I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

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Lafinca
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I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Lafinca » Fri May 04, 2018 8:41 am

I am wondering if the magic of compound interest would suggest that instead of adding money to a Roth IRA, perhaps I should instead just add that money to this million dollars which is invested in Vanguard ETFs. I am 36 with a one year old. I have a very modest 401k at work and my husband has 100k in his IRA. We own our home free and clear but I don’t know if the money will grow more in a taxable brokerage account that already has one million dollars or in a new tax free Roth IRA - or maybe it makes no difference???

Tamalak
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Tamalak » Fri May 04, 2018 9:02 am

If you have two accounts with 1 million dollars each in them, and the market goes up 10%, you've made $200,000

If you instead have one account with 2 million dollars in it, and the market goes up 10%, you've made $200,000

dbr
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by dbr » Fri May 04, 2018 9:09 am

If you have a pool of after tax money getting as much of that as possible placed in a Roth would be to your advantage, but the maximum annual contribution allowed for a Roth ($5500/$6500 per person) is so small that the option is irrelevant. Placing the money in tax deferred I bonds is also irrelevant due to similarly low annual purchase limits. What you mean by compounding, I have no idea. All investment returns compound in the sense that each year's return is earned on whatever has been already accumulated at that time.

magicrat
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by magicrat » Fri May 04, 2018 9:19 am

Max out all tax advantaged space you have access to, every year.

soccerrules
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by soccerrules » Fri May 04, 2018 9:27 am

if you have after tax money to put in an investment (for retirement) -- most would choose putting the maximum $5500/6500/ year in a Roth IRA over placing the same amount in an after tax brokerage account.
The Roth offers better tax benefits for you and your beneficiaries.
Between now and age 60 you can accumulate put $142K (+ gains) into a Roth (assuming limits stay the same). That is likely to be a small portion of all your HH assets, but tax free income which is THE benefit of the Roth IRA.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Watty
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Watty » Fri May 04, 2018 9:30 am

Lafinca wrote:
Fri May 04, 2018 8:41 am
I have a very modest 401k at work...
If you are eligible for an IRA or Roth IRA then contributing to those is a slam dunk easy choice because of the tax advantages.

You should also max out your 401k. You have to do this through payroll deductions so your would need to do something like increase your monthly 401k contributions by $1,000 and then take $750 a month out of the inherited account if you need that to live on. The difference in the numbers is assuming you are in the 25% tax bracket, but you would need to figure out your own tax rate.

bltn
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by bltn » Fri May 04, 2018 9:48 am

Tamalak wrote:
Fri May 04, 2018 9:02 am
If you have two accounts with 1 million dollars each in them, and the market goes up 10%, you've made $200,000

If you instead have one account with 2 million dollars in it, and the market goes up 10%, you've made $200,000
But, if one of the accounts is a Roth, the earnings are tax free for that account.

sport
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by sport » Fri May 04, 2018 9:55 am

A taxable account and a Roth account will have the same growth. However, the Roth account is tax free. Tax free is much better than paying taxes.
Last edited by sport on Fri May 04, 2018 9:55 am, edited 1 time in total.

MotoTrojan
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by MotoTrojan » Fri May 04, 2018 9:55 am

A $1M account will compound/grow the same as 1 million $1 accounts.

If you can afford it, max out the Roth and the 401k. If you can't and the market goes down (this $1M is a loss) you should tax-loss harvest, with some of the harvesting going into your Roth/401k. Doing this into your Roth is the perfect scenario; you get the write-off a loss, don't change exposure, and get tax-free growth from a lower basis.

This may be entirely too complicated to understand if you are new, and is not totally necessary, so apologies if all I did was confuse you. At a minimum, focus on the Roth & 401k being maxed before even thinking about taxable investing.

What is the $1M invested in now?

JW-Retired
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by JW-Retired » Fri May 04, 2018 9:57 am

Watty wrote:
Fri May 04, 2018 9:30 am
Lafinca wrote:
Fri May 04, 2018 8:41 am
I have a very modest 401k at work...
If you are eligible for an IRA or Roth IRA then contributing to those is a slam dunk easy choice because of the tax advantages.

You should also max out your 401k. You have to do this through payroll deductions so you would need to do something like increase your monthly 401k contributions by $1,000 and then take $750 a month out of the inherited account if you need that to live on.
Yes, do this.
JW
Retired at Last

Lafinca
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Lafinca » Fri May 04, 2018 12:01 pm

Thank you all so much - I am new to this and I don’t want to make unnecessary mistakes. It makes sense what you all are saying, there is no “growth” advantage to adding more money to the inherited brokerage account, versus putting it every year into a ROTH IRA that I will open up today. I can certainly understand that the tax saving are huge but I didn’t know if those tax savings were offset by some additional growth I’d be missing out on by not adding the money to the million dollar brokerage account. It seems like a silly question but this is all very new to me. We are fortunate to be able to live off of our earned income right now - so I want to invest as much as we can and not take any distributions from the brokerage account- although with another baby on the way and maybe taking a year off from work again to be with my baby, we may need to draw on that brokerage account for a few months. Thank you all very much for the advice - based on your input I think it’s best if my husband and I open up two Roth IRAs, max them out and max out 401ks at work - after that we won’t have enough in savings to invest more in the brokerage accounts but we also probably won’t need to take any money from the brokerage account either. In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.

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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by uberdoc » Fri May 04, 2018 12:05 pm

the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
All good but we have doubts about this line of thinking.

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BeBH65
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by BeBH65 » Fri May 04, 2018 12:07 pm

Lafinca wrote:
Fri May 04, 2018 12:01 pm
In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
On this forum we do not like to time the market as no-one can predict the future.
Additionally on this forum we do not like to guess which sector will be doing well next, that a sector has been doing well does not say anyting about the future.

Please have a look at the table of sectorreturns in USfunds periodic table sector returns. Can you determine what will be the hot secotr of next year?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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David Jay
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by David Jay » Fri May 04, 2018 12:09 pm

magicrat wrote:
Fri May 04, 2018 9:19 am
Max out all tax advantaged space you have access to, every year.
This.

Max out your 401K and take the equivalent living expenses out of your inherited funds.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

FoolMeOnce
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by FoolMeOnce » Fri May 04, 2018 12:19 pm

Lafinca wrote:
Fri May 04, 2018 12:01 pm
In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
Vanguard's Total US Stock Market ETF returned over 21% last year. So did the S&P500. http://performance.morningstar.com/fund ... ture=en_US

Moving from sector to sector and having all the assets sit on the sidelines for a few weeks or months waiting to time the market is a good way to blow your inheritance. And waiting for them to go up before selling and moving to your desired allocation is a good way to pay more taxes.

Read the wiki. Start here: http://performance.morningstar.com/fund ... ture=en_US

Consider transitioning to a two or three fund portfolio, or just use a Target Date fund. https://www.bogleheads.org/wiki/Three-fund_portfolio

Lafinca
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Lafinca » Fri May 04, 2018 12:44 pm

This gives us much to think about. Thank you - I’m going to research these all.

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William4u
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by William4u » Fri May 04, 2018 12:51 pm

dbr wrote:
Fri May 04, 2018 9:09 am
If you have a pool of after tax money getting as much of that as possible placed in a Roth would be to your advantage, but the maximum annual contribution allowed for a Roth ($5500/$6500 per person) is so small that the option is irrelevant. Placing the money in tax deferred I bonds is also irrelevant due to similarly low annual purchase limits. What you mean by compounding, I have no idea. All investment returns compound in the sense that each year's return is earned on whatever has been already accumulated at that time.
If someone young maxes out his/her Roth annually and leaves it in a vanguard fund, he/she is could have over a million dollars in that Roth when retirement comes. That is pretty nice, and a helpful tax strategy.

Boxtrap
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Boxtrap » Fri May 04, 2018 12:52 pm

David Jay wrote:
Fri May 04, 2018 12:09 pm
magicrat wrote:
Fri May 04, 2018 9:19 am
Max out all tax advantaged space you have access to, every year.
This.

Max out your 401K and take the equivalent living expenses out of your inherited funds.
Agreed. I would max out 401k and IRA options and take the equivalent out of the taxable account with the inherited money to offset and live on. As others have said, there is no growth advantage based on number of accounts you use with the money. This is about the tax benefits you can reap, which shouldn't be ignored. With the rest of the inherited money, don't give yourself an ulcer trying to time the market or guess what cannot possibly be known. That's a large chunk of money that will grow over the long haul if you don't fiddle with it by attempting to time.

WhiteMaxima
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by WhiteMaxima » Fri May 04, 2018 12:56 pm

1 mil buys you 3.3 share of BRKA. No dividend every paid so no cap gain and dividend tax until you sell. After you retired before RMD and SS, convert it to BRAKB and start to sell, keep cap gain a bit below your target tax rate and hopefully zero.

dbr
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by dbr » Fri May 04, 2018 1:19 pm

William4u wrote:
Fri May 04, 2018 12:51 pm
dbr wrote:
Fri May 04, 2018 9:09 am
If you have a pool of after tax money getting as much of that as possible placed in a Roth would be to your advantage, but the maximum annual contribution allowed for a Roth ($5500/$6500 per person) is so small that the option is irrelevant. Placing the money in tax deferred I bonds is also irrelevant due to similarly low annual purchase limits. What you mean by compounding, I have no idea. All investment returns compound in the sense that each year's return is earned on whatever has been already accumulated at that time.
If someone young maxes out his/her Roth annually and leaves it in a vanguard fund, he/she is could have over a million dollars in that Roth when retirement comes. That is pretty nice, and a helpful tax strategy.
Right. But the question at hand is what to do with a million dollars he has now. That money can't be put in a Roth today though the OP is written to imply that idea.

Lafinca
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Lafinca » Fri May 04, 2018 1:58 pm

Yes- we can only put $5,500 each in our new Roth IRAs-but it is better than nothing. I did not realize Berkshire Hathaway stock was available for purchase by the public - I’m going to look into that. Thank you too for the suggestion that I not give myself an ulcer thinking about timing - there is a steep learning curve for me with investing, I sincerely appreciate everyone’s input. We want to make good use of what my grandparents worked and sacrificed to leave us.

MotoTrojan
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by MotoTrojan » Fri May 04, 2018 2:00 pm

Very dangerous tendencies going on here. Two/three fund is what you should work towards. Assuming basis isn’t too low, I’d sell/exchange soon and then truly let it go for decades.

delamer
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by delamer » Fri May 04, 2018 2:01 pm

Lafinca wrote:
Fri May 04, 2018 12:44 pm
This gives us much to think about. Thank you - I’m going to research these all.

Read this: http://www.etf.com/docs/IfYouCan.pdf

soccerrules
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by soccerrules » Fri May 04, 2018 2:13 pm

Lafinca wrote:
Fri May 04, 2018 1:58 pm
Yes- we can only put $5,500 each in our new Roth IRAs-but it is better than nothing. I did not realize Berkshire Hathaway stock was available for purchase by the public - I’m going to look into that. Thank you too for the suggestion that I not give myself an ulcer thinking about timing - there is a steep learning curve for me with investing, I sincerely appreciate everyone’s input. We want to make good use of what my grandparents worked and sacrificed to leave us.
Lafinca-
If you inherited $1M I would not do anything until you READ and understand WHY you are making these moves. Although I agree that most of the advice you will get here on BH is very helpful-- it is so important to make sure you understand and believe it is in YOUR best interests.

Read the Wiki's, this forum and a few of the books under suggested reading. Take it slow. Once you understand the basics (Asset Allocation, Tax Deferred vs taxable, Traditional IRA and Roth IRA) then you will be ready to make a plan.

After reading I would come back and layout your entire financial picture (age, tax brackets, income, debt, financial assets and where they are currently invested, goals etc) Once you read a few of the posts where other posters have asked for advice- you will get the idea of how/what to post.
Don't let your outflow exceed your income or your upkeep will be your downfall.

FoolMeOnce
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by FoolMeOnce » Fri May 04, 2018 3:50 pm

WhiteMaxima wrote:
Fri May 04, 2018 12:56 pm
1 mil buys you 3.3 share of BRKA. No dividend every paid so no cap gain and dividend tax until you sell. After you retired before RMD and SS, convert it to BRAKB and start to sell, keep cap gain a bit below your target tax rate and hopefully zero.
Are you kidding? Serious question here. Are you kidding? Are you really suggesting they take a $1 million inheritance, which makes up something like 90% of their investable assets, put it all in one stock, and hope for the best? (Not to mention Warren Buffet's advanced age, which many on this board often worry about)

WhiteMaxima
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by WhiteMaxima » Fri May 04, 2018 4:05 pm

FoolMeOnce wrote:
Fri May 04, 2018 3:50 pm
WhiteMaxima wrote:
Fri May 04, 2018 12:56 pm
1 mil buys you 3.3 share of BRKA. No dividend every paid so no cap gain and dividend tax until you sell. After you retired before RMD and SS, convert it to BRAKB and start to sell, keep cap gain a bit below your target tax rate and hopefully zero.
Are you kidding? Serious question here. Are you kidding? Are you really suggesting they take a $1 million inheritance, which makes up something like 90% of their investable assets, put it all in one stock, and hope for the best? (Not to mention Warren Buffet's advanced age, which many on this board often worry about)
I am not kidding. BRKA is a stock holding company that Warren Buffett founded. So it is like a mutual fund. Their invest philosophy is value investing. The holding company doesn't pay dividend. So there is no tax cost until you sell. And unlike most mutual fund manager, W Buffett is a very low pay CEO. I don't own directly through BRKA/B but I like how the company does for its investors.

soccerrules
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by soccerrules » Fri May 04, 2018 4:10 pm

WhiteMaxima wrote:
Fri May 04, 2018 4:05 pm
FoolMeOnce wrote:
Fri May 04, 2018 3:50 pm
WhiteMaxima wrote:
Fri May 04, 2018 12:56 pm
1 mil buys you 3.3 share of BRKA. No dividend every paid so no cap gain and dividend tax until you sell. After you retired before RMD and SS, convert it to BRAKB and start to sell, keep cap gain a bit below your target tax rate and hopefully zero.
Are you kidding? Serious question here. Are you kidding? Are you really suggesting they take a $1 million inheritance, which makes up something like 90% of their investable assets, put it all in one stock, and hope for the best? (Not to mention Warren Buffet's advanced age, which many on this board often worry about)
I am not kidding. BRKA is a stock holding company that Warren Buffett founded. So it is like a mutual fund. Their invest philosophy is value investing. The holding company doesn't pay dividend. So there is no tax cost until you sell. And unlike most mutual fund manager, W Buffett is a very low pay CEO. I don't own directly through BRKA/B but I like how the company does for its investors.
I have BRK-B which represents about 3% of my porfolio. I had another poster tell me BRK-B is like a "mini index fund within itself".
It would reason that if OP or investors are unsure of their plan and goal -- BRK would not be my recommendation. A Target Date Fund or simple 3 fund portfolio is probably best.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Watty
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Watty » Fri May 04, 2018 5:21 pm

FoolMeOnce wrote:
Fri May 04, 2018 12:19 pm
Lafinca wrote:
Fri May 04, 2018 12:01 pm
In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
Vanguard's Total US Stock Market ETF returned over 21% last year. So did the S&P500. http://performance.morningstar.com/fund ... ture=en_US

Moving from sector to sector and having all the assets sit on the sidelines for a few weeks or months waiting to time the market is a good way to blow your inheritance. And waiting for them to go up before selling and moving to your desired allocation is a good way to pay more taxes.

Read the wiki. Start here: http://performance.morningstar.com/fund ... ture=en_US

Consider transitioning to a two or three fund portfolio, or just use a Target Date fund. https://www.bogleheads.org/wiki/Three-fund_portfolio
Normally in a taxable account when you inherit a stock or mutual fund you get it as a stepped up cost basis that is what the stock was selling for at the day the person died.

https://www.bogleheads.org/wiki/Step-up_in_basis

You would need to look it up but if the estate did not take a long time to settle then that may mean that you can sell those ETFs and only pay a little bit in capital gains, or you might even have a loss. If that is the case then it would be good to sell those soon since you would not want to hold those for the long term because they are not diversified enough and they do not include bonds so they may be too volitile.

There is a wiki on how to invest a windfall and one of the things that it stresses is that it is a good idea just to put the money into something ultra safe like insured CD's for six months or a year while you get comfortable with the money and come up with a long term plan.

https://www.bogleheads.org/wiki/Managing_a_windfall

It would be very reasonable to do that. (You would need to split the money between several banks to stay below the FDIC(or similar) insurance limit but that is not a big deal.)

When you are ready to invest the money there two very generic general approaches which will work for a lot of people. They are;

1) A three fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio

https://www.bogleheads.org/wiki/Tax-eff ... _placement

or

2) Just use a Life Strategy fund.

https://investor.vanguard.com/mutual-fu ... estrategy/#/

If you are in a high tax bracket then a life strategy fund is not very tax efficient so you would want to look into that and know what to expect before you buy a life strategy fund.

mouses
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by mouses » Fri May 04, 2018 5:28 pm

Lafinca wrote:
Fri May 04, 2018 1:58 pm
Yes- we can only put $5,500 each in our new Roth IRAs-but it is better than nothing. I did not realize Berkshire Hathaway stock was available for purchase by the public - I’m going to look into that. Thank you too for the suggestion that I not give myself an ulcer thinking about timing - there is a steep learning curve for me with investing, I sincerely appreciate everyone’s input. We want to make good use of what my grandparents worked and sacrificed to leave us.
Don't invest everything in one place. If that sinks, you've blown your inheritance.

I am concerned that you seem to think you can predict the market's behavior. That's also a good way to lose money.

DavidW
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by DavidW » Fri May 04, 2018 5:45 pm

soccerrules wrote:
Fri May 04, 2018 2:13 pm
Lafinca wrote:
Fri May 04, 2018 1:58 pm
Yes- we can only put $5,500 each in our new Roth IRAs-but it is better than nothing. I did not realize Berkshire Hathaway stock was available for purchase by the public - I’m going to look into that. Thank you too for the suggestion that I not give myself an ulcer thinking about timing - there is a steep learning curve for me with investing, I sincerely appreciate everyone’s input. We want to make good use of what my grandparents worked and sacrificed to leave us.
Lafinca-
If you inherited $1M I would not do anything until you READ and understand WHY you are making these moves. Although I agree that most of the advice you will get here on BH is very helpful-- it is so important to make sure you understand and believe it is in YOUR best interests.

Read the Wiki's, this forum and a few of the books under suggested reading. Take it slow. Once you understand the basics (Asset Allocation, Tax Deferred vs taxable, Traditional IRA and Roth IRA) then you will be ready to make a plan.

After reading I would come back and layout your entire financial picture (age, tax brackets, income, debt, financial assets and where they are currently invested, goals etc) Once you read a few of the posts where other posters have asked for advice- you will get the idea of how/what to post.
+1

I think there are different approaches to managing this money but it has to be something you can understand and believe in. A lot of folks who inherit this much money will either blow it or invest in a business that they know little about. I think you are smart in asking and wanting to do it yourself.

As soccerrules suggested, come up with an investment plan but also a spending plan to have some fun. Otherwise, all you will do is save money but won't be able to enjoy it...

WhiteMaxima
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by WhiteMaxima » Fri May 04, 2018 5:57 pm

The reason I recommend BRKA/B is 1.0mil in a taxable account would generate approx 2% dividend and cap gain which will complicate your tax situation depend your situation. You can also super fund 529 but it max at 70k. Just keep it a simple way. Also majority of BH here can't afford a share of BRKA.

md&pharmacist
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by md&pharmacist » Fri May 04, 2018 6:55 pm

You can get general answers here, but your accountant and a financial advisor (preferably fee only to avoid conflicts of interest) need to make the recommendations based on your individual circumstances and desires.

If you inherited the $1M this year and it was not transferred tax advantaged in a trust, it is considered income for this year and you will have to pay a lot of taxes on it. With that amount of income, that will price you out of a Roth IRA contribution, as I believe has income limits. You may be able to start next year, subject to the same annual income limits for eligibility.

if your health insurance plan is eligible, you may be able to contribute up to $6,900 to an HSA this year - those funds will go in tax free and come out tax free if used for healthcare purposes in the future - no other retirement account is completely tax free like that, and it is not subject to income limits, just health insurance plan eligibility.

Even if you can do the Roth and the HSA annually, it will take a long time for those accounts to absorb what's left of the $1M after taxes. That's why your financial advisor needs to figure out the best way to make this money work for you in the meantime (play it safe, but try to beat inflation). It may be investing in the current brokerage account, paying down high interest rates if you have credit card debt, enjoying a very small amount of it (don't squander it or give in to lifestyle creep), or a combination of things.

Congratulations on the inheritance.

desafinado
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by desafinado » Fri May 04, 2018 7:02 pm

md&pharmacist wrote:
Fri May 04, 2018 6:55 pm
If you inherited the $1M this year and it was not transferred tax advantaged in a trust, it is considered income for this year
pretty sure this isn't the case in the us

md&pharmacist
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by md&pharmacist » Fri May 04, 2018 7:09 pm

desafinado wrote:
Fri May 04, 2018 7:02 pm
md&pharmacist wrote:
Fri May 04, 2018 6:55 pm
If you inherited the $1M this year and it was not transferred tax advantaged in a trust, it is considered income for this year
pretty sure this isn't the case in the us
Thanks for the reminder, estates are not taxable unless they are a over $11M individual or $22M couple.

:oops:

FoolMeOnce
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by FoolMeOnce » Fri May 04, 2018 7:25 pm

WhiteMaxima wrote:
Fri May 04, 2018 5:57 pm
Also majority of BH here can't afford a share of BRKA.
From my time here, it seems like the majority of posters here can afford a share of BRKA. Many even own some that they have held for decades. But no one recommends making that the entirety of one's holdings. Except you.

Lafinca, you've found the one person who will ever tell you to put everything into Berkshire. Follow the wisdom of the crowds.

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BL
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by BL » Fri May 04, 2018 7:42 pm

Suggest you do some reading before making big purchases.
The recommended pdf, If You Can, is a great one for starters.
Jane Bryant Quinn has a lot of common sense advise on personal finance, not just investing:
Making the Most of Your Money NOW
and later for actual retirement:
How To Make Your Money Last]
Keep them both on hand for reference.
Also the Boglehead's Guide to Investing is a great one.

I gather your inheritance is not in retirement accounts. There are rules if they are.
Normally there is a step-up in cost basis so there are no tax consequences for selling except for gains since date of death.
Selling is a good idea as those are not Boglehead-suggested investments like
1.Total Stock Market
2.Total International stock market
3. maybe total bond market or municipal bonds; shorter term if you don't like to see it drop with increases in interest rates, Other fixed income choices are CDs, I-Bonds (10k/yr limit), Money market at Vanguard, etc.
I would consider 40-60% fixed income to start with to see how you do when markets crash.

Those funds you mentioned are sector funds,and they seem to take turns on which is good. The Total Funds cover all of them. The U.S. and international are tax-efficient as they kick off mostly qualified dividends, taxed at capital gains rates, and no Capital gains (CGs). The ones you are in may give you more taxable dividends and CGs, haven't looked at them. Total return is what is important, not dividends which cost money in taxes. But I wouldn't go for Berkshire either.

DavidW
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by DavidW » Fri May 04, 2018 8:07 pm

Also, I forgot to mention that you don't have to make a move until you ready. There isn't a time requirement but as long as you are looking up the reference material many posters have suggested, you should be fine.

Don't let someone pressure in buying an investment or doing what they are doing. It is your money....

You probably know this but don't tell your friends and family about this money. Some will be happy for you but most will be envious. If you don't believe me, google lottery winners.

There are many discussions on windfall. Search the posts and read the recommendations.

finite_difference
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by finite_difference » Fri May 04, 2018 8:19 pm

soccerrules wrote:
Fri May 04, 2018 4:10 pm
WhiteMaxima wrote:
Fri May 04, 2018 4:05 pm
FoolMeOnce wrote:
Fri May 04, 2018 3:50 pm
WhiteMaxima wrote:
Fri May 04, 2018 12:56 pm
1 mil buys you 3.3 share of BRKA. No dividend every paid so no cap gain and dividend tax until you sell. After you retired before RMD and SS, convert it to BRAKB and start to sell, keep cap gain a bit below your target tax rate and hopefully zero.
Are you kidding? Serious question here. Are you kidding? Are you really suggesting they take a $1 million inheritance, which makes up something like 90% of their investable assets, put it all in one stock, and hope for the best? (Not to mention Warren Buffet's advanced age, which many on this board often worry about)
I am not kidding. BRKA is a stock holding company that Warren Buffett founded. So it is like a mutual fund. Their invest philosophy is value investing. The holding company doesn't pay dividend. So there is no tax cost until you sell. And unlike most mutual fund manager, W Buffett is a very low pay CEO. I don't own directly through BRKA/B but I like how the company does for its investors.
I have BRK-B which represents about 3% of my porfolio. I had another poster tell me BRK-B is like a "mini index fund within itself".
It would reason that if OP or investors are unsure of their plan and goal -- BRK would not be my recommendation. A Target Date Fund or simple 3 fund portfolio is probably best.
Yes, a 3-fund portfolio is definitely the way to go. Own the entire market and not sector funds.

The fact that the OP is talking about market timing is not a good sign. The OP has 3 sector funds and is 100% stock. OP needs to study this website and the wiki and understand what AA (asset allocation) is and figure out what they’re comfortable with.

I would avoid target date funds except for retirement accounts.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

billfromct
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by billfromct » Fri May 04, 2018 8:51 pm

You mentioned that you have a 1 year old.

Have you started to save for college?

You can open a 529 college savings plan. Vanguard has a good low cost 529 plan. You will also want to check to see if your state has a tax deduction to contribute to your state's 529 plan. Just be careful since some states have high cost 529 plans & the tax deduction does not over ride the high cost home state 529 plan.
-a person can give $15,000 to anyone without having to file gift tax papers; $30,000 for a couple (I won't get into the details) & a single person can contribute up to 5 years of gifts ($75,000) into a 529 college savings account (you cannot gift any more to that person for the next 4 years)
-the 529 investment grows state & Federal tax free
-the money can be taken out state & Federal tax free if used for college expenses (tuition, room & board, books, required fees, etc).
-at 1 year old, you will want to consider 100% in stocks for the 1st 10-12 years since you have 17 years until college; you can move to a balanced portfolio (stocks & bonds) as your child gets closer to college

If it was me, I would start off putting $100k into the 529 & then review in a couple of years.

bill

retiredjg
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by retiredjg » Sat May 05, 2018 8:02 am

Lafinca wrote:
Fri May 04, 2018 12:01 pm
In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF.
These are all good funds/ETFs, but this is not a very good portfolio. It is not diversified enough. There is a lot of risk in an undiversified portfolio and that is completely unnecessary.

There is a very good possibility we can help you improve this portfolio and make it into something that will be more stable and lasting. But, we don't know if you inherited this or if you bought it. We don't know if you are managing your portfolio yourself or if you are paying someone else to do it. Nobody can offer reliable help without knowing more.
When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
If you want to sell something in your taxable account (an account that is not an IRA or 401k, etc) it is usually best NOT to "wait until the market rebounds". It is usually best to sell it at the lower price because that reduces or eliminates the taxes you pay for selling it.

I don't think anyone posted this link yet. It is a good place to start your learning. Be sure to watch the videos.

https://www.bogleheads.org/wiki/Getting_started

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Watty
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Watty » Sat May 05, 2018 8:21 am

DavidW wrote:
Fri May 04, 2018 8:07 pm
There isn't a time requirement but as long as you are looking up the reference material many posters have suggested, you should be fine.
You don't want to wait too long though. If the market has a big drop then just by random chance those sector funds could be his especially hard just by random chance.

There have been posters that inherited a mishmash of stocks but just held it for years before deciding what to do with it. By they they had a lot of capital gains so selling the old stocks would cause them to pay more in capital gains taxes.

As I said in my prior post you could sell those ETF's and just put the money into CD's for six months or more while you come up with a long term plan.

KlangFool
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by KlangFool » Sat May 05, 2018 9:33 am

Lafinca wrote:
Fri May 04, 2018 12:01 pm

Thank you all so much - I am new to this and I don’t want to make unnecessary mistakes. It makes sense what you all are saying, there is no “growth” advantage to adding more money to the inherited brokerage account, versus putting it every year into a ROTH IRA that I will open up today. I can certainly understand that the tax saving are huge but I didn’t know if those tax savings were offset by some additional growth I’d be missing out on by not adding the money to the million dollar brokerage account.
Lafinca,

1) Please break your post into multiple paragraphs.

2) How does that statement make any sense? 401K is an account. You could invest in the 401K account. The brokerage account is an account. You could invest in that account too. So, there is little to no difference between the brokerage account and the 401K account in term of investing.

The only difference is if you do not invest in the 401K account, you pay tax on that money.

<<I can certainly understand that the tax saving are huge>>

3) What is your marginal tax rate? Do you pay state income tax?

4) The tax savings are big enough to override any gain in your brokerage account. So, why would you invest in that brokerage account?

Max up all your tax-advantaged accounts.

KlangFool

wolf359
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by wolf359 » Sat May 05, 2018 10:08 am

You've accustomed to handling a net worth of a couple hundred thousand dollars or so, and suddenly you have $1 million.

Stop and read this: https://www.bogleheads.org/wiki/Managing_a_windfall

You're getting some good advice here, but some may not be appropriate for you personally. Follow these steps to help sort it out. Don't rush into any decisions.

dbr
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by dbr » Sat May 05, 2018 10:16 am

It is clear that the answer is that having a million dollars in a taxable account does not mean a person should stop adding money to tax protected investments. In fact, it means maximizing before tax contributions is a bit more important than before from the point of view of cutting tax costs. It is also possible, however, that in this case the savings rate required to meet long term objectives is now less .. . or not. The reference to "compounding" suggests some kind of misunderstanding. I don't know what is up with that.

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Earl Lemongrab
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Earl Lemongrab » Sat May 05, 2018 3:08 pm

Definitely quit trying to time the market. You're going against people with better knowledge and sources of information. Frankly I'd sell the sector funds in the taxable account right now, especially if it's at a loss (not sure what the basis from inheritance was) then go for a diversified portfolio.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Lafinca
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Lafinca » Sat May 05, 2018 6:37 pm

Thanks everyone for the continued advice. Regarding tax basis - my grandmother passed away a little over a year ago so the basis was about 930k and now it’s 1 million. I haven’t touched it since I inherited it. My husband and I want to try to live as though we don’t have that inheritance so that it can grow - and then maybe start using it anywhere between 4 to 10 years from now to help us pay for private schools for our two children.

From everyone’s comments, I think we will open two RoTH IRAs and max those out every year and also contribute to our work 401ks but not to the inherited brokerage account. We will likely sell those three holdings and invest in three etfs or mutual funds that are NOT sector specific- I’ve been looking at some more general funds at Vanguard and I am reading already a few of the resources recommended by you all. My main concern to begin with was that by investing in retirement plans we might not grow the money as quickly as if we invested in the account that already has quite a bit in it - I can see how that sounds silly but we are very new to this and I wanted to make sure the mathematics of compound interest did not somehow cause money to grow more when put into an already large account. But everyone here has laid that fear to rest. If I invest 11k a year in a new Roth IRA, that money will grow just the same as if I invested it into the million dollar fund - assuming in both cases I invested in the same fund/etf. A lot to learn and I’m thankful for everyone’s input. And our tax bracket is 22%.

Saving$
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Saving$ » Sat May 05, 2018 7:47 pm

Lafinca wrote:
Fri May 04, 2018 12:01 pm
- based on your input I think it’s best if my husband and I open up two Roth IRAs, max them out and max out 401ks at work - after that we won’t have enough in savings to invest more in the brokerage accounts but we also probably won’t need to take any money from the brokerage account either.
This is the right idea. Also max out an HSA if you have access to one.
Lafinca wrote:
Fri May 04, 2018 12:01 pm
In response to someone’s question, the brokerage account earned 7% last year and is split evenly between Vanguard Health Care Mutual Fund, Vanguard Utilities ETF and Vanguard Consumer Giods ETF. When the market rebounds we want to sell the two ETFs and place that money in a money market fund a few weeks or months until the market is down again and then buy, we think, Vanguards Technology ETF which has been doing very well.
This is a bad idea. Start reading more here, and start to move these funds to a simple 3 fund portfolio or similar. At the very least, dividends should NOT be reinvested in these ETF - they should go to a 3 fund. Also your Roths and 401k's should be in a 3 fund.

dknightd
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by dknightd » Sat May 05, 2018 7:51 pm

you should retire today, Or whatever day makes you happy

Saving$
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Saving$ » Sat May 05, 2018 7:54 pm

Lafinca wrote:
Sat May 05, 2018 6:37 pm
Thanks everyone for the continued advice. Regarding tax basis - my grandmother passed away a little over a year ago so the basis was about 930k and now it’s 1 million. I haven’t touched it since I inherited it. My husband and I want to try to live as though we don’t have that inheritance so that it can grow - and then maybe start using it anywhere between 4 to 10 years from now to help us pay for private schools for our two children.
Your basis if $930k. It remains the same per share as long as you own those shares/ETFs. If the assets are now worth $1 mil, you have $70k growth, or roughly 7.5%. If you sell to put into different ETF's, you will need to pay tax on the earnings, but not on the basis. So at this point, if you sold all the ETF's you currently hold in order to invest in a 3 fund, you would owe tax on only $70k. At 22%, that would be about $15,400 in federal taxes.

Others here can comment if you could do a first in/first out, and sell only the original $930k basis ETF's to invest that in a 3 fund, and leave the $70k growth where it is. It is a small part of your portfolio.

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Earl Lemongrab
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Re: I inherited 1 million dollars, should I open an IRA or keep adding money to this million dollar brokerage account

Post by Earl Lemongrab » Sat May 05, 2018 8:46 pm

dknightd wrote:
Sat May 05, 2018 7:51 pm
you should retire today, Or whatever day makes you happy
Uh, a 36 YO with dependents? How is that going be possible?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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