Where to store an inheritance.
September 29, 2012 6:53 PM Subscribe
How in invest inherited money?
I inherited about $75k from my grandparents, which was recently transferred to me (I'm 25). I have a Roth IRA which I just opened and has been maxed out for this year ($5000). I have an emergency savings account of $10k, and I'm currently temping so I have somewhat unstable employment and generally expect to make about 28-35k a year (hopefully not forever, but realistically probably for the next couple of years).
I'm wondering how I should handle this money. I would like to max out my IRA for the next couple of years, and I can't do that on my current income. Does it make sense to set aside some of this recently acquired money as liquid assets to feed the IRA for the next few years? Or will it waste potential if it sits as cash instead of being invested?
I probably won't look into buying a home for ~10 years, but I may want to get a graduate education within the next five years or so. I don't know anything really about the tax penalties for liquidating invested money, so I'm not sure how much of this to invest, in what kinds of stocks/bonds/whatever, and at what risk profile.
If you were me, what would you do with this money?
I inherited about $75k from my grandparents, which was recently transferred to me (I'm 25). I have a Roth IRA which I just opened and has been maxed out for this year ($5000). I have an emergency savings account of $10k, and I'm currently temping so I have somewhat unstable employment and generally expect to make about 28-35k a year (hopefully not forever, but realistically probably for the next couple of years).
I'm wondering how I should handle this money. I would like to max out my IRA for the next couple of years, and I can't do that on my current income. Does it make sense to set aside some of this recently acquired money as liquid assets to feed the IRA for the next few years? Or will it waste potential if it sits as cash instead of being invested?
I probably won't look into buying a home for ~10 years, but I may want to get a graduate education within the next five years or so. I don't know anything really about the tax penalties for liquidating invested money, so I'm not sure how much of this to invest, in what kinds of stocks/bonds/whatever, and at what risk profile.
If you were me, what would you do with this money?
The standard response is a fee based financial planner, they will walk you through all of this (goals, etc etc), it will cost you 3-500 bucks at MOST. Possibly you will also need to consult with a tax attorney or tax planner based on the financial planners advice.
posted by iamabot at 7:02 PM on September 29, 2012 [2 favorites]
posted by iamabot at 7:02 PM on September 29, 2012 [2 favorites]
Most of the answers to this question will depend on exactly what form the inheritance came in, whether cash or securities or an IRA or what-have you.
If a Roth IRA, for example, and you haven't yet screwed it up by taking a distribution, you have the best possible option ever - The "stretch" IRA, which will pay you over the remainder of your expected life, tax free, while the bulk of the account continues building value.
So, seconding the first two answers, with a caveat - See an advisor before you do anything with the inheritance. Pay that $300-500 out of pocket. It might literally mean the difference between 5 years of insane tax bills vs 50 years of tax-free steadily-growing income.
posted by pla at 8:06 PM on September 29, 2012
If a Roth IRA, for example, and you haven't yet screwed it up by taking a distribution, you have the best possible option ever - The "stretch" IRA, which will pay you over the remainder of your expected life, tax free, while the bulk of the account continues building value.
So, seconding the first two answers, with a caveat - See an advisor before you do anything with the inheritance. Pay that $300-500 out of pocket. It might literally mean the difference between 5 years of insane tax bills vs 50 years of tax-free steadily-growing income.
posted by pla at 8:06 PM on September 29, 2012
Agree with the suggestion for a fee-based planner. I like the idea of setting it aside and using it to maximize the Roth over several years. You get the best of all worlds - tax-free funding, tax-free growth, tax-free distributions.
posted by megatherium at 8:20 PM on September 29, 2012
posted by megatherium at 8:20 PM on September 29, 2012
I definitely agree with fee based financial planner, but would also like to point out that you are not limited to two choices here in the way that you seem to think that you are. Investments can have different degrees of liquidity - it isn't just either liquid and in cash or investment and untouchable.
For example, a certificate of deposit (CD) is a relatively non-liquid investment, but you could still invest in CDs with this money and just choose different maturity dates so that the CDs would mature and you could withdraw the money at the time you would need to use the money for the IRA (i.e. put $5000 in a 1 year CD, put $5000 in a 2 year CD, and so forth).
I would suggest that you read a book on the basics of personal finance before your appointment with the financial planner so that you can go and be in a better place to discuss things with that person. You can learn a little bit more about various types of investments and their degrees of liquidity, and relatively how much risk/volatility and interest you can expect from them.
posted by treehorn+bunny at 8:49 PM on September 29, 2012
For example, a certificate of deposit (CD) is a relatively non-liquid investment, but you could still invest in CDs with this money and just choose different maturity dates so that the CDs would mature and you could withdraw the money at the time you would need to use the money for the IRA (i.e. put $5000 in a 1 year CD, put $5000 in a 2 year CD, and so forth).
I would suggest that you read a book on the basics of personal finance before your appointment with the financial planner so that you can go and be in a better place to discuss things with that person. You can learn a little bit more about various types of investments and their degrees of liquidity, and relatively how much risk/volatility and interest you can expect from them.
posted by treehorn+bunny at 8:49 PM on September 29, 2012
Look at the fees associated with investments and any penalties for early withdrawal. Look at whether investments are insured or not. And make sure you diversify your investments. If you use a financial advisor, indeed only use one who charges a fixed fee, and be very careful about being steered into investments with high or even opaque fees that might be commissions going to the advisor. Educate yourself about the danger of fees by reading a book such as "The Big Investment Lie".
For longer term investing you could look at low cost index funds (stocks and bonds, maybe REITs) from Vanguard or Fidelity (expense ratio around 0.10%).
For mid-term investing you could look at low fee EFTs (stocks and bonds, such as PIMCO Total Return) and CDs and look at being a diversified lender on Lendingclub.com (36 month loans).
You could also look at TIFS from the US Treasury.
I am not a financial advisor. These are just some ideas that you can bounce off a professional advisor and/or research and educate yourself about.
posted by Dansaman at 11:49 PM on September 29, 2012
For longer term investing you could look at low cost index funds (stocks and bonds, maybe REITs) from Vanguard or Fidelity (expense ratio around 0.10%).
For mid-term investing you could look at low fee EFTs (stocks and bonds, such as PIMCO Total Return) and CDs and look at being a diversified lender on Lendingclub.com (36 month loans).
You could also look at TIFS from the US Treasury.
I am not a financial advisor. These are just some ideas that you can bounce off a professional advisor and/or research and educate yourself about.
posted by Dansaman at 11:49 PM on September 29, 2012
I wouldn't go to a fee-based planner for advice on $75,000. A $500 fee is almost 1% of your cash down the tubes. They're going to give you very simple advice and pocket your money.
Maxing out your Roth is always the right choice. treehorn+bunny's advice about CDs is very good, as long as you don't mind foregoing some profits. CD rates are very low right now. Still better than cash though.
I don't know anything really about the tax penalties for liquidating invested money
Quite simple for money that's not in an IRA. Assuming you are single and have no kids, you're in the 15% tax bracket. When you sell money you've invested in stocks, mutual funds, etc., you pay 15% tax if you've held the investment for less than a year. You pay 0% if you've held it for more than a year. You fill out 1040 Schedule D. It is, obviously, advantageous to hold your investments for more than a year.
If Romney wins your short-term rate will probably be 0% too. If Obama wins your long-term rate will probably go up to 10%. Either way not a big deal. You also probably have state income taxes on top of that 15%/0%.
You don't know anything about investing -- so act accordingly. If I were you, I would come up with a very simple asset allocation that assumes no knowledge of the market, and never touch it. Say, 50% of your money in a S&P or Dow index fund, 22% in a bond index fund, and $20000 in CDs timed to coincide with the next four January 1 payments into your Roth. Then, never think about that money again until you want to buy a house or pay for school or something.
And never touch the money in your Roth, even if you have a good reason.
This is pretty much the same advice you will get from a good financial planner, and it's free.
posted by zvs at 11:24 AM on September 30, 2012 [3 favorites]
Maxing out your Roth is always the right choice. treehorn+bunny's advice about CDs is very good, as long as you don't mind foregoing some profits. CD rates are very low right now. Still better than cash though.
I don't know anything really about the tax penalties for liquidating invested money
Quite simple for money that's not in an IRA. Assuming you are single and have no kids, you're in the 15% tax bracket. When you sell money you've invested in stocks, mutual funds, etc., you pay 15% tax if you've held the investment for less than a year. You pay 0% if you've held it for more than a year. You fill out 1040 Schedule D. It is, obviously, advantageous to hold your investments for more than a year.
If Romney wins your short-term rate will probably be 0% too. If Obama wins your long-term rate will probably go up to 10%. Either way not a big deal. You also probably have state income taxes on top of that 15%/0%.
You don't know anything about investing -- so act accordingly. If I were you, I would come up with a very simple asset allocation that assumes no knowledge of the market, and never touch it. Say, 50% of your money in a S&P or Dow index fund, 22% in a bond index fund, and $20000 in CDs timed to coincide with the next four January 1 payments into your Roth. Then, never think about that money again until you want to buy a house or pay for school or something.
And never touch the money in your Roth, even if you have a good reason.
This is pretty much the same advice you will get from a good financial planner, and it's free.
posted by zvs at 11:24 AM on September 30, 2012 [3 favorites]
This thread is closed to new comments.
posted by waldo at 6:58 PM on September 29, 2012 [1 favorite]