What to do with 150,000 inheritance?

[NYC1967]

HI everyone,

I will be inheriting about $150,000. Help me decide what to do with it? Put in IRA? Ibonds to build up cash savings? any other suggestions welcome.

This is where we are financially:

UPDATED 1/2022 -
Him wanting to retire 6/2027 (60y) - Her 6/2030 (62y)


Him 55 -- Her 54- Emergency Savings $37,500 (goal 150,000 cash)

Own Home - No Debt
Combined yearly salary about - $155,000 - him $110,000 - her $45,000

TOTAL COMBINED PORTFOLIO $1,355,470.00 (50% stock/50% bond)



HIM Current 401k Contributions (6%) -company matches 82% of our 6% )

HER Current 403b Contributions (13%)

HER current contribtions - $500 month to ROTH (VTSAX)

Two Children 19/21
NY 529 $41,300 (will be used in the next 2 1/2 years for younger sons college - will cashflow when it runs out)
Currently cash flowing older sons college - graduates in June


HIM Projected Social Security @62yr ($25,250)….. @67yr ($37,000)…..@70yr ($46,000)

Projected Full Pension (no penalty) @ 57 years old lump sum approx $700,000 or
Full Life $28,800 yr (we would take 100% spousal so would be reduced) NO COLA

HER Projected Social Secuirty @62yr ($15,500)…..@67yr ($23,400)

Pension (1) @ 63 years old $12,500 Full or $11,500 spouse would get $953 NO COLA
Pension (2) @ 65 years old 9/2032) $8,700yr NO COLA (spouse would get 50%)

 

[mystang52]

Remember you are limited to buying a max of $20,000 per year for I Bonds (plus an additional max of $5000 if you choose to take a Federal taxr refund in I Bond). One easy answer to your question: your post mentioned you wanted $150,000 cash for Emergency Fund. So, you can just take $113,000 of the inheritance and voila one of your goals has been reached.

 

[NYC1967]

Remember you are limited to buying a max of $20,000 per year for I Bonds (plus an additional max of $5000 if you choose to take a Federal taxr refund in I Bond). One easy answer to your question: your post mentioned you wanted $150,000 cash for Emergency Fund. So, you can just take $113,000 of the inheritance and voila one of your goals has been reached.

Yes, that is pretty much what I was thinking of doing - but just wonder if I should invest some in equities in my IRA or ROTH to grow

 

[mystang52]

Yes, that is pretty much what I was thinking of doing - but just wonder if I should invest some in equities in my IRA or ROTH to grow

I defer to others on giving specific advice, but I would point this out: you can use the same argument for your Emergency Fund, that it would be better invested in equities. However, since you expressed a wish for $150,000 cash in an Emergency Fund, you now have it!

 

[pjm-7]

Look at major house repairs, upgrades. How is your furnace, AC, water heater? Have you considered adding a solar system?

 

[NYC1967]

Look at major house repairs, upgrades. How is your furnace, AC, water heater? Have you considered adding a solar system?

So are u also thinking I should put the money in emergency savings? I do have money in a house repairs online saving account - just don't add that as part of my emergency account. I add to it monthly for repairs, upgrades that I need/want.

 

[street]

I would invest it if it were me. Your young and have a steady income plan some of that income for emergency. Just my 2¢.

 

[Ronstar]

If you can max your 401k and take catch up contributions, I would do that. Especially if there would be a company match on the increased contributions. That would pump an additional $20k or more annually into your 401k. That would also allow you to dollar cost average more $ into the market tax free (for now)

Then keep the inheritance in cash and withdraw as needed due to the increased 401k withdrawals.

 

[njhowie]

I would invest it if it were me. Your young and have a steady income plan some of that income for emergency. Just my 2¢.

I disagree.

54/55 looking to retire in under 10 years is not "young".

When you are within sight of retirement (under 10 years fits the bill in my book), it's time to begin tightening up the loose ends and begin reducing risk.

He/she already has over $1M with 50/50 AA, no debt, and an emergency fund which is below his comfort level and can be fully funded with spare left over.

I agree with mustang52.

Fully fund the emergency fund now, use additional income to invest going forward.

 

[finnski1]

I vote for fully funding the emergency fund.

 

[CRLLS]

Certainly, fill the emergency fund. By definition, emergencies come at unexpected times. Best to be prepared. Unless I missed it, OP didn't mention their current or expected expenses. From a rough estimate after savings, I get a current burn rate of 136k including taxes and college tuition.

I would do an analysis of taxes now and projected in retirement and decide whether changing to Roth 401K's or Roth conversions are appropriate.

It looks as though things are pretty well set for covering your nut when Pensions and SS cut in.

 

[NYC1967]

Certainly, fill the emergency fund. By definition, emergencies come at unexpected times. Best to be prepared. Unless I missed it, OP didn't mention their current or expected expenses. From a rough estimate after savings, I get a current burn rate of 136k including taxes and college tuition.

I would do an analysis of taxes now and projected in retirement and decide whether changing to Roth 401K's or Roth conversions are appropriate.

It looks as though things are pretty well set for covering your nut when Pensions and SS cut in.

we might be in a slightly lower tax bracket after retirement - but since we only have about 140,000 in ROTH now, we have just started to contribute 500 per month into ROTh VTSAX fund thru vanguard

 

[38Chevy454]

Since funding the emergency fund is your top priority do that first up to the level you want at $150K. Any leftover cash I would consider to do back door Roth conversion from your 401k/403b, using the leftover inheritance cash to pay the tax bill. As for how much, look at your income and step increases in tax rates and decide how much to convert. This pumps up your Roth as you have also desired to do.

 

[NW-Bound]

I would invest it if it were me. Your young and have a steady income plan some of that income for emergency. Just my 2¢.

I disagree.

54/55 looking to retire in under 10 years is not "young"...

Is 55 young? I retired when 55. I did not think I was young then, but my gosh, where did the time go?

It's sad. I am going to put the Trotsky quote back to my signature line. Trotsky was about 55 when he wrote this line in his memoir.

 

[NYC1967]

Since funding the emergency fund is your top priority do that first up to the level you want at $150K. Any leftover cash I would consider to do back door Roth conversion from your 401k/403b, using the leftover inheritance cash to pay the tax bill. As for how much, look at your income and step increases in tax rates and decide how much to convert. This pumps up your Roth as you have also desired to do.

Have to admit, I don't understand the backdoor ROTH conversions - and or when they are needed to be done. just curious why you recommend I do this? I am now contributing 500 a month to ROTH so why more in addition to this?

 

[pb4uski]

Yes, that is pretty much what I was thinking of doing - but just wonder if I should invest some in equities in my IRA or ROTH to grow

You can do both if you are willing to accept a little risk. Invest it in the same equities that you would invest if in if you put it in your IRA or Roth, but in a taxable brokerage account... that way it will grow the same... and any qualified dividends and LTCG will only be taxed at 15%... lower than ordinary income tax rates.

If an emergency arises then you can always tap it if you need to... but if you don't need it you can let it grow.

Worst case is if the equities decline and some sort of emergency arises and you need to tap it but even then you could use any capital loss to offset ordinary income or other gain positions.

 

[Sunset]

I would buy the $20K in I-bonds and count it as part of the emergency fund.

While the I-bonds would not be cash-able for 1 year, after that they would be cash-able for emergencies.



Personally I wonder how many times people need to access an emergency fund of more than $20K ? So I think calling a $150K cash account for emergencies is too much.


Besides, OP should have some credit cards, for emergencies.


If my car was smashed up, would be what I use for immediate costs like rental, or repairs. If the car needed replacing after insurance I'm the type where $25K->$40K would be enough for a car.

 

[pb4uski]

I would buy the $20K in I-bonds and count it as part of the emergency fund.

While the I-bonds would not be cash-able for 1 year, after that they would be cash-able for emergencies.



Personally I wonder how many times people need to access an emergency fund of more than $20K ? So I think calling a $150K cash account for emergencies is too much.


Besides, OP should have some credit cards, for emergencies.


If my car was smashed up, would be what I use for immediate costs like rental, or repairs. If the car needed replacing after insurance I'm the type where $25K->$40K would be enough for a car.

Yes, we really never had an emergency fund. We had some savings when I was working, but any true emergencies could have been covered temporarily with credit cards and that would give us 20-40 days to figure out what to liquidate to pay of the credit card bill.

 

[Out-to-Lunch]

Several have mentioned the annual limit on I-bonds, but AFAIK no one has pointed out that you cannot simply "Put it in IRA." There is an annual contribution limit of $7k at your ages.

I believe the answers of Ronstar and 38Chevy tacitly took this into consideration, but I wanted to point it out explicitly.

 

[pb4uski]

Good point. Similarly, you can't put it in your 401k directly... but you can indirectly by inceasing your 401k contributions (assuming that you have headroom to do so) and then tapping the inheritance to compensate for the withholdings from earnings.

 

[NYC1967]

I would buy the $20K in I-bonds and count it as part of the emergency fund.

While the I-bonds would not be cash-able for 1 year, after that they would be cash-able for emergencies.



Personally I wonder how many times people need to access an emergency fund of more than $20K ? So I think calling a $150K cash account for emergencies is too much.


Besides, OP should have some credit cards, for emergencies.




If my car was smashed up, would be what I use for immediate costs like rental, or repairs. If the car needed replacing after insurance I'm the type where $25K->$40K would be enough for a car.

I was wrong in stating to use for "emergencies". What I mean is that I want about 100,000 - 200,000 in cash by the time we retire. If the market drops and I need money I will have, when my husband retires and before we get our SS and pensions, we could use it etc.

 

[38Chevy454]

Have to admit, I don't understand the backdoor ROTH conversions - and or when they are needed to be done. just curious why you recommend I do this? I am now contributing 500 a month to ROTH so why more in addition to this?

You stated that you want to boost your Roth amounts. As pointed out by Out-to-Lunch, doing through your annual limit it is topped out at $7K/year. A way to increase that is by converting pretax 401k/403b money into Roth.

For example, you can do $100K of conversion now, and assuming 22% tax bracket you would have to pay $22K in tax to Fed. Plus whatever your state tax bite would be.

In the original post you have $37.5K in cash in emergency fund now and want to make that $150K; so use $112.5 out of the $150K inheritance goes to your cash emergency fund. That leaves $37.5K of inheritance money that is after tax money. You can use that to pay the tax on Roth conversion. This conversion gives an immediate $100K boost to your Roth savings. Much better than $6K/year ($500/mo) you are now doing over the next approx 5 years or whenever you stop working. Plus that Roth now is growing tax free from now. It just needs the tax bill paid now, which you have the cash available from the inheritance money. Hope that explains it better.


Or use the leftover $37.5K and buy yourself a new vehicle and remember the person everytime you drive the new car. It's also OK to buy something with the inheritance since you have topped up your cash emergency fund. Maybe one of your kids could use a hand me down car from Mom or Dad, and Mom or Dad gets a nice new car.

 

[NYC1967]

Thanks for the Roth conversion explanation...

A new car sounds good too - crazy me has an online savings account that I contribute to monthly to save up for a new car when needed )

 

[pb4uski]

^^^ Do you have a Christmas Club account too?

Remember those?

 

[NYC1967]

^^^ Do you have a Christmas Club account too?

Remember those?

I do remember those LOL, never had one.

I've been doing the "envelope" system for 30 years....instead of envelopes I now use online savings accounts