinwantsacracker wrote:Thank you everyone for such practical and thoughtful advice.

I'm sure it is obvious that I am just getting my feet wet in this area. I will not be making any investment decisions for at least 6 months with the exception of student loans. I will notify ML to stop all trading. While I'm learning I will likely take the advice to put the money in a vanguard account.

At least 200 k of the inheritance will come from an ira. I have been researching what the implications are - about minimmm distributions and all - and it seems a little complicated.

Another 100 k from a 401k

100k from the sale of property

30 k or so in cash

Thanks again everyone for your advise. Everyone's input has been consistent with my own values and goals, and you are so very helpful.

Take care
I'm sorry for your loss.

You mention in your first post that there are no state/federal taxes. Here you mention that 300k will come from an IRA and 401k. Unless these are Roth, you likely will be responsible for taxes on these.

In my experience with IRAs and inheritances, there are two scenarios that may be applicable.

1) You were named the beneficiary of the IRA. Not the estate, but you, personally. If so, you can convert this IRA to your own IRA and take Minimum Required Distributions (MRDs) based on your own life expectancy as defined by the IRS. This process begins immediately--you must begin withdrawals in year one and continue to make the MRDs until the money is exhausted or you pass away and it becomes part of your estate. You can also just take a lump sum payment, but the tax bill would be huge. Typically folks take the MRDs and spread it over the course of many years to minimize taxes.

2) You were not named the beneficiary of the IRA. For example, your mother's estate was named beneficiary, and you an a beneficiary of the estate. If so, you can convert this IRA to your own IRA and take Minimum Required Distributions based on your mother's life expectancy. This happened with my family last year--my grandfather named his estate as beneficiary, and since he was 86 years old, we had six years to make the MRDs and exhaust the funds. Again--you can collect a lump sum, but the tax hit is huge.

With all that said, I am no expert. :D

Good luck to you, and I wish your family well during this hard time.

aristotelian
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Re: What to do with inheritance

Post by aristotelian » Fri May 05, 2017 6:35 am

The IRA changes things somewhat. You will have the option to receive the IRA money as a lump sum or take it in small amounts over your lifetime. You do not want to do the lump sum unless you absolutely need the money because then you will lose most of it due to it being taxed in a higher tax bracket.

Both the 401K and the IRA will become Inherited IRA's. That is pretty easy, just a matter of filling out some forms. If you want to simplify, the two can be combined into a single Inherited IRA. Because all the funds will be tax deferred you can then reinvest them in whatever funds you want with no tax consequences.

That also means a) you do not need to worry about putting the IRA funds it into tax deferred accounts, because it is already going to be tax deferred, and b) you will not have the option of putting it all directly into 529's.

My plan would be:
Convert 401K and IRA to Inherited IRA's in your name. Transfer to Vanguard or brokerage of choice and consolidate. Invest in Target Date retirement fund or something simple.

Take $100K from property sale to pay off student loans.

Use the rest for emergency fund and your next vacation.

Boglegrappler
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Re: What to do with inheritance

Post by Boglegrappler » Fri May 05, 2017 7:03 am

I think paying your 6% student loans down makes sense.

That leaves you with what's left, but as you've said, some of that is in an IRA. Note that if its in a traditional IRA (meaning all the distributions are taxable to you), you shouldn't think of it as being $200,000, because it isn't. It's that, less your current marginal tax rate, roughly speaking, so maybe you think of it as 150,000 or so (at a 25% tax rate). If its a Roth IRA, then that's different and there are no income taxes on obtaining the funds.

I've told my kids that inheritances should be thought of in perpetuity. That means that I think if someone has $100,000 he should budget to spend the after-tax return that would be generated by dividends from that amount. Using an S&P500 index dividend yield today of just under 2%, $100k would generate $2000/year in pretax income, or about $1500/year in after tax income. If you spend about that amount, you'll still have the "body" of the investment over time, and through appreciation it should keep pace with inflation.

The point I'd make is that this amount is not as life changing as it might seem at first. Especially not in the long run. Go carefully. The good news is that if you had the mentality to find this website, you'll be able to manage your own assets decently.

Good luck.

Jack FFR1846
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Re: What to do with inheritance

Post by Jack FFR1846 » Fri May 05, 2017 7:30 am

Let's see if I understand this.

$200k are in her IRA. I would say to move this to a low cost provider like Vanguard as an inherited IRA. You'll have to take RMDs based on her age when the time comes. I think leaving it and then taking withdrawals as needed or as the RMD requirements come would be a good plan.

$100k? House sale? Counting chickens and all. Do nothing until you have settled funds. Consider this to be student loan payoff.

$100k in cash. You don't mention Roth accounts. If you have not contributed for 2017, there's $11k. Up the 401k contributions to max (full $18k each).

Beyond that, your emergency fund is way too low. I really like to see a full year of income sitting in a CD. Capital One 360 has a 2.3% 5 year CD. Consider this. If you did need the money in less than 5 years, you could break the CD, paying the penalty for early withdrawal.

Extra mortgage payments: As money settles and comes in, don't be afraid to make more mortgage payments. I'm one of the few here who absolutely HATE any debt and I paid off my mortgage early and have not regretted it for a moment. It's guaranteed saving of the interest. I am sure others here will disagree with me. I just don't like debt.

With this plan, you rid yourself of the student loans, make extra mortgage payments easy, have periodic income (from the IRA) and set yourself up for retirement. You're not going to have a heck of a lot of extra beyond this. Using extra income towards max 401ks and Roths each year is a good way to use the IRA withdrawals and any pent up cash. I would tend to buy iBonds rather than 529s first as you get the tax benefits for college use without the restrictions that 529s put on you. As you approach college, absolutely pay off the mortgage. FAFSA penalizes you for income and for assets like 529s and ibonds but is blind to your home. This is also another reason why you want to fill up all retirement space as much as possible.
Bogle: Smart Beta is stupid

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BL
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Re: What to do with inheritance

Post by BL » Fri May 05, 2017 7:52 am

BL wrote:EDITED: Below advice was based on it not being retirement accounts. I will try to do some changes based on that.

Both of you could increase your 401k contributions up to 18,000 each, and use up to that amount from the IRAs/401Ks which you will pay tax on inheritance. Doing this and paying off student loans should be done fairly soon considered carefully. Set up your emergency fund as well, and set aside the amount needed to max your 401ks. You can use what would have been going to the student loans to off-set much of this contribution. Student loan payoffs would come from sale of property or cash. Perhaps only pay highest % rate loans soon and delay some since you will only have ~ $130k available tax-free. To consider for later:
you could withdraw some money from inherited retirement account and put the same amount to fill your 401k and the result might be the same tax-wise (pay on the withdrawal, not pay on the 401k contribution).


Put the money in a FDIC insured bank account and/or in a money market at Vanguard while you take your time to deal with your loss and windfall. Look up the windfall page in the Wiki here. You don't want to make any mistakes, so take your time for 6-12 months as needed. You have until next April to do Roth IRAs for this year.

Try using a 2016 tax program to try "what-ifs" on maxing trad 401k, or Roth 401k, if available. The AGI and income from work are used to consider some credits (child tax credit, dependent care credit, etc.), so it is hard to know if maxing the trad has other benefits than just the 15% tax deferment. Essentially transferring some of your inherited retirement money to your retirement money lets you reduce current RMDs so you can defer your money longer. You can withdraw (and pay taxes on) your inherited money anytime, but there is an added penalty on withdrawing your own retirement money until you are ~60. Thus there are advantages either way and it may be good to have some of both.

Is there an IRA or 401k in the inheritance? Setting up the correct inherited title and RMDs would be involved there.

Be very careful about spending much right away as it could easily be squandered if not very careful. Setting up your retirement is more important than children's college investment, because you can't borrow for retirement. Agree that planning a small trip with 5k makes sense.

Perhaps doing a single years' investing for college will make sense later on this year.
Saving some for a house and some for investing might be a good idea later on as well. Some use Ally Bank online for 1% savings and CD accounts. 250k should be the max held in one bank for FDIC insurance coverage.


Vanguard is a good place for investments. The 3-fund portfolio is good. A balanced fund is good, also. Check into PAS management service for 0.3%/year if you don't feel confident on your own. You could discontinue after a year or two if preferred.

People are going to want to "help" you spend this money if you let it be known. So put on your armor and don't let them suggest expensive insurance or investment products, or anything else that transfers your money to them!

Penguin
Posts: 543
Joined: Sat Mar 03, 2007 1:52 pm

Re: What to do with inheritance

Post by Penguin » Fri May 05, 2017 7:54 am

Jack says:
$200k are in her IRA. I would say to move this to a low cost provider like Vanguard as an inherited IRA. You'll have to take RMDs based on her age when the time comes. I think leaving it and then taking withdrawals as needed or as the RMD requirements come would be a good plan.
You will have to start taking distributions the year after mother's death based on your own age. This assumes mother died before age 70 1/2.
Owner Died Before Required Beginning Date
If the owner died before his or her required beginning date (defined earlier), and you are the designated beneficiary, you generally must base required minimum distributions for years after the year of the owner's death using your single life expectancy shown on Table I in Appendix B as determined under Beneficiary an individual, later.
Jon

Grt2bOutdoors
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Location: New York

Re: What to do with inheritance

Post by Grt2bOutdoors » Fri May 05, 2017 8:08 am

Robinwantsacracker wrote:Thank you everyone for such practical and thoughtful advice.

I'm sure it is obvious that I am just getting my feet wet in this area. I will not be making any investment decisions for at least 6 months with the exception of student loans. I will notify ML to stop all trading. While I'm learning I will likely take the advice to put the money in a vanguard account.

At least 200 k of the inheritance will come from an ira. I have been researching what the implications are - about minimmm distributions and all - and it seems a little complicated.

Another 100 k from a 401k

100k from the sale of property

30 k or so in cash

Thanks again everyone for your advise. Everyone's input has been consistent with my own values and goals, and you are so very helpful.

Take care
Very sorry for your loss. Welcome to the forum! Vanguard is your friend, here are the rules for inheriting an IRA from a non-spouse (mother).

Here ---> https://personal.vanguard.com/us/insigh ... ira-072014

and here ---> https://investor.vanguard.com/inherit/ira

and here-----> https://investor.vanguard.com/inherit/ira-rmd

and the ultimate source but one that requires alot of your time to sift through and understand -https://www.irs.gov/publications/p590b/ ... 1000230538

Do you happen to know what type of IRA it is? Is it a Traditional IRA or a Roth IRA? Other things you may want to consider with the IRA - since the IRS considers the beneficiaries life expectancy in the determination of required minimum distributions and given your current age, your mother's investments may or may not be age and risk appropriate for you. This is a decision you need to make, but again, do not feel rushed to do so, I would take your time in researching this, you could even take a year, no real rush there. If you haven't read the wiki's recommended reading list there are a number of good books out there and your local library may have them in the bookstacks (electronic or real :wink: ). In the mean time, while this is directed at millenials, it's still a good read and it can be found here ----> https://www.etf.com/docs/IfYouCan.pdf

Come back and continue asking questions, we'll help you through it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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CyclingDuo
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Re: What to do with inheritance

Post by CyclingDuo » Fri May 05, 2017 8:48 am

CAsage wrote: 2) If you have any retirement options available (401k, IRA) begin funding them now. I don't think there are any 'lump sum' things available, but you can certainly put the full amount towards an IRA for each of you (which one depends on tax bracket...) and increasing a 401k to the max this year and from now on.
Obviously, the suggestion to contribute to the employer/employee 401k/403b is first from salary, and one could boost that to the max for a year or two or more and use the inherited money as your "salary replacement" for those years as a strategy to get money moved into tax deferred vehicles. The other is to use the inherited money to fully fund IRA's for a few years.

Those are both ideal strategies to explore first - in our opinions.

However, there is a third option.

A couple of people have raised the concept about no "things" available to put a lump sum chunk into tax deferred. Actually there are some low cost products available to set aside money for retirement tax deferred.

Both Vanguard and Fidelity have tax deferred annuities available that allow you to invest in underlying mutual funds, and pay the annuity "wrap" fee for the account's management. Fidelity's wrap is .25 and they have over 55 funds you can invest in within the plan (and exchange back and forth). Vanguard's wrap is .29 and they have 17 "portfolios" you can invest in. Vanguard's "portfolios" contain one's desired mix of investing goals.

Fidelity: https://www.fidelity.com/annuities/FPRA ... y/overview

Vanguard: https://investor.vanguard.com/annuity/variable

We personally use the Fidelity with all of it being in their S&P 500 Index fund with an ER of .1 which, when combined with the .25 annual wrap fee, is .35 (ER). Not too bad of an expense fee, and it at least provided enough of a place to keep some money tax-deferred until retirement. Penalty to withdraw before 59 1/2, but no required age where you must take withdrawals.

This could be a considered option for inheriting a chunk of money, and looking for a place to put a chunk of it in a tax-deferred vehicle until retirement if options 1 and 2 have been fully explored and maxed out, or not enough to shelter the amount of "inherited or windfall" chunk of money one is considering.

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BL
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Re: What to do with inheritance

Post by BL » Fri May 05, 2017 2:04 pm

At 120k income, I see no need to use annuities, although the Fidelity or Vanguard ones are a reasonable choice if one wanted one, rather than the very expensive ones that ML or other advisors would try to sell with huge surrender fees. Most of this inheritance is already in a tax-deferred status.

I don't see that you are set for life, but this can put you into a much better situation going forward with debts paid off and being "caught up" on retirement savings, so you can go forward with more confidence in achieving the things you need and a few of the "wants" as well.

This can also be a good time to check on your personal finance situation.
If you don't have enough life insurance, this might be a time to consider low cost term insurance for each parent for perhaps 20 years. The kids would probably be eligible for Social Security until 18 or through h.s. Parent might get some if not earning too much and child is under 16??

Even checking liability in car insurance to see if you have enough coverage is a good idea. You are slightly more vulnerable to being sued since you have more assets. Not sure if inherited IRAs are as protected from legal claims as your own may be.

Jane Bryant Quinn has good advice on many subjects in a nice big reference book that maybe can be checked out from your library, Making the Most of Your Money Now: The Classic Bestseller Completely Revised for the New Economy.
Did I mention the advice in a nutshell pdf, If You Can?
https://www.etf.com/docs/IfYouCan.pdf

Robinwantsacracker
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Re: What to do with inheritance

Post by Robinwantsacracker » Fri May 05, 2017 7:25 pm

BL wrote:At 120k income, I see no need to use annuities, although the Fidelity or Vanguard ones are a reasonable choice if one wanted one, rather than the very expensive ones that ML or other advisors would try to sell with huge surrender fees. Most of this inheritance is already in a tax-deferred status.

I don't see that you are set for life, but this can put you into a much better situation going forward with debts paid off and being "caught up" on retirement savings, so you can go forward with more confidence in achieving the things you need and a few of the "wants" as well.

This can also be a good time to check on your personal finance situation.
If you don't have enough life insurance, this might be a time to consider low cost term insurance for each parent for perhaps 20 years. The kids would probably be eligible for Social Security until 18 or through h.s. Parent might get some if not earning too much and child is under 16??

Even checking liability in car insurance to see if you have enough coverage is a good idea. You are slightly more vulnerable to being sued since you have more assets. Not sure if inherited IRAs are as protected from legal claims as your own may be.

Jane Bryant Quinn has good advice on many subjects in a nice big reference book that maybe can be checked out from your library, Making the Most of Your Money Now: The Classic Bestseller Completely Revised for the New Economy.
Did I mention the advice in a nutshell pdf, If You Can?
https://www.etf.com/docs/IfYouCan.pdf
This is good advice about considering insurance as I am addressing our changing financial plan.

We were sold insurance products when I was 19 that I have since come to realize are not ideal. My husband has a universal life policy that is more expensive than I would like for 200 k. I have since cancelled my own universal life policy in place of an inexpensive term policy for 500 k 20 year term. My husband is a pilot and I have not been able to secure alternative insurance for him, so I have held onto those silly products we got before he entered that industry. He also has about 200 k of life coverage through his employer and would almost certainly be offered some coverage if he were to change jobs in the future.

We have a 2 mil umbrella policy, disability, and long-term care insurance. I can't think of any changes we would need to make to our wills.

I agree that this is not a "quit our jobs/set for life" amount of money - however it is significant for our family and does warrant careful consideration of how if will impact our financial picture. Our general goals are the same as before the inheritance, and we view this money as a way to speed up the timeline of what we were already working towards while providing additional security and stability. Our spending habits and day-to-day budget will not change much, but we will certainly be a lot better off in the long-run. We will sleep easier at night without our student loans looming over us, and knowing that we are better prepared for retirement and that our children will have their education funded.

Thanks again everyone for your thoughtful advise. If I did not reply to you individually, I did read your comments and will carefully consider the advise of every poster. I found the "if you can" article particularly interesting.

You all are tremendously helpful.

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Raymond
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Re: What to do with inheritance

Post by Raymond » Fri May 05, 2017 7:43 pm

Sorry for your loss.

The only thing I can contribute is for you and your husband to keep your lips sealed about the inheritance.

The less people around you know about it, the better - otherwise long-lost relatives and "friends" may come sniffing around.

This includes "financial professionals" - as William Bernstein writes in "If You Can" (.pdf file):

...If you act on the assumption that every broker, insurance salesman, mutual fund salesperson, and financial advisor you encounter is a hardened criminal, you will do just fine...
"Ritter, Tod und Teufel"

Robinwantsacracker
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Re: What to do with inheritance

Post by Robinwantsacracker » Fri May 05, 2017 8:17 pm

Clarification about the details of the inheritance: previous numbers were a rough estimate:

Property sale: 100k
Cash: 25 k
Non-retirement investments: 120k
Traditional ira: 105k
Non-probate pension disbursement: 50k - unsure exact details of this

I am looking at the historical date of death valuation from ML. They handled moms non-retirement as well as retirement accounts. I don't really understand what I'm looking at here.

I need to research more about the implications of inheriting a traditional ira? I was a named beneficiary (along with my three sisters - we are the only heirs - all numbers I have provided are my portion of the estate). It seems that the ira will be non-probate but will be taxed at my marginal tax rate when I take a disbursement - and there will be mandatory disbursemenrs of some kind? Is it beneficial to take a disbursement and make a co tribute on to my own ira in the same year to mitigate tax liability? Since I was not the spouse of the deceased, I cannot simply use this as my own ira? My goal is to maximize tax deferred investment options, but I have to take mandatory disbursements from moms ira, pay taxes, and then I could put that same money into my own ira? I feel like I'm going in circles.

I assume that shares of non-retirement investments will be divided among the heirs. Does each heir decide if/when to liquidate portions of her inherited sharesthat are currently invested? I know it is impossible to time the marked but is there general advice about how to divest/reinvest or when to cash out if I were to use some of the job-retirement money for immediate use for student loans etc.

I will not be discussing this inheritance with anyone other than the other heirs and my husband. This is a good reminder to maintain this social boundary. We are fairly private people,and do not have any toxic relationships with friends or family. Talk of money is generally off limits, and I do not make a habit of boasting about money/belongings in social settings. We are not at all concerned with status.

Thanks again.

aristotelian
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Re: What to do with inheritance

Post by aristotelian » Fri May 05, 2017 8:40 pm

Robinwantsacracker wrote:
I am looking at the historical date of death valuation from ML. They handled moms non-retirement as well as retirement accounts. I don't really understand what I'm looking at here.

I need to research more about the implications of inheriting a traditional ira? I was a named beneficiary (along with my three sisters - we are the only heirs - all numbers I have provided are my portion of the estate). It seems that the ira will be non-probate but will be taxed at my marginal tax rate when I take a disbursement - and there will be mandatory disbursemenrs of some kind? Is it beneficial to take a disbursement and make a co tribute on to my own ira in the same year to mitigate tax liability? Since I was not the spouse of the deceased, I cannot simply use this as my own ira? My goal is to maximize tax deferred investment options, but I have to take mandatory disbursements from moms ira, pay taxes, and then I could put that same money into my own ira? I feel like I'm going in circles.

I assume that shares of non-retirement investments will be divided among the heirs. Does each heir decide if/when to liquidate portions of her inherited sharesthat are currently invested? I know it is impossible to time the marked but is there general advice about how to divest/reinvest or when to cash out if I were to use some of the job-retirement money for immediate use for student loans etc.

I will not be discussing this inheritance with anyone other than the other heirs and my husband. This is a good reminder to maintain this social boundary. We are fairly private people,and do not have any toxic relationships with friends or family. Talk of money is generally off limits, and I do not make a habit of boasting about money/belongings in social settings. We are not at all concerned with status.

Thanks again.
For the IRA, I believe your understanding is correct and the answer to all your questions is yes. You could take it as a lump sum but you generally don't want to do that because it will put you in a higher tax bracket. Your other choices are to take it over 5 years or over your lifetime. Since it is not a huge amount of money, you might want to do the 5 year plan.

Nothing would preclude you from using the funds to make your own annual IRA contributions or to offset contributions to your employer plan. If you are already maxing those out, then you could deposit the distributions into your taxable brokerage account.

Chadnudj
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Re: What to do with inheritance

Post by Chadnudj » Fri May 05, 2017 8:45 pm

Sorry for your loss.

One practical idea I can offer you -- once you pay off your student loans (perhaps with the cash portion of the sale of the property), continue to make your student loan payments but into 529 accounts for your kids. It's basically the same Boglehead-ish principle of paying your car payment to yourself once you pay off your car (for the next car you buy). This will also keep you honest and reduce the likelihood of any lifestyle inflation wrecking your current plan/progress.

Just my 2 cents....good luck, and again, sorry for your loss.

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Watty
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Re: What to do with inheritance

Post by Watty » Fri May 05, 2017 9:12 pm

Iorek wrote:Second, the wiki has a good section on windfalls (including inheritances)-- https://www.bogleheads.org/wiki/Managing_a_windfall
The basic advice is to put aside 6-12 months in a bank account and the rest in another bank account or CDs and not make any big decisions about how to invest or spend the money for 6-12 months.
I agree mostly agree with this since it will take a while to feel comfortable with your choices.

Paying off the students loans right away would make sense to me since the interest rate is so high.

Something I have not seen mentioned is that now that you have more assets you are more likely to be sued.

You should review your car insurance and get an umbrella policy if you don't already have one.

Something else that has not been mentioned is that you should also consider the possibility that you might get divorced some day. No one plans on it and I seen couples that seemed great but still ended up splitting up later on. It would be good to consider that and talk it over with your spouse and then maybe have some sort of postnuptial agreement covering the inheritance drawn up by a lawyer.

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BL
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Re: What to do with inheritance

Post by BL » Fri May 05, 2017 9:40 pm

It looks like you have less IRA and more taxable than I thought. I would plan to do just RMDs and not necessarily do extra withdrawals from the IRA. Use the taxable left after paying off loans and emergency fund to invest in Roth IRAs as eligible, and to cover any shortfall so you can take the max 401k deductions. This would save on taxes, as only capital gains would be taxed if above 15% tax bracket, and that would be on long-term gains since date of death.

Inheritances are individual property. You own it and have an individual claim to it apart from spouse and joint income during marriage. Not sure what actions would make it a joint ownership, but some of the plans we suggested would probably make it co-mingled with your spouse. Not sure whether to suggest you talk to a lawyer, but you should at least be aware of what you are doing.

delamer
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Re: What to do with inheritance

Post by delamer » Fri May 05, 2017 9:48 pm

BL wrote:It looks like you have less IRA and more taxable than I thought. I would plan to do just RMDs and not necessarily do extra withdrawals from the IRA. Use the taxable left after paying off loans and emergency fund to invest in Roth IRAs as eligible, and to cover any shortfall so you can take the max 401k deductions. This would save on taxes, as only capital gains would be taxed if above 15% tax bracket, and that would be on long-term gains since date of death.

Inheritances are individual property. You own it and have an individual claim to it apart from spouse and joint income during marriage. Not sure what actions would make it a joint ownership, but some of the plans we suggested would probably make it co-mingled with your spouse. Not sure whether to suggest you talk to a lawyer, but you should at least be aware of what you are doing.
The IRA can only be the the OP's name. If she keeps the other assets in an individual, not joint, account that would establish them as non-marital property. I know that's necessary, if not sufficient. I assume if she puts money in the kids' 529s or pays down his student loans then she loses that protection.

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Re: What to do with inheritance

Post by Robinwantsacracker » Sat May 06, 2017 11:18 am

I have gotten some advice about weather or not then inheritance should be comingled with family money. I have a truly wonderful marriage - we married when I was 19, sort of feel like we grew up together. We are quite happy.

We made the decision to take out loans for my husband's education as a family, and I feel strongly about using this inheritance to pay off the student loans. I made just as much of a commitment to pay them off as he did. Although I did not need student loans for my own education, he supported me emotionally during he time I was in college, and I consider the student loans a family debt. I am comfortable Commingling funds in the kids' 529 disincentive he shares my goal to be able to help hem with their education. If he makes off with some extra retirement of investment income if we were to divorce, then so be it.

Even in the worst case scenario if he were to leave me for another woman etc. (which he is loyal to a fault, and it seems completely inconceivable - but I suppose anything is possible), I don't really have a problem with considering the inheritance a marital asset. The only circumstance I could imagine having a hard time with it is if he were to succumb to some sort of addiction. For our entire marriage he has been without any vice at all, so he is either really good at hiding it or he is actually a really wonderful person ( my opinion is hat he is the latter).

Thanks again for the thoughtful discussion.

inbox788
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Re: What to do with inheritance

Post by inbox788 » Sat May 06, 2017 5:47 pm

Robinwantsacracker wrote:At least 200 k of the inheritance will come from an ira. I have been researching what the implications are - about minimmm distributions and all - and it seems a little complicated.

Another 100 k from a 401k

100k from the sale of property

30 k or so in cash
I didn't get if you mentioned who was the executor. Are there other heirs? Are accounts being split?

Be careful how the accounts are liquidated so they don't inadvertently lose their tax advantage status.

How old was deceased? Look into Stretch IRA! You may be able to roll the 401k into the IRA too!

Record all step-up basis dates and values. Get cash from complex transactions like property sale and put it in a 1%+ savings account for now until you figure out how you want to invest it.

It is a little complicated, but you're not likely to receive much help unless you're very lucky and find a very good person who knows what they're doing (and doesn't charge a hefty fee). It's very possible, if not likely that you find someone that will charge you a lot up front, make some big financial mistakes that are costly, and put you into investments that cost you even more far into the future. Spend the time to learn and take it one step at a time. There's not much you need to do right away, and there's lots of things you should avoid (i.e. life insurance, annuities, complex/high fee investments, etc.)

[looks like you've already encountered some mistakes in universal life -- avoid these salespeople!]

Sandi_k
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Re: What to do with inheritance

Post by Sandi_k » Sat May 06, 2017 7:38 pm

If your husband is a pilot, he should be able to get term insurance via AOPA - the Aircraft Owners' and Pilots' Association. My DH has 20 year term life from them, and is insured with Minnesota Western Life. Very reasonable.

Billionaire
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Re: What to do with inheritance

Post by Billionaire » Sat May 06, 2017 7:42 pm

You've received a lot of good advice, but as an aside you really should know the balance of your personal retirement accounts. I'd guess you are closing in on $100,000.00 and should have that invested accordingly.

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knpstr
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Re: What to do with inheritance

Post by knpstr » Sat May 06, 2017 7:57 pm

Be debt free, house and student loans
Fully fund emergency fund
vacation if you'd like
Invest the rest in VFIAX
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

Robinwantsacracker
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Re: What to do with inheritance

Post by Robinwantsacracker » Sat May 06, 2017 8:00 pm

I am the executor. I am one of 4 heirs: myself and 3 sisters. All of my sisters are extremely amicable, we are close but not 'enmeshed'. We all have similar financial goals and everyone is being extremely reasonable. No animosity at all. None of us are fighting over table lamps or anything... The estate is simple, and I have started the probate process without an attorney. I feel confident that I can manage it myself.

The total value of the estate is 1.6 mil, to be split among us 4 equally.

I will look into the insurance option mentioned. Very good to know :)

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Watty
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Re: What to do with inheritance

Post by Watty » Sat May 06, 2017 11:16 pm

Robinwantsacracker wrote:The estate is simple, and I have started the probate process without an attorney. I feel confident that I can manage it myself.

The total value of the estate is 1.6 mil,
From your posts you sound overwhelmed and still grieving so even if you could do it all yourself there is no need to.

Money spent on a lawyer would be well spent just to make things easier on your and might allow you to get the estate closed quicker.

As the executor you also have a lot of potential legal liability so having a lawyer involved could help you avoid some unexpected problem. Do not be shy about interviewing several lawyers to find one that you feel comfortable working with.

There will be all sorts of tax issues so you should pay to have the estates taxes professionally done too.

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