Where do we invest 'extra' money?

[goingtotravel]

Not sure if this is the right board for this question but here goes. We are trying to figure out where to invest an inheritance that is approximately worth 10% of our current portfolio. We are inheriting a few IRA's where the original owner was already taking their RMD's due to age.

We plan to FIRE in 2 years for DH and 2 1/2 years for me. All of our investments are in tax deferred accounts and they will cover approximately 35% - 40% of our anticipated expenses in retirement with pensions and SS (eventually) covering the rest. We actually don't even need the 35%, could go much lower, but that is for a very generous budget covering a lot of travel, keep our large home, continuing to contract out our lawn maintenance, etc

We are focusing on bringing our emergency fund up to cover 6 months expenses right now and we will have paid off all debt but our mortgage which has a 3.75% rate. We have a VA loan and can for very little money lower that rate if rates decline again and we plan to carry the mortgage into retirement so we don't want to use the money to pay down the mortgage.

Our portfolio is currently invested with 54% fixed income and 46% stocks. Stock split is 25% large cap fund, 7% small cap fund, and 14% international fund. We are being a bit conservative right now and may start increasing our equity allocation once we retire and feel comfortable with our projected expenses.

We have to decide what to do with the inheritance this month. Give our situation how would you invest this money?

 

[Lawrencewendall]

ROTH Total Market Index?

 

[OldShooter]

If your portfolio went up by 10% due to market forces what would you do? There is nothing special about a 10% increase. The source Is irrelevant.

 

[goingtotravel]

Oops, forgot to mention we are inheriting traditional IRA's. We were told by the companies managing them now that we cannot convert these to Roth's but it sounds like more equities might be the place to put them. Right? We were originally debating using this money first in retirement, doing some Roth conversions after retirement (anticipating higher tax rates eventually) with our tax deferred accounts and then pulling from the tax deferred once we ran through the inherited money, and finally hitting up the Roth converted accounts. Lots of questions. We are good at saving but not very investment savvy (we've just been lucky to save, save, save and not touch the money).

 

[goingtotravel]

If your portfolio went up by 10% due to market forces what would you do? There is nothing special about a 10% increase. The source Is irrelevant.

I totally understand what you are saying. If we got a 10% equity gain I would probably re-balance our accounts at some point during the year to match our current allocation.

Maybe I'm asking the wrong question. We have all of our investments in TSP (outside of our emergency fund in a MM). This is our first investment outside of TSP. We can open an inherited IRA with Vanguard and put the money into an index fund(s). Does this seem like the best use of the money given our current portfolio and FIRE plans?

 

[audreyh1]

If you are retiring in 2 years or so, just combine them into your planned retirement asset allocation. They do not need to be treated differently. Just review your overall asset placements (taxable versus tax-deferred) in terms of tax efficiency.

 

[ExFlyBoy5]

Why do you have to figure it out in a month? If it's an inherited IRA, you can trade within it all day long with no tax consequence like a normal IRA. You will only be taxed on any distributions.

If you are retiring in 2 years or so, just combine them into your planned retirement asset allocation. They do not need to be treated differently. Just review your overall asset placements (taxable versus tax-deferred) in terms of tax efficiency.

This. Just because the money is separate from your TSP, doesn't mean the allocation would be any different. We have money scattered to the four corners of the world, but a handy/dandy Google spreadsheet lets me know at any given time what my AA is.

 

[flintnational]

Generally, IMO, when you receive windfalls they should be invested per your normal AA. So, do not look at this as separate money but as part of your total assets and allocate accordingly.

 

[Lawrencewendall]

Inherited IRAs have RMDs based on your age if I recall. Take the RMDS and contribute to the ROTHs, not convert. You will pay taxes on the RMDs.

 

[goingtotravel]

Why do you have to figure it out in a month?

We do not like the entity that is handling the accounts now due to their fees. That is why we want to move the money soon.

Thanks everyone. I think we are overthinking this and we will just throw this into our normal AA and keep chugging along.

 

[ExFlyBoy5]

We do not like the entity that is handling the accounts now due to their fees. That is why we want to move the money soon.

Thanks everyone. I think we are overthinking this and we will just throw this into our normal AA and keep chugging along.

You can "roll it over" to any brokerage you want to and I don't think there is a time limit with that. Just DO NOT take a distribution! But, yep...keep on chugging!

 

[HadEnuff]

I inherited a traditional IRA from my dad. I set up an inherited IRA at Vanguard, (the rules are different for inherited vs. regular IRA), and just set it to the same AA I had already established.

I didn't consider it "extra" money, because I plan on drawing it (have to with the RMD rules for inherited IRAs) and living on it.
Now, I have a cousin who has "extra" money, in that he doesn't plan on living on it. He and his DW have enough coming in on teacher pensions that they plan on their heirs getting ALL of it, and it's a lot, so they have it 100% in equities.
That's what I'd call "extra" money, and probably what I'd do with it.

 

[joeea]

We have to decide what to do with the inheritance this month. Give our situation how would you invest this money?

I see no need to treat this windfall differently than the rest of your portfolio. Invest it according to your current plan.

 

[kgtest]

RMD is required on an inherited IRA and the amounf of money a person is required to withdraw is based off of the (oldest if multiple) beneficiaries life expectancy.

IF you say you have Bonds and equities, I would do this..

1. Any RMD money should be used for fun money or living expenses and the tax bill due for the RMD.

2. The rest of the money still in the account should be re balanced to meet your defined Asset Allocation %. So if you are at 60/40 bond/equity then take the leftovers in the inherited account, and sell what you need and buy what you need to get back to your asset allocation. This requires aggregating ALL retirement accounts together so you know which buckets to fill, and which ones to empty. You need a wholistic view, now that you have new money its a great opportunity to take stock in what you own and what your asset allocation is now and what it will be in the future.

3. Delay SSA if you can since you have newfound RMD money.

4. IF you still have money sitting around, rather than sitting in a checking or savings, put it into a brokerage account and again buy/sell to reach the desired asset allocation.

5. Rebalance as you need to when allocation gets outside of your preferred % which should be 1-2x a year.

Since you are getting taxed on the RMD of the inheritence regardless, I might just be prone to paying bills with it along with the tax bill for the RMD and then delay my own taxable withdraws a little bit.

Option 6. If you do not need the money and need some tax harvesting due to a currently high tax bracket, donate the RMDs to charity and take the tax deduction.

 

[OldShooter]

Said more briefly, this is not an asset allocation problem per se. It is a tax and SS strategy problem. I would seek professional help from a CPA or a really tax-savvy FA. One of the SS optimization computer programs may be of benefit.

An aspect of the tax strategy problem is deciding where to hold and how to spend down various types of assets. Typically fixed income in tax sheltered accounts and equities invested passively to minimize capital gains, possibly a tax-managed passive fund like DFA and other offer, held in taxable accounts to the extent necessitated by RMDs and other considerations.

 

[rodi]

I think all of us are assuming you plan to do a "stretch IRA" with this money, rather than cash it out. If so - continued RMDs based on your age will apply. The RMDs are taxed at the time you withdraw.

You can roll it over to any brokerage... When I inherited an IRA from my dad I moved it to Schwab... it was pretty easy. I factor the RMD into my annual income sources that I use for spending. I have the inherited IRA, my IRAs, our savings/brokerage accounts all included in my overall asset allocation... I don't treat it as separate money.

 

[kgtest]

Said more briefly, this is not an asset allocation problem per se. It is a tax and SS strategy problem. I would seek professional help from a CPA or a really tax-savvy FA. One of the SS optimization computer programs may be of benefit.

An aspect of the tax strategy problem is deciding where to hold and how to spend down various types of assets. Typically fixed income in tax sheltered accounts and equities invested passively to minimize capital gains, possibly a tax-managed passive fund like DFA and other offer, held in taxable accounts to the extent necessitated by RMDs and other considerations.

Thanks for shooting straight and setting me straight OldShooter. That's basically what I was trying to make a point of, its really looking at maximizing your tax efficiency and Social Security withdrawals.



The questions to answer "How will I minimize taxes while maximizing social security?"



And really this is a question everyone retiring should try and answer for themselves.

 

[HI Bill]

We can open an inherited IRA with Vanguard and put the money into an index fund(s). Does this seem like the best use of the money given our current portfolio and FIRE plans?

It might depend on your ages...if you're not ready for your own RMDs, you'll be required to at least take RMDs from the inherited IRA. In my case, this year, this is exactly what I did. I opened an inherited IRA account with Vanguard, then put half in bonds (my only bonds at the time), and half in VTI. You have to take taxable distributions of at least the RMDs, but the beauty of this is, you can take all of your initial distributions from these accounts, while letting your tax-deferred accounts grow tax-free. Anyway, consider age, income levels (and tax brackets) can help you decide.

 

[pb4uski]

Open new inherited IRA accounts at Vanguard. Then have Vanguard transfer the money in from the broker that you don't like. Then invest in Total Stock Market Index and Total International Stock Market Index.

Assumes that your are comfortable with 58/42 AA (54/46 current plus 10 added to equities.... so 64/110 = 58% and 46/110 = 42%).