Teacher received an inheritance, seeking advice

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AJL42
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Joined: Sat Oct 05, 2019 10:51 pm

Teacher received an inheritance, seeking advice

Post by AJL42 » Sat Oct 05, 2019 11:09 pm

Hello!
I have been reading this forum/doing research and thought I would seek some advice from the community. I am a teacher in Oregon with a young family (an infant and a toddler). Before my second son was born, my wife was doing some freelance work but has quit for an indefinite time as we grow our family. We may decide to have one more child, and we plan to move in the next 3-4 years. Over the last year the estate of my deceased uncle has been resolved and I was fortunate to receive an inheritance (in the form of an inherited IRA and as 92K cash) from him. We are now trying to decide the best options for spending and investing the cash portion. Below are the major questions we are considering

Emergency funds: 6 Months Expenses

Debt:
Auto-Loan 9.6K 3.74% 3 year loan
Mortgage 227K 3.25% 3 years into a 30 year loan, no PMI
Student loans 9.5K 3.64%

Tax Filing Status: Married Filing Jointly with 2 dependents
Tax Rate: 12% Federal, 9% State
Income: 65K
State of Residence: Oregon
Age: Both 32

Desired Asset allocation: 90% stocks / 10% bonds

Current retirement assets
Total = 333K
Taxable
28% cash [92K] Acquired through inheritance in the last few months
Roth IRA at Vanguard
14% [47K] LifeStrategy Growth Fund (VASGX) (.14%)
Roth IRA at Vanguard (Started Separately by parents)
2% [7K] Target Date 2050 (VFIFX) (.15%)
Inherited IRA at Vanguard
46% [154K] Target Date 2050 (VFIFX) (.15%)
Oregon Individual Account Program (Required by State)
4% [15K] IAP 2050 Target-Date Fund (.58%)
Pension
State Funded Pension - After 30 Years 45% of final salary with COLA {If I stay at my current district my final salary would be 94K, in today’s dollars, at retirement}

Contributions

New annual Contributions
6K Roth IRA
6% Pre-tax Salary Goes to Oregon IAP


Questions:
1. In planning for purchasing a new home, should we invest a portion of the inheritance into a short term CD or pay down the principle of our current mortgage or are there other options?

2. Are we saving enough for retirement, or should we consider using some of the inheritance to contribute to my wife’s Roth IRA (currently not contributing any to hers)?

3. Should we use some of the cash to pay off our student loans or auto loan even though they are low interest?

4. We would like to save some money for our kids’ college. Our plan was to open 529 accounts for each child. Is this the best way to save for their college and how much should we invest in these accounts (In Oregon there is a $4865 per year tax deduction.)?

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Teacher received an inheritance, seeking advice

Post by lakpr » Sun Oct 06, 2019 7:34 am

The first thing you should do with the inheritance is to get rid of the student loan (This is not rechargeable even in a bankruptcy), and pay off the auto loan (high interest, depreciating asset, paying off the loan will allow you to reduce or drop the collision coverage that lenders require).

$92k - $19k = $73k left

The next step I would suggest is to have Roth IRAs for you and your wife. With January 2020 just 3 months away, that would be $6k for 2019 and 2020 for your wife, and $6k for presumably only 2020.

$73k - $18k = $45k left

The remaining $45k, if I were you, I would put it into 529 plans for your two kids. Spike the amount slightly higher in favor of the older kid, since that kid has lesser number of years before needing the money for college education. I would also do it in such a way that you maximize the state tax deduction (not everything at once in a single year).

Let this $92k be spoken for this way. With $45k in 529 accounts and at least 16 years of investing horizon, it should cover in state tuition at least for your kids, if not also room and board, by the time they are ready for college. Think that your uncle indirectly paid in advance for your kids education. If we don't commit to this now, life has a way of happening, the funds slipping through your fingers for expenses you wouldn't even remember what in a few years. You will possibly then regret not funding kids education when you had the chance and the funds.

I notice that you have not mentioned any 403b or 457 plans contributions in your post. I suggest that you turn the inherited IRA as your living expenses fund, and maximize your contributions to these plans. With a 12% bracket, it makes sense to contribute to a Roth 403b, unless the withdrawal from the inherited IRA pushes you into 22% tax bracket; in which case Traditional 403b makes sense.

Money is fungible. Through above, what you will have accomplished is to transform the Inherited IRA into your personal 403b account. What is the advantage, you might ask. When your kids inherit an inherited IRA, they would be forced to take distributions based on YOUR life expectancy, which unnecessarily depletes the fund more than necessary. With an IRA or a 403b or a 457 plans inherited directly from you, they can use their own life expectancy to calculate and take the distributions. Smaller RMDs, more time in the plan and in the market, more wealth for your kids.

[Sorry if I am implying at morbid situations above, just saying plan for such situations]

aristotelian
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Re: Teacher received an inheritance, seeking advice

Post by aristotelian » Sun Oct 06, 2019 7:39 am

You are one income with a modest salary and a lot of uncertainty. I would do nothing and try not to touch it as long as possible. Put in a short term bond fund and keep as secondary emergency fund.

I agree that paying off the student loan is a no brainier.

HomeStretch
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Re: Teacher received an inheritance, seeking advice

Post by HomeStretch » Sun Oct 06, 2019 8:12 am

Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund

You are saving ~15% per year ($6k Roth IRA and 6% IAP contribution). You have a pension plan but at your age it’s hard to count on this with certainty. Increase your savings rate perhaps by:
1. saving 100% of IRA RMD
2. redirecting 100% of former your auto/student loan payment amounts towards savings.
3. cutting expenses if possible
4. spouse taking on a few hours of freelance work if possible which will also keep her skill set and work experience current which is helpful when/if spouse goes back to work

Look into whether there are good retirement savings plans offered by your district. If not, savings should go to the 6% IAP, Roth IRAs, Taxable account and 529 accounts.

Minor tweaks to your investments to consider:
1. Hold 100% equities in your Roth IRAs for highest expected tax-free growth
2. Hold your 10% bond allocation in your Inherited IRA for slower expected growth and in turn lower current RMDs which are taxable as ordinary income.

Buy autos for cash going forward to avoid debt. Consider whether a larger home and its ongoing expenses is do-able on one salary without impacting your annual savings %.

Run a tax projection to see how the Inherited IRA RMD Income and 529 contribution deduction will affect your tax liability for 2019 and 2020. Adjust your payroll withholdings so you aren’t under or over withheld for federal and state taxes.

3funder
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Re: Teacher received an inheritance, seeking advice

Post by 3funder » Sun Oct 06, 2019 8:46 am

HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund

You are saving ~15% per year ($6k Roth IRA and 6% IAP contribution). You have a pension plan but at your age it’s hard to count on this with certainty. Increase your savings rate perhaps by:
1. saving 100% of IRA RMD
2. redirecting 100% of former your auto/student loan payment amounts towards savings.
3. cutting expenses if possible
4. spouse taking on a few hours of freelance work if possible which will also keep her skill set and work experience current which is helpful when/if spouse goes back to work

Look into whether there are good retirement savings plans offered by your district. If not, savings should go to the 6% IAP, Roth IRAs, Taxable account and 529 accounts.

Minor tweaks to your investments to consider:
1. Hold 100% equities in your Roth IRAs for highest expected tax-free growth
2. Hold your 10% bond allocation in your Inherited IRA for slower expected growth and in turn lower current RMDs which are taxable as ordinary income.

Buy autos for cash going forward to avoid debt. Consider whether a larger home and its ongoing expenses is do-able on one salary without impacting your annual savings %.

Run a tax projection to see how the Inherited IRA RMD Income and 529 contribution deduction will affect your tax liability for 2019 and 2020. Adjust your payroll withholdings so you aren’t under or over withheld for federal and state taxes.
+1

Strayshot
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Location: New Mexico

Re: Teacher received an inheritance, seeking advice

Post by Strayshot » Sun Oct 06, 2019 8:55 am

3funder wrote:
Sun Oct 06, 2019 8:46 am
HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund

You are saving ~15% per year ($6k Roth IRA and 6% IAP contribution). You have a pension plan but at your age it’s hard to count on this with certainty. Increase your savings rate perhaps by:
1. saving 100% of IRA RMD
2. redirecting 100% of former your auto/student loan payment amounts towards savings.
3. cutting expenses if possible
4. spouse taking on a few hours of freelance work if possible which will also keep her skill set and work experience current which is helpful when/if spouse goes back to work

Look into whether there are good retirement savings plans offered by your district. If not, savings should go to the 6% IAP, Roth IRAs, Taxable account and 529 accounts.

Minor tweaks to your investments to consider:
1. Hold 100% equities in your Roth IRAs for highest expected tax-free growth
2. Hold your 10% bond allocation in your Inherited IRA for slower expected growth and in turn lower current RMDs which are taxable as ordinary income.

Buy autos for cash going forward to avoid debt. Consider whether a larger home and its ongoing expenses is do-able on one salary without impacting your annual savings %.

Run a tax projection to see how the Inherited IRA RMD Income and 529 contribution deduction will affect your tax liability for 2019 and 2020. Adjust your payroll withholdings so you aren’t under or over withheld for federal and state taxes.
+1
+2

If your house move is to something more expensive, I would strongly question the financial prudence of such a move on a 65k salary with the current assets you listed above and lean in favor of making your current housing work.

Also, slightly off topic but as a single earner with multiple small children are you appropriately insured with a term life and disability policy to cover your income?

aristotelian
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Re: Teacher received an inheritance, seeking advice

Post by aristotelian » Sun Oct 06, 2019 10:03 am

HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund
I agree with all of the above except I question the 529's, especially such a large amount. This is a teacher with one income. He has no funds outside of retirement accounts aside from this inheritance. Does he really want to tie up that much of his liquid funds in 529 when his own retirement is far from secure?

Dottie57
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Re: Teacher received an inheritance, seeking advice

Post by Dottie57 » Sun Oct 06, 2019 10:06 am

aristotelian wrote:
Sun Oct 06, 2019 10:03 am
HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund
I agree with all of the above except I question the 529's, especially such a large amount. This is a teacher with one income. He has no funds outside of retirement accounts aside from this inheritance. Does he really want to tie up that much of his liquid funds in 529 when his own retirement is far from secure?
This.

And agree to not move into more expensive home. Wait until wife can resume working.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Teacher received an inheritance, seeking advice

Post by HomeStretch » Sun Oct 06, 2019 10:29 am

aristotelian wrote:
Sun Oct 06, 2019 10:03 am
HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund
I agree with all of the above except I question the 529's, especially such a large amount. This is a teacher with one income. He has no funds outside of retirement accounts aside from this inheritance. Does he really want to tie up that much of his liquid funds in 529 when his own retirement is far from secure?
Agree, there certainly is a good case to be made for not using 529 accounts. But I don’t see using $20k of inheritance to seed the two 529s and perhaps a $100 monthly contribution to each as significantly changing OP’s financial future (nor will the 529s pay for four years of college). The significant change factors will be whether OP vests in pension, they up-size their house, spouse goes back to work and their savings rate.

Strayshot
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Location: New Mexico

Re: Teacher received an inheritance, seeking advice

Post by Strayshot » Sun Oct 06, 2019 10:42 am

OP would need to weigh the state tax deduction and tax free growth of the 529 against taxable investing for the kids education (which will possibly be tax free depending on tax bracket when they need the funds, might be 0% capital gains).
If OP pays off debt and doesn’t incur more via a new mortgage etc, and doesn’t need a down payment on a new house, the 529s are a reasonable use of the funds. With OP income situation, that may be the most savings for education the kids get as future contributions will be small (better to do spousal Roth than more 529 in out years).
If OP needs more liquid money, taxable or a money market would be a good choice (but since I would disagree with more expensive I don’t believe OP should need more liquid funds and should go the 529 route).

themuse
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Re: Teacher received an inheritance, seeking advice

Post by themuse » Sun Oct 06, 2019 10:59 am

aristotelian wrote:
Sun Oct 06, 2019 10:03 am
HomeStretch wrote:
Sun Oct 06, 2019 8:12 am
Welcome!

Consider using the $92k inheritance:
1. $19k to pay off the student/auto loans
2. $6k to a spousal Roth IRA for 2019
3. $12k to both Roth IRAs in January 2020
4. $10k each to 529 accounts for 2 children; for the state tax credit/deduction you can carry forward the amount above $4,865 for 4 years
5. $45k in your Taxable account invested in VTSAX Vanguard Total Stock Market Fund
I agree with all of the above except I question the 529's, especially such a large amount. This is a teacher with one income. He has no funds outside of retirement accounts aside from this inheritance. Does he really want to tie up that much of his liquid funds in 529 when his own retirement is far from secure?
+1

Don't recommend 529 either. Taxable in low cost TM index would be my recommendation.

If spouse goes back to work, or income/investment level increases, they can always superfund 529 to catch up.
--themuse-- | | Investing should be boring

aristotelian
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Re: Teacher received an inheritance, seeking advice

Post by aristotelian » Sun Oct 06, 2019 11:05 am

Strayshot wrote:
Sun Oct 06, 2019 10:42 am
OP would need to weigh the state tax deduction and tax free growth of the 529 against taxable investing for the kids education (which will possibly be tax free depending on tax bracket when they need the funds, might be 0% capital gains).
If OP pays off debt and doesn’t incur more via a new mortgage etc, and doesn’t need a down payment on a new house, the 529s are a reasonable use of the funds. With OP income situation, that may be the most savings for education the kids get as future contributions will be small (better to do spousal Roth than more 529 in out years).
If OP needs more liquid money, taxable or a money market would be a good choice (but since I would disagree with more expensive I don’t believe OP should need more liquid funds and should go the 529 route).
You are assuming he will pay for college no matter what. I don't know that he has the income or savings to do that. Kids can take out loans for college (if they go to college) but he can't do the same for retirement.

I would want liquid funds as emergency savings, not for bigger house. I agree, upgrading his house is the last priority and should not be on the table at all.

LearnerSD
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Re: Teacher received an inheritance, seeking advice

Post by LearnerSD » Sun Oct 06, 2019 12:37 pm

Others are addressing the financial questions, which were all you asked. But with 2 small children, why on earth would you think of a third. BTW, they don't ever need less love!

LittleMaggieMae
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Re: Teacher received an inheritance, seeking advice

Post by LittleMaggieMae » Sun Oct 06, 2019 12:52 pm

The OP apparently has atleast 20% equity (no pmi) in the current house... and is hopefully adding more with each mortgage payment. They think they may move/buy another house in 3 to 4 years. I'd vote for letting the current house equity translate into the down payment on the next house possible having a smaller mortgage/same size as current house mortgage on the next house. Make your house do some work for you. I'm assuming the "get a new house" would be to move into a better school district or to be closer to work or into a more family oriented community.
I'd probably not "reserve" any of the inherited money for the next house. I'd let my income dictate my housing.

(more expensive houses come with more expensive upkeep costs which come out of your income...so even if you can afford to buy the house - can your income support it going forward - and what future things do you give up to have the house??)

I'm in my 50's. The money I saved/invested decades ago has made a major impact on my retirement. I also have an employer pension. I'm looking at possibly NOT having to save gobs of income for the next 15 years til I retire. I'm looking at possibly being able to FIRE before I'm 60yo.

Do not underestimate the power of big lump sum of $$ that will grow over time (2 decades in your case).

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Stinky
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Re: Teacher received an inheritance, seeking advice

Post by Stinky » Sun Oct 06, 2019 1:07 pm

OP, has the $92k already had taxes withheld from it? I didn’t see that mentioned in your posts.

I expect that taxes have been withheld at an adequate rate (probably 12% + 9%). But, if not, you’ll need to take that into account.
It's a GREAT day to be alive - Travis Tritt

delamer
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Re: Teacher received an inheritance, seeking advice

Post by delamer » Sun Oct 06, 2019 1:25 pm

Stinky wrote:
Sun Oct 06, 2019 1:07 pm
OP, has the $92k already had taxes withheld from it? I didn’t see that mentioned in your posts.

I expect that taxes have been withheld at an adequate rate (probably 12% + 9%). But, if not, you’ll need to take that into account.
Why would there be taxes on the cash inheritance?

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Stinky
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Re: Teacher received an inheritance, seeking advice

Post by Stinky » Sun Oct 06, 2019 1:27 pm

delamer wrote:
Sun Oct 06, 2019 1:25 pm
Stinky wrote:
Sun Oct 06, 2019 1:07 pm
OP, has the $92k already had taxes withheld from it? I didn’t see that mentioned in your posts.

I expect that taxes have been withheld at an adequate rate (probably 12% + 9%). But, if not, you’ll need to take that into account.
Why would there be taxes on the cash inheritance?
OP mentioned it was an inherited IRA in original post.

If it’s now in a taxable account, taxes need to be provided for somewhere (I think). I expect that taxes were withheld when it went into taxable account, but maybe not.
It's a GREAT day to be alive - Travis Tritt

delamer
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Re: Teacher received an inheritance, seeking advice

Post by delamer » Sun Oct 06, 2019 1:48 pm

Stinky wrote:
Sun Oct 06, 2019 1:27 pm
delamer wrote:
Sun Oct 06, 2019 1:25 pm
Stinky wrote:
Sun Oct 06, 2019 1:07 pm
OP, has the $92k already had taxes withheld from it? I didn’t see that mentioned in your posts.

I expect that taxes have been withheld at an adequate rate (probably 12% + 9%). But, if not, you’ll need to take that into account.
Why would there be taxes on the cash inheritance?
OP mentioned it was an inherited IRA in original post.

If it’s now in a taxable account, taxes need to be provided for somewhere (I think). I expect that taxes were withheld when it went into taxable account, but maybe not.
There are 2 parts to the inheritance — some cash and a separate Inherited IRA.

The only taxes that would be due is when the OP takes RMDs from the IRA or on interest earned from the cash.

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Stinky
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Re: Teacher received an inheritance, seeking advice

Post by Stinky » Sun Oct 06, 2019 1:52 pm

delamer wrote:
Sun Oct 06, 2019 1:48 pm
Stinky wrote:
Sun Oct 06, 2019 1:27 pm
delamer wrote:
Sun Oct 06, 2019 1:25 pm
Stinky wrote:
Sun Oct 06, 2019 1:07 pm
OP, has the $92k already had taxes withheld from it? I didn’t see that mentioned in your posts.

I expect that taxes have been withheld at an adequate rate (probably 12% + 9%). But, if not, you’ll need to take that into account.
Why would there be taxes on the cash inheritance?
OP mentioned it was an inherited IRA in original post.

If it’s now in a taxable account, taxes need to be provided for somewhere (I think). I expect that taxes were withheld when it went into taxable account, but maybe not.
There are 2 parts to the inheritance — some cash and a separate Inherited IRA.

The only taxes that would be due is when the OP takes RMDs from the IRA or on interest earned from the cash.
You’re right.

Thank you for correcting me. :happy
It's a GREAT day to be alive - Travis Tritt

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Wiggums
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Re: Teacher received an inheritance, seeking advice

Post by Wiggums » Sun Oct 06, 2019 2:52 pm

You received some really good suggestions. I would encourage you to pay off the student loan and car payment. Then I would focus on retirement savings next. Personally, I would hold the rest until your wife goes back to work. The family is relying on your salary right now.

Good luck to you...

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Watty
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Re: Teacher received an inheritance, seeking advice

Post by Watty » Sun Oct 06, 2019 9:52 pm

AJL42 wrote:
Sat Oct 05, 2019 11:09 pm
Auto-Loan 9.6K 3.74% 3 year loan
.....
Student loans 9.5K 3.64%
Paying this off is an easy choice. It is mainly just a question of "when" to pay these off not "if"you will pay them off.

One thing that has not been mentioned is that if you have access to any other retirement accounts like a 401k, 403b, etc then you can make indirect contributions to them by making additional withdrawals, above the RMD, from the inherited IRA. For example you could increase your monthly 401k contributions by $1,000 a month and als withdraw $1,000 a month from the inherited IRA. These would almost always cancel each other out on your taxes. The advantage of this is that it would reduce future RMDs and give better inheritance rules for your estate in case you die.

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celia
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Re: Teacher received an inheritance, seeking advice

Post by celia » Sun Oct 06, 2019 10:57 pm

I wouldn’t touch the 92k for now but withdraw from the Inherited IRA instead while your tax rate is low (while your wife is not working). The last thing you want (if you only take the Required MINIMUM Distribution), is large distributions when you are in your 70s and taking a pension or SS and your tax rate may be higher. Use the withdrawals to fully fund both your Roths each year and to replace any income due to increased withholding at work for taxes, contributions to an optional employer retirement plan (403b, 457), or to buy life insurance for both of you. Since you are young, $1m or more 20 or 25 year term policies should be considered. Get the policies outside your employer so that you would still have them if you stopped working there.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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AJL42
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Re: Teacher received an inheritance, seeking advice

Post by AJL42 » Tue Oct 08, 2019 11:46 pm

Thank you all for your advice and the time that you put into replying to me. This has been incredibly helpful and a great learning experience.

Going forward as many of you suggested, I plan to do the following:

Pay off our auto loan and student loans.
Fully fund both Roth IRAs for 2019 and 2020
Open Oregon Growth Saving Plan (457b) and fund it using income saved from student loan/auto
Possibly fund $20K for 529 to take advantage of tax free growth and yearly tax deduction
Our move would not be necessarily to upgrade our home but to move to a different area with better schools, which I realize can come with a higher price tag. I appreciate the idea of using the equity in our current home and income when the time comes to further assess if we can afford a move.
Purchase into term life insurance and disability insurance

One follow-up question:

It seems like some are suggesting taking extra distributions from our inherited and putting them in an employee sponsored account + Roth IRA, and others suggested using the remaining inheritance to do this. In Oregon, government employees can invest in a Roth 457b. After paying off loans and funding Roth IRAs we will have $35K.

A couple of options we are looking into:
Use the leftover inheritance to max out a Roth 457b at $18K for the next two years.
Take extra distributions max the 457 and let the $35K + any other savings we can afford from not paying loans sit in a taxable account invested in VTSAX Vanguard Total Stock Market Fund

Does one option seem more beneficial than the other?

lakpr
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Re: Teacher received an inheritance, seeking advice

Post by lakpr » Wed Oct 09, 2019 5:54 am

The advantage of 457 plan is that, should you separate from the employer offering the plan, the funds in that plan can be withdrawn without penalty, at any age. Taxes due of course, but no penalties.

If you contribute to 457 plan as Roth, until you reach age 59.5, the growth in the plan is still treated as taxable income. So if you lose your job and having to withdraw from the 457 plan, you need to keep track of your contributions and the growth; and treat the withdrawal as a proportionate withdrawal of contributions and growth. Then pay taxes to Uncle Sam on the growth portion.

You will have thus negated the advantage of Roth nature of the account (growth tax free). You will have turned it to a a flavor of non-deductible IRA. The 457 advantage is still there but now you need to run complex mathematical calculations. Wouldn't it be simpler if you just did pre-tax contributions to the 457 plan in the first place?

To realize the full advantage of Roth 457 plan, therefore you must let the account be qualified. In other words, NO withdrawal prior to age 59.5.

Now, if you are committing to not withdrawing from 457 plan until 59.5, what difference is there for practical purposes between a 403b plan and a 457 plan? With a 403b plan, if you contribute as a Roth 403b, you have the option of growth being tax free inside the account. If you happen to lose or leave the job, you can roll it over to a personal Roth IRA, where it is subject to Roth distribution rules (the rollover is treated as a fresh contribution on the date of rollover).

You are in the 12% bracket, so contributing to retirement plans as Roth contribution is the right decision. But, in my opinion, due to reasons I cited above, make those contributions to a Roth 403b plan instead of a Roth 457 plan. Or at least, make contributions to traditional 457 plan, realizing that you are escaping 12% tax rate now, and possibly pay a 15% tax rate in the future (unless Congress changes tax rules in the future).

k3vb0t
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Joined: Mon Jun 02, 2014 4:42 pm

Re: Teacher received an inheritance, seeking advice

Post by k3vb0t » Wed Oct 09, 2019 7:22 am

AJL42 wrote:
Tue Oct 08, 2019 11:46 pm
Going forward as many of you suggested, I plan to do the following:

Pay off our auto loan and student loans.
Fully fund both Roth IRAs for 2019 and 2020
Open Oregon Growth Saving Plan (457b) and fund it using income saved from student loan/auto
Possibly fund $20K for 529 to take advantage of tax free growth and yearly tax deduction
Our move would not be necessarily to upgrade our home but to move to a different area with better schools, which I realize can come with a higher price tag. I appreciate the idea of using the equity in our current home and income when the time comes to further assess if we can afford a move.
Purchase into term life insurance and disability insurance
“Purchase into” term and disability sounds like through your employer. Maybe I’m reading that wrong but most would recommend buying term life outside of employment as you can always be laid off and lose both your income and your life insurance. Lots of term life companies out there (and quote aggregators) to find an inexpensive long term policy.

wilked
Posts: 1581
Joined: Thu Mar 24, 2011 1:50 pm

Re: Teacher received an inheritance, seeking advice

Post by wilked » Wed Oct 09, 2019 7:29 am

Agree w most of advice.

1. Pay off non house debt. Try not to acquire new debt (including new house - you can’t afford it). Pay for future cars w cash.
2. Max Roth’s for this year and next, you and spouse.
3. I would not put money into 529s
4. Whatever is left, invest in taxable account

HomeStretch
Posts: 2051
Joined: Thu Dec 27, 2018 3:06 pm

Re: Teacher received an inheritance, seeking advice

Post by HomeStretch » Wed Oct 09, 2019 7:40 am

Get some quotes for term life insurance and short-term/long-term disability policies that are not through your employer. The policies remain in effect even if your employment ends.

You can get life insurance quotes from online brokers like selectquote, Zander or term4life. I used the first and had a good experience. Look for level-premium term life insurance for 20-30 year term.

Thegame14
Posts: 1226
Joined: Mon May 07, 2018 11:53 am

Re: Teacher received an inheritance, seeking advice

Post by Thegame14 » Wed Oct 09, 2019 8:29 am

The easiest first thing to do is pay off the student loans and car.

Pops1860
Posts: 100
Joined: Thu Mar 14, 2013 4:05 pm

Re: Teacher received an inheritance, seeking advice

Post by Pops1860 » Wed Oct 09, 2019 8:55 am

You already noted you will fund both Roth IRAs to max.

Remember that Roth IRA contributions (but not earnings) can be withdrawn at any time for any reason without tax or penalty. This means that the Roth IRA contributions can be seen as an 'emergency fund' of last resort if/when appropriate. Standard advice, which I agree with 100%, is not to withdraw Roth IRA $$ that is intended for retirement, the Roth IRA is a great way to save for retirement. But if you are concerned about liquidity (available cash) in your investment holdings, this is something to keep in mind.

Good sailing.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw

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