What To Do With Inheritance


T

TundraMan

My spouse is inheriting some money from her parents' estate. We are in
our early 50's, our current retirement plans on track, so this is a
nice bonus but not critical to our long-term financial survival.

We'd like to preserve (and grow) the original investment, and use the
income to 'enhance' our lifestyle, while minimizing the tax bite. I
plan to talk with a CFP about our options, but would appreciate any
suggestions/opinions/comments this group might have.

Fire away...

Thanks!
 
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J

joetaxpayer

TundraMan said:
My spouse is inheriting some money from her parents' estate. We are in
our early 50's, our current retirement plans on track, so this is a
nice bonus but not critical to our long-term financial survival.

We'd like to preserve (and grow) the original investment, and use the
income to 'enhance' our lifestyle, while minimizing the tax bite. I
plan to talk with a CFP about our options, but would appreciate any
suggestions/opinions/comments this group might have.

Fire away...

Thanks!
You provided too little detail for anyone to answer intelligently.

It would be good to provide;
Where do you stand in your current situation/goal? By 50, you should be
well on your way to a portfolio (including your money, pension, SS,
etc.) with a present value to replace replace 40% or so of your income
or at least 10 times your income as a present value number.
If you are on track with that target, are are comfortable with how the
money is invested, why not add the sum to your investments and allocate
accordingly?

You make no mention of a mortgage. There are those who advocate knocking
off the balance as you may not be beyond the standard deduction for
writing off the interest, and going into retirement with no mortgage is
advisable.

Kids? How old? Is their college tuition funded? (Grandkids?) You get the
idea.

You mention 'tax bite'. There is no federal tax for the beneficiaries of
an inheritance, and few states tax the beneficiary, I don't recall
which. So you will receive the money, net. For you to minimize the tax
on the growth, you can seek out an index fund, either a mutual fund or
ETF, with minimal fees and taxable distributions that would also be
minimal, just dividends and distributed capital gains. These usually get
a favorable 15% rate if you are not in AMT land.

Oh, and don't let anyone sell you 1) an annuity or 2) gold.

More details about your situation will trigger some better, in depth
replies.
JOE
 
P

po.ning

TundraMan said:
My spouse is inheriting some money from her parents' estate.
Some money? $10,000, 1 mil? 10 mil? Investment options are different
depending, amongst other factors, on the size of the estate. As
another reply says, not enough information.

And I agree, don't sign on that dotted line if your financial advisor
tries to sell you an annuity.
 
S

speednxs

Congratulations on your windfall!

Take a quarter of your money and spend it on making your life better
now. This is your reward for your fiscal prudence to date.

Take half your money and put it in CDs. Some 6 months, some 1 year and
some 3 years. CD rates are quite good right now. Unfortunately this
is taxed at ordinary income rates.

Take a quarter of your money and put it in a stock index fund. Be
willing to lose it all. Dividends and long term capital gains (more
than 1 year) are taxed at a lower rate than ordinary income.

Fear and Greed are a problem in the stock market. When stocks are
going up people get greedy and buy in. When stocks are going down
people get filled with fear and sell. This is called Buy High, Sell
Low. Think about how you will react to this.

Nobody can predict the future. The correct path is unknowable. You
pays your money and takes your chances.

Enjoy your life.
 
R

Ron Peterson

TundraMan said:
My spouse is inheriting some money from her parents' estate. We are in
our early 50's, our current retirement plans on track, so this is a
nice bonus but not critical to our long-term financial survival.
We'd like to preserve (and grow) the original investment, and use the
income to 'enhance' our lifestyle, while minimizing the tax bite. I
plan to talk with a CFP about our options, but would appreciate any
suggestions/opinions/comments this group might have.
Since you are otherwise set for retirement, you can invest most of the
inheritence in the stock market, saving on taxes by not selling the
stock. Use the dividends to enhance your lifestyle.
 
T

TundraMan

Thanks to everyone for your comments; after reading them I understand
that with so little information you cannot make specific
recommendations.

We will have about $100,000 from the estate to invest. There will be
no inheritance taxes. We want to protect the original capital by
growing it by at least the rate of inflation. We want to use anything
more than that to 'enhance our lifestyle'.

Since all my experience to-date is with tax-deferred investment plans
(IRA, 401k, etc), I'm unsure of the best options for minimizing taxes
while still reaching the above objectives. The traditional 60/40
stock/bond mix should serve well to preserve capital and provide
growth, but we'd have to pay taxes on the dividends/gains on the
equities we sell to provide monthly income. Is there a better option?
What role might tax-exempt securities play?

Thanks again for your comments, and feel free to respond to the above!
 
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E

Elle

TundraMan said:
Since all my experience to-date is with tax-deferred
investment plans
(IRA, 401k, etc), I'm unsure of the best options for
minimizing taxes
while still reaching the above objectives.
Do you have a Traditional IRA? If so, one thing you should
consider is converting all or some of it to a Roth IRA. The
tax benefits of doing so are attractive in many people's
circumstances. Plus, the Traditional IRA has some unusual
disadvantages when it comes to how (high!) your social
security etc. income is taxed in retirement. Your
inheritance would be used in part to pay the conversion
taxes.
The traditional 60/40
stock/bond mix should serve well to preserve capital and
provide
growth, but we'd have to pay taxes on the dividends/gains
on the
equities we sell to provide monthly income. Is there a
better option?
What role might tax-exempt securities play?
You have to weigh the current super low capital gain and
qualified dividends taxes (15% in most people's cases)
against the returns of tax-exempt bonds.

Do you know how all your assets are allocated? For ideas on
this, maybe try some of the free online asset allocators I
like and that are linked at the following site:
http://home.earthlink.net/~elle_navorski/id8.html
 
R

rick++

I'd recommend a total market index fund.
It grows faster than bonds or cash, on average, if
you intend to keep it more than five years.
Indexes are somewhat protected by diversication.
They do cause a little bit of taxes from dividends
and underlying index changes, but relatively low.
When you want to cosnsume dome of the fund,
then sell a part of it, which could result in some
taxes, but not as much as the whole amount sold.
 
P

po.ning

TundraMan said:
Thanks to everyone for your comments; after reading them I understand
that with so little information you cannot make specific
recommendations.

We will have about $100,000 from the estate to invest. There will be
no inheritance taxes. We want to protect the original capital by
growing it by at least the rate of inflation. We want to use anything
more than that to 'enhance our lifestyle'.

Since all my experience to-date is with tax-deferred investment plans
(IRA, 401k, etc), I'm unsure of the best options for minimizing taxes
while still reaching the above objectives. The traditional 60/40
stock/bond mix should serve well to preserve capital and provide
growth, but we'd have to pay taxes on the dividends/gains on the
equities we sell to provide monthly income. Is there a better option?
What role might tax-exempt securities play?
It depends on your tax bracket. For that amount of money I think your
traditional mix will provide you with good growth while protecting the
capital. Tax on most dividend income is only 15%. If you choose to
invest with a long term horizon you won't be selling too often.
 
J

joetaxpayer

Elle said:
Do you have a Traditional IRA? If so, one thing you should
consider is converting all or some of it to a Roth IRA. The
tax benefits of doing so are attractive in many people's
circumstances. Plus, the Traditional IRA has some unusual
disadvantages when it comes to how (high!) your social
security etc. income is taxed in retirement. Your
inheritance would be used in part to pay the conversion
taxes.
To add to Elle's point, use
http://www.fairmark.com/refrence/2006reference.htm
which gives a quick reply to "what tax bracket am I in?". As you've
stated that most of your savings is pre-tax, her advice can help you
keep from getting very nailed while in retirement and paying tax on all
withdrawals.
You have to weigh the current super low capital gain and
qualified dividends taxes (15% in most people's cases)
against the returns of tax-exempt bonds.

Do you know how all your assets are allocated? For ideas on
this, maybe try some of the free online asset allocators I
like and that are linked at the following site:
http://home.earthlink.net/~elle_navorski/id8.html
I'd use this advice, looking at all your funds. Here's a chance to use
new money to offset an overweighting in the pre-tax accounts.
Consider that $100,000 properly diversified can (should) provide
$4,000/yr (gross) that you may spend as you wish (see Elle's links to
"retirement withdrawal rates") This can add to your lifestyle now and
into retirement. In theory, using this money to convert to Roth will do
the same, as the conversion changes gross money to net, on a permanent
basis.

JOE
 
J

jIM

TundraMan said:
My spouse is inheriting some money from her parents' estate. We are in
our early 50's, our current retirement plans on track, so this is a
nice bonus but not critical to our long-term financial survival.

We'd like to preserve (and grow) the original investment, and use the
income to 'enhance' our lifestyle, while minimizing the tax bite. I
plan to talk with a CFP about our options, but would appreciate any
suggestions/opinions/comments this group might have.
I'd second the questions on:

1) How much is in 401k/IRA accounts?
2) Do you have an IRA? Traditional or Roth?
3) What is current tax bracket? Do you think this will change in 20
years based on income from retirement accounts?

You might consider owning individual stocks, as then you would control
when stocks are sold. Investing directly in dividend paying companies
like Microsoft, Proctor and Gamble and GE should enhance current
lifestyle with dividends and grow similar to the rest of the stock
market.
 
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E

Elle

joetaxpayer said:
To add to Elle's point, use
http://www.fairmark.com/refrence/2006reference.htm
which gives a quick reply to "what tax bracket am I in?".
As you've stated that most of your savings is pre-tax, her
advice can help you keep from getting very nailed while in
retirement and paying tax on all withdrawals.
I had in mind in particular the tax trap financial columnist
Scott Burns(among others) describes at the link below. A
Roth IRA is currently one way to help minimize the effects
of this trap.

http://www.dallasnews.com/sharedcon...lumns/2003/stories/021803dnbusburns.ee63.html
 
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J

joetaxpayer

Elle said:
I had in mind in particular the tax trap financial columnist
Scott Burns(among others) describes at the link below. A
Roth IRA is currently one way to help minimize the effects
of this trap.

http://www.dallasnews.com/sharedcon...lumns/2003/stories/021803dnbusburns.ee63.html
yes, I was thinking about that Burn's article. There was link there that
charted the impact of the extra withdrawal on Social Security, too bad
the link was bad. When discussing 401(k) or pre-tax IRA savings, this is
often overlooked. I was aware of the impact AMT can have on income,
effectively taking some people's long term gains up to 23% from 15%, but
at least the presumption is that people caught by this have relatively
high incomes. The SS trap hits people who can least afford this.
JOE
 

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