What To Do With Inheritance

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

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.

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.

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.

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!

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.

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.

I'd second the questions on:

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.

"joetaxpayer" wrote

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.

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