Inheritance math
March 12, 2025 7:13 AM Subscribe
I am in the US and was recently left a modest inheritance by a family member. The money is invested and not in a tax-advantaged retirement account. With the current state of the stock market in mind, what should I do with it?
I have immediate needs for most of the money, but perhaps not all of it. I know I can talk to a fee-based financial planner, but I would like to understand my options before I do so.
Due to the current state of the stock market, the investments may have depreciated since my relative's death, resulting in a possible capital loss. If this is the case, here are the immediate options that I am aware of:
-Keep some of the funds where they are, or move them to investments that better meet my needs (i.e. an index fund), and wait for them to regain the value they've lost, however long that takes.
-Immediately cash out the investments and use the money for living expenses, allowing me to divert an equal amount of income toward my employer-sponsored retirement account.
Based on the math involved, is one of these obviously the better option? As I understand it, the first option would allow me to recoup the lost value tax-free (since gains will be offset by the initial loss), while the second would be taxable when I start drawing from retirement. But I have never had non-retirement investments before, so option two feels less intimidating.
If it's impossible to say without knowing my exact situation, that's fine. If it helps, I am decades from retirement, medium income (i.e. not wealthy but would be on the hook for capital gains taxes), pay state as well as federal income tax, and think it is likely that I will never be in a higher tax bracket than I am now. I have already maxed out my employer match for retirement.
I have immediate needs for most of the money, but perhaps not all of it. I know I can talk to a fee-based financial planner, but I would like to understand my options before I do so.
Due to the current state of the stock market, the investments may have depreciated since my relative's death, resulting in a possible capital loss. If this is the case, here are the immediate options that I am aware of:
-Keep some of the funds where they are, or move them to investments that better meet my needs (i.e. an index fund), and wait for them to regain the value they've lost, however long that takes.
-Immediately cash out the investments and use the money for living expenses, allowing me to divert an equal amount of income toward my employer-sponsored retirement account.
Based on the math involved, is one of these obviously the better option? As I understand it, the first option would allow me to recoup the lost value tax-free (since gains will be offset by the initial loss), while the second would be taxable when I start drawing from retirement. But I have never had non-retirement investments before, so option two feels less intimidating.
If it's impossible to say without knowing my exact situation, that's fine. If it helps, I am decades from retirement, medium income (i.e. not wealthy but would be on the hook for capital gains taxes), pay state as well as federal income tax, and think it is likely that I will never be in a higher tax bracket than I am now. I have already maxed out my employer match for retirement.
The "cost basis" for inherited investments is apparently set when the assets are transferred to you.
This is incorrect. The cost basis of inherited assets is set to the value of the assets at the time of the previous owner's death, not at the point they are transferred to the new owner.
posted by saeculorum at 7:45 AM on March 12 [6 favorites]
This is incorrect. The cost basis of inherited assets is set to the value of the assets at the time of the previous owner's death, not at the point they are transferred to the new owner.
posted by saeculorum at 7:45 AM on March 12 [6 favorites]
It is very hard to time the market, and usually counter productive to try. The fact that the market has gone down over the last three weeks doesn't tell you whether it is going to keep going down or come back up. There's no such thing as "waiting for them to regain the value they've lost." You have to completely let go of that idea. The value is the value you have today. The market doesn't look back, it just looks forward.
Before making any decisions, you should fully understand the tax implications of any strategy you take. Will you be subject to a capital gain? Will you have a loss that you can apply to some other gain? You should understand this thoroughly with the help of a professional before proceeding.
With that out of the way, if you have an immediate and pressing need for the money, you should sell the assets and use the money. Waiting might increase their value, but it might also decrease their value.
If you don't have an immediate, I agree that you should sell the assets and reinvestment them in something high quality, efficient, and boring. Any money that you won't need for a long time can be put in an index fund. Any money that you expect to need in the next couple of years should be put in CDs or a money market fund.
You should try to put the long-term into tax-sheltered funds (IRA, 401K) as much as possible. A financial advisor would be able to advise you on the best way to do that.
Good luck to you.
posted by Winnie the Proust at 9:54 AM on March 12
Before making any decisions, you should fully understand the tax implications of any strategy you take. Will you be subject to a capital gain? Will you have a loss that you can apply to some other gain? You should understand this thoroughly with the help of a professional before proceeding.
With that out of the way, if you have an immediate and pressing need for the money, you should sell the assets and use the money. Waiting might increase their value, but it might also decrease their value.
If you don't have an immediate, I agree that you should sell the assets and reinvestment them in something high quality, efficient, and boring. Any money that you won't need for a long time can be put in an index fund. Any money that you expect to need in the next couple of years should be put in CDs or a money market fund.
You should try to put the long-term into tax-sheltered funds (IRA, 401K) as much as possible. A financial advisor would be able to advise you on the best way to do that.
Good luck to you.
posted by Winnie the Proust at 9:54 AM on March 12
Big picture: I dunno what a modest inheritance is to you. If it's under eh let's say $25K, just do whatever you're comfortable with and don't worry about it.
For your after-immediate-needs money, you shouldn't be comparing retirement vs nonretirement savings. If you're willing to, you can do both as retirement savings.
This would mean replacing option 1 with "Open a Roth IRA ideally invested in a target date fund, and dump as much of the remaining money in there as the law will allow." This is probably $7K if you're under 50 but things can get Complicated when you have a web of employer and non-employer retirement accounts. Then, whatever this money turns into over the decades until retirement will (according to current tax law anyway) be untaxed when you withdraw it. Obvs it might take a few years to get it all dumped into the Roth.
Also, you should modify Option 2, because you'd be contributing pretax money. If you're in the 24% bracket, contributing 10000 in pretax would only cost you $7600 in living expenses, and (I think anyway) you could contribute about $1.30 for each dollar of inheritance you live off of. --IF-- that level of contribution is legal for you.
At that point, the question of New Option 1 versus Option 2 is Very Complicated and depends on what the tax brackets and law will be in 2050 or whenever. If you'd be in the same or higher tax bracket in 2050, then a Roth would be smarter. If future-history turns out so that you pay a lower tax rate in 2050, then Option 2 will be better. But, again, you don't know what the law will look like then.
posted by GCU Sweet and Full of Grace at 10:11 AM on March 12
For your after-immediate-needs money, you shouldn't be comparing retirement vs nonretirement savings. If you're willing to, you can do both as retirement savings.
This would mean replacing option 1 with "Open a Roth IRA ideally invested in a target date fund, and dump as much of the remaining money in there as the law will allow." This is probably $7K if you're under 50 but things can get Complicated when you have a web of employer and non-employer retirement accounts. Then, whatever this money turns into over the decades until retirement will (according to current tax law anyway) be untaxed when you withdraw it. Obvs it might take a few years to get it all dumped into the Roth.
Also, you should modify Option 2, because you'd be contributing pretax money. If you're in the 24% bracket, contributing 10000 in pretax would only cost you $7600 in living expenses, and (I think anyway) you could contribute about $1.30 for each dollar of inheritance you live off of. --IF-- that level of contribution is legal for you.
At that point, the question of New Option 1 versus Option 2 is Very Complicated and depends on what the tax brackets and law will be in 2050 or whenever. If you'd be in the same or higher tax bracket in 2050, then a Roth would be smarter. If future-history turns out so that you pay a lower tax rate in 2050, then Option 2 will be better. But, again, you don't know what the law will look like then.
posted by GCU Sweet and Full of Grace at 10:11 AM on March 12
If it's not in a tax-advantaged account, you have the advantage that there's no requirement to do anything with it by any particular time. As noted, market timing is a loser's game. If you (or me, or anyone) was skilled enough to know that the market would be down, we could make millions at a minimum.
If you have an emergency fund, are you sure you couldn't stick most of the money into a retirement account and forget it's there? From a strictly financial standpoint, sometimes the best thing is a pre-tax (401k or Traditional IRA), post-tax (Roth IRA or Roth 401k), and other times taxable. It's pretty complicated, depending on your spending in retirement relative to your current income, whether you have access to an employer plan, age you plan to retire, your current income, etc. And that's before you get into the question of what income tax rates will look like in the future. It's controversial, but my personal opinion is for most people who have an employer 401k and will spend less in retirement, the 401(k) is better. But putting it somewhere you won't touch is the most important thing.
posted by wnissen at 11:19 AM on March 12 [1 favorite]
If you have an emergency fund, are you sure you couldn't stick most of the money into a retirement account and forget it's there? From a strictly financial standpoint, sometimes the best thing is a pre-tax (401k or Traditional IRA), post-tax (Roth IRA or Roth 401k), and other times taxable. It's pretty complicated, depending on your spending in retirement relative to your current income, whether you have access to an employer plan, age you plan to retire, your current income, etc. And that's before you get into the question of what income tax rates will look like in the future. It's controversial, but my personal opinion is for most people who have an employer 401k and will spend less in retirement, the 401(k) is better. But putting it somewhere you won't touch is the most important thing.
posted by wnissen at 11:19 AM on March 12 [1 favorite]
I am hopelessly incompetent to answer any of the rest of this question, but to the best of my knowledge, your investments should not have lost any value: they should have been frozen at your relatives death.
posted by mygothlaundry at 12:12 PM on March 12
posted by mygothlaundry at 12:12 PM on March 12
your investments should not have lost any value: they should have been frozen at your relatives death
This is also incorrect, there's no mechanism by which to "freeze" investments at death - they simply are transferred to a new owner. It's similar to inheriting a house (given a house is also an investment) - the previous owner dying doesn't mean the house doesn't change market value.
posted by saeculorum at 12:53 PM on March 12 [3 favorites]
This is also incorrect, there's no mechanism by which to "freeze" investments at death - they simply are transferred to a new owner. It's similar to inheriting a house (given a house is also an investment) - the previous owner dying doesn't mean the house doesn't change market value.
posted by saeculorum at 12:53 PM on March 12 [3 favorites]
It's controversial, but my personal opinion is for most people who have an employer 401k and will spend less in retirement, the 401(k) is better.
I think 401ks are great because they lower your pre-tax income, but since this is inheritance, that's off the board. The only options are types of IRAs, which have yearly contribution limits, or taxable accounts which don't have limits. Or course, buying other assets like real estate, emergency funding, paying down loans, etc.
There are no major provisions against having both Roth IRAs and 401k, but there are provisions against regular IRAs depending on income and employment status.
posted by The_Vegetables at 1:21 PM on March 12
I think 401ks are great because they lower your pre-tax income, but since this is inheritance, that's off the board. The only options are types of IRAs, which have yearly contribution limits, or taxable accounts which don't have limits. Or course, buying other assets like real estate, emergency funding, paying down loans, etc.
There are no major provisions against having both Roth IRAs and 401k, but there are provisions against regular IRAs depending on income and employment status.
posted by The_Vegetables at 1:21 PM on March 12
There are income provisions against Roth IRAs and the cap isn’t that low. Both 401ks and IRAs have a shared contribution limit: if you contribute the max to your 401k, you can’t just open an IRA and have a new limit.
posted by MisantropicPainforest at 4:16 PM on March 12
posted by MisantropicPainforest at 4:16 PM on March 12
I know that when my aunt died in 2015 all her accounts were frozen - I was the executor - and that included her Merrill Lynch accounts. Basically it was like they had been cashed out that day and the cash value was included in her estate. But maybe that is North Carolina specific.
posted by mygothlaundry at 4:56 PM on March 12
posted by mygothlaundry at 4:56 PM on March 12
I think people are missing the fact that you aren't planning to transfer the money directly into a retirement account but , rather you would increase the amount of your salary that is directed to your 401k account and use the money from the inheritance to give you cash to cover the loss of take home pay. That sounds good to me - simple for you and it gives you extra leverage since increasing your 401k contribution by, say $1000 per month only decreases your take home pay by maybe $750, maybe less depending on your tax bracket. If there is any extra employer matching that you get with increased contribution, then it becomes an even more compelling option since you get extra free money for your retirement.
Bonus: since the money will get added in monthly installments, you spread out the risk that market makes sudden move. If it continues to slide down, you will be able to buy more shares with later investements. If the stock market rebounds, at least you got some of your money in while it was still low.
The only downside is that once you put the money into your 401k, there are penalties if you take it before retirement. Although that could also be an advantage if it helps you not spend your savings.
Do check where your 401k money is being invested. It should be in some kind of reasonable mix of stocks and bonds that make sense given the number of years to retirement.
Regardless of what you decide, don't leave the money in current investments unless that is what you would go out and buy right now. In fact, people often choose to "harvest" their tax losses - selling when the market is down and using the loss to offset the taxes they would owe on other income. Then they buy something similar (but not identical). The new stock will have a lower cost basis, so they will owe more taxes in the future when they finally sell it but having the current tax savings that can be invested makes up for that. TLDR: good reasons to sell the stock now, regardless of what you want to do next with the money.
posted by metahawk at 5:35 PM on March 12
Bonus: since the money will get added in monthly installments, you spread out the risk that market makes sudden move. If it continues to slide down, you will be able to buy more shares with later investements. If the stock market rebounds, at least you got some of your money in while it was still low.
The only downside is that once you put the money into your 401k, there are penalties if you take it before retirement. Although that could also be an advantage if it helps you not spend your savings.
Do check where your 401k money is being invested. It should be in some kind of reasonable mix of stocks and bonds that make sense given the number of years to retirement.
Regardless of what you decide, don't leave the money in current investments unless that is what you would go out and buy right now. In fact, people often choose to "harvest" their tax losses - selling when the market is down and using the loss to offset the taxes they would owe on other income. Then they buy something similar (but not identical). The new stock will have a lower cost basis, so they will owe more taxes in the future when they finally sell it but having the current tax savings that can be invested makes up for that. TLDR: good reasons to sell the stock now, regardless of what you want to do next with the money.
posted by metahawk at 5:35 PM on March 12
I don't have the knowledge to improve upon the replies above as to what to do with the money, but I wanted to comment on this part: I know I can talk to a fee-based financial planner... [emphasis added].
The terms fee-based and fee-only sound similar, but to avoid conflicts of interest, a fee-only planner is the kind you want.
posted by daisyace at 5:58 PM on March 12
The terms fee-based and fee-only sound similar, but to avoid conflicts of interest, a fee-only planner is the kind you want.
posted by daisyace at 5:58 PM on March 12
I will just mention that if your employer has a match for 401(k) or other retirement options, that is another factor to consider.
Just for example, if your employer will match your contributions dollar-for-dollar up to 5% of your income (or whatever) it is hard to beat the idea of literally doubling your money going into your retirement fund (and actually somewhat more than that, because of the tax advantage you gain) by taking full advantage of the employer match, and then just spending down the inheritance to meet your monthly shortfall in income, whatever that may be.
Some employers match dollar for dollar for some percent, then a lower match for further percents, even lower for further, etc.
Point is, if this is a factor at all, now your calculation becomes even MORE complex because you are figuring employer match at different rates, tax consequences, capital gains consequences, etc etc. So your fee-based financial planner may well be a great investment.
posted by flug at 7:13 PM on March 12
Just for example, if your employer will match your contributions dollar-for-dollar up to 5% of your income (or whatever) it is hard to beat the idea of literally doubling your money going into your retirement fund (and actually somewhat more than that, because of the tax advantage you gain) by taking full advantage of the employer match, and then just spending down the inheritance to meet your monthly shortfall in income, whatever that may be.
Some employers match dollar for dollar for some percent, then a lower match for further percents, even lower for further, etc.
Point is, if this is a factor at all, now your calculation becomes even MORE complex because you are figuring employer match at different rates, tax consequences, capital gains consequences, etc etc. So your fee-based financial planner may well be a great investment.
posted by flug at 7:13 PM on March 12
RE: timing the market, if your plan was to start withdrawing in say 5 years and then use it as a retirement asset over the ensuing 20-30 years then you could probably "time the market" by assuming that sometime in the next 10 years or so, the market is likely to recover well above its current level. As it gets into that realm, whenever that is, you can start gradually moving your assets into less volatile places.
So if you have a lot of time like that, you can (with pretty good reliability, still not 100%) in fact "time the market" but you are timing it in like decades, not months or even years.
Since Feb 19th, the U.S. market has dropped roughly 9%. With that kind of volatility, in another 3 weeks or 3 months it could easily gain that 9% back, or drop another 9%. Or more in either direction, of course.
If you can't tolerate risk, you just get out now, all at once, and call it good. The value of the market now is "all the way" back down the level it first reached in July & August 2024. And that is literally double the value of the market in June 2019 and April 2020, so you cannot really complain about how much money you have "lost" in the stock market. (source - obvs details may vary depending on your exact investments)
Regardless of the exact details, the actual value of these investments has almost certainly doubled or far more over their lifetime, depending on when they were made and what they were, and in the past month you've lost just a little bit of the frosting on the very top of that.
It's nothing to really cry, or even worry, over. If you need the money now, just liquidate and proceed.
posted by flug at 7:26 PM on March 12
So if you have a lot of time like that, you can (with pretty good reliability, still not 100%) in fact "time the market" but you are timing it in like decades, not months or even years.
Since Feb 19th, the U.S. market has dropped roughly 9%. With that kind of volatility, in another 3 weeks or 3 months it could easily gain that 9% back, or drop another 9%. Or more in either direction, of course.
If you can't tolerate risk, you just get out now, all at once, and call it good. The value of the market now is "all the way" back down the level it first reached in July & August 2024. And that is literally double the value of the market in June 2019 and April 2020, so you cannot really complain about how much money you have "lost" in the stock market. (source - obvs details may vary depending on your exact investments)
Regardless of the exact details, the actual value of these investments has almost certainly doubled or far more over their lifetime, depending on when they were made and what they were, and in the past month you've lost just a little bit of the frosting on the very top of that.
It's nothing to really cry, or even worry, over. If you need the money now, just liquidate and proceed.
posted by flug at 7:26 PM on March 12
And just to reinforce something that was mentioned above, if you are worried about stock market volatility (and you should be right now) and will need to use the money in the next year or two or three, absolutely do not move your money into something like an index fund or mutual fund.
Long-term (decades) those are a good and safe investment. But short term they are directly tied to the stock market. If the stock market drops 50% over the next 6 months (as it did in say 2008-09) then so will your index funds and mutual funds.
Anything you're going to use for current expenses in the next couple of years needs to be in something like a CD - something that has a 0% chance of losing value no matter what the economy does.
If you are planning to spend the money over say the next two years you could spread it into CDs with different maturity dates, say some 1 month, some 3 month, some 6 month, some 9 month and so on up to 2 years or so. That gives you the money in increments as you need it, and it looks like rates are 3-5% right now, depending on term.
That is pretty darn good for a guaranteed return, no risk investment right now.
posted by flug at 7:50 PM on March 12
Long-term (decades) those are a good and safe investment. But short term they are directly tied to the stock market. If the stock market drops 50% over the next 6 months (as it did in say 2008-09) then so will your index funds and mutual funds.
Anything you're going to use for current expenses in the next couple of years needs to be in something like a CD - something that has a 0% chance of losing value no matter what the economy does.
If you are planning to spend the money over say the next two years you could spread it into CDs with different maturity dates, say some 1 month, some 3 month, some 6 month, some 9 month and so on up to 2 years or so. That gives you the money in increments as you need it, and it looks like rates are 3-5% right now, depending on term.
That is pretty darn good for a guaranteed return, no risk investment right now.
posted by flug at 7:50 PM on March 12
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I don't know what the right thing is to do with investments right now (no one does) but your second option is not an obviously wrong choice.
posted by JZig at 7:42 AM on March 12 [1 favorite]