23 year old who just inherited 13,000 from grandpa.

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Topic Author
MedicalMonkey
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Joined: Sun May 13, 2012 8:59 am

23 year old who just inherited 13,000 from grandpa.

Post by MedicalMonkey »

Hi Bogleheads,
As you can see I am new to this forum, but I appreciate any advice I can acquire. Let me preface by stating honestly that I am a complete layman when it comes to investing. A little background information about myself. I'm 23 and will start my third year of Medical school soon.... because of this I have no income and a lot of debt that is racking up. However, I recently was given 13,000 from my grandpa who passed away, and I want to spend/save it responsibly (Also, it may be more than 13,000, but i'm not sure how much more.... apparently that is the limit on gift giving before you have to register with the IRS?) To be honest I do not see myself actively managing investments too much in the future given that I have 2 more years of schooling and then 4 years of residency and then a career which is well known for producing members of society who know absolutely nothing about investment or business. I want to be responsible with this money but do not really know the best avenue... I recently was reading about mutual funds and the whole paying for them to try to beat the system didn't really sound appealing to me... I have friends in investment banking and while they're smart kids I see them drink too much on weekends to want to pay them for playing with my money :P. So, I researched a little into in lazy portfolios after the word lazy caught my eye.... lazy is an appealing word. Honestly, I got this 13,000 yesterday and this morning I just learned that There are different types of IRA's and that IRA's do not have interest rates... so I am extremely new. Anyway, I have a simple plan after 2 hours of research and I am not conceited enough to think that this plan is good.... or even fair.... Ok, so the plan.

1) Open a Roth IRA
2) invest within that IRA with one of these lazy portfolios
3) leave money alone for forever until I'm 60 or something and want to blow it on cocaine (jokes).

Is this a stupid plan?? I really do not know.
and if it's not what is your favorite lazy portfolio?? (i'm sure this will invoke the fury of the internet).

Thank you all.
Johm221122
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Joined: Fri May 13, 2011 6:27 pm

Re: 23 year old who just inherited 13,000 from grandpa.

Post by Johm221122 »

You need income for Ira
5 million is exempt from taxes and estate pays tax not you in inheritance
Sorry for loss
You have no need to rush,take your time
Good luck
Nukeboilermaker
Posts: 299
Joined: Mon Apr 11, 2011 9:49 am

Re: 23 year old who just inherited 13,000 from grandpa.

Post by Nukeboilermaker »

Welcome to the forum and sorry on the passing of your grandpa. As mentioned by John only Earned income is eligible to be placed in an IRA. However this forum does cover personal finances as well, currently how much cash savings do you have? How much debt? Do you plan on having any major purchases in the future? Are student loans subsidized? Etc. Some more details may help us give advice on what to do with the money at this stage of your life.
Last edited by Nukeboilermaker on Sun May 13, 2012 12:09 pm, edited 1 time in total.
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retiredjg
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by retiredjg »

Medicalmonkey, welcome to the forum! You cannot contribute to an IRA without having earned income.

No, an IRA can't have an interest rate - think of an IRA as a container. You can put stocks in it, or bonds, or other things. As long as the money is in the container, you don't pay tax on the money or the earnings. When you take money out, you pay tax on it then. And this has really nothing to do with "interest rates".

You appear to have very little knowledge about financial matters. That's not a criticism - you've spent your time doing other things. I think you'd benefit from reading a quick and easy book which has just enough knowledge to get you started and keep you from doing stupid stuff. http://www.amazon.com/Only-Investment-G ... 431&sr=8-1 The title mentions investments, but it really deals with issues of personal finance as well. If you want more info after that, go to the top of this page and click on the Amazon button for a list of very helpful books.

As for your $13k, before you start investing, you need an emergency fund. This would be a good start. It should not be invested in either stocks or bonds - just find the highest paying savings account or CD you can find.
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retiredjg
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by retiredjg »

Wiki article link: Getting Started
stan1
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by stan1 »

To be honest, I would live off the $13,000 for 6-12 months to reduce the amount of money you need to borrow (especially if the interest rate is above 5%) or put it into a savings account if you don't have any cash reserves for something like car repairs.

If the amount involved was $130K or $1.3M the advice would be different (and might be different if you weren't on track to a high paying professional salary).
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
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BL
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by BL »

Take your time. Maybe buy Boglehead Guide to Investing to have available on a lazy day someday in the future.
You could:
1. Spend it on your education
2. Save to spend it on your student loans
3. Save and wait until you have some earned income to put up to $5000 per year in a Roth (Maybe Vanguard Target Retirement ($3000 min.) and have it as part of your emergency fund
4. Spend it on a ring and wedding to a woman who will help pay your way through med training :)
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22twain
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by 22twain »

MedicalMonkey wrote:I recently was reading about mutual funds and the whole paying for them to try to beat the system didn't really sound appealing to me
Not all mutual funds try to beat the system (i.e. the overall stock market, or some section of it). Read up on "index funds" which simply hold a basket of stocks that more or less matches one of the major indexes (e.g. the S&P 500). Those funds are a very popular approach to investing here, first because most "actively managed" funds don't actually "beat the market" at any given time, and second because index funds take less of your money for expenses.

The simplest way to do this is to open an account at a major mutual fund house, say Vanguard which is popular here, and put some of the money in their Total Stock Market Index Fund and some in their Total Bond Market Index Fund. How much to put in which depends on how much you can tolerate drops in the stock market. The bond fund will fluctuate a lot less, and usually in the opposite direction to the stock fund. During good times the bond fund probably won't grow as much overall as the stock fund.
Meet my pet, Peeve, who loves to convert non-acronyms into acronyms: FED, ROTH, CASH, IVY, ...
Topic Author
MedicalMonkey
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Joined: Sun May 13, 2012 8:59 am

Re: 23 year old who just inherited 13,000 from grandpa.

Post by MedicalMonkey »

Wow, thank you for all the responses!! and all of them have really helpful tips...... is this the internet? Anyway, you have earned the MedicalMonkey first impression stamp of approval (you can store that in your Roth IRA.... it does not break any rules). Also, I think I received the money and had this instant idea that I should be responsible and I was searching for an immediate answer.... but upon reading your responses I think it makes the most sense for me to just chill out for a bit and spend some time learning about finances. I'll look into the resources you guys pointed to, and i'll revive this thread when i'm dumb enough to not understand them :). Also, apparently the max gift giving is 13,000 a year or something.... so there is a chance i'll receive more than this although there has only been speculation as to how much.
Topic Author
MedicalMonkey
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by MedicalMonkey »

Johm221122 wrote:You need income for Ira
5 million is exempt from taxes and estate pays tax not you in inheritance
Sorry for loss
You have no need to rush,take your time
Good luck
thank you for the response!!! does this vary by state? My grandpa was divorced and remarried to a woman in flordia... and her children are taking care of the estate and his wishes. From my understanding they split the money between 7 members of our family. I just recently learned that they even had any money to give away.... my grandpa died 14 years ago, but he left his money with her. I consider her a grandma... and she considers my a grandson. Anyway, does the 13,000 dollar limit apply if 5 million is exempt from taxes? would it be wise of them to just split the money between us now and not wait? I am naive on these matters. Anyway, there is also speculation that she is giving us the max per year before she passes away and has to have estate taxes applied.... but if there is no tax on anything less than 5 million then that would be pointless. Just wondering if I should inform someone of this... thanks for the thought.
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retiredjg
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by retiredjg »

You are confusing "inheritance" and "gift". There is no limit on an inheritance. Since your grandpa died 14 years ago, this is not an inheritance and no inheritance rules apply.

Apparently, your grandma considers that it is time to start giving some of the money away and you are one of the people she wants to give it to. That is why there is a $13k limit per year. She can give you $13k a year without paying gift taxes.
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LAlearning
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by LAlearning »

Hello MedicalMonkey (appreciate that as a 4th year med student, you may train 3rd year monkeys of your own),

Check out this website: http://whitecoatinvestor.com/

This is a gift. Anyone in the country can give you 13k per year, and you do not have to report this.

As previously stated, you have not "worked" for this money. IRA's can only be funded with income from employment. Therefore, none of this can (immediately) go towards a Roth IRA.

I suggest saving this money and using on your current expenses. Like what you might ask?

1) Do you carry any credit card debt? If so, PUT ALL OF THIS TOWARDS THAT! Immediate 10-30% return on investment.
2) As soon to be 4th year, interviews will take up most of your loan disposable income. Remember, there is airfare, hotels, car rentals, etc. So keep this for that.
3) Paying rent/utilities/intertubes....you already pay these, so why use loan money when you can use this money for free!
4) Open an interest bearing savings or checking account with any local bank or online bank. DO NOT PAY FEES FOR THIS SERVICE! If you are uncomfortable with this or just don't want to do anything,
let the money sit in your current account. It is OK to do nothing. Realize the best "safe" return will only be 0.25-1% or 32-130$ per year.

But at the very least, go to dinner one night someplace you like (pay only for yourself!), and enjoy your new found "wealth".

Best of luck in medical school, and for your upcoming match.
I know nothing!
galectin
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Re: 23 year old who just inherited 13,000 from grandpa.

Post by galectin »

First, good luck on USMLE Step 1, which should be imminent.

Second, you can use the money to reduce student loan amounts (deferred interest??) or other expenses (like a car loan) if that is applicable. Or, you can put it in a one year CD and worry about it after Year 3, which should be pretty intense with your required clerkships.

Alternatively, put it in a 2060 Target fund and don't worry about it for a year or two. You can always change your investments in the future. When you have income, then you can do the IRAs.

Kudos to you for thinking about this rationally.
MrMiyagi
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Joined: Wed Jul 15, 2009 3:28 pm

Re: 23 year old who just inherited 13,000 from grandpa.

Post by MrMiyagi »

You can't contribute to an IRA as everyone above as said.

My best advice: Use that money during your 3rd year so you have to take out less unsubsidized stafford loans. At 6.8% rate of borrowing, you're getting robbed highway robbery style and nothing you invest in will give you anywhere close to that return (safely). Good luck with your training. I'm a resident in my 3rd yr now if that matters. Make sure you keep enough funds for interview season.
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