Investing a Large Inherited IRA

[Hopeful]

Unfortunately, I recently had a good friend who passed. I wam the sole beneficiary of his estate and a large IRA, which increases our investable assets by about 50%. I’m 52, and DW is 58. We’ve been comfortably retired for the past three years and have been using the rule of 55 to draw down her 403b in lieu of Roth conversions, as we have no children.

I wanted to run my thoughts regarding the inherited IRA by the brilliant minds here. The inherited IRA must be liquidated within 10 years, and the yearly withdrawals would alone fund our current lifestyle. This IRA will fund our “delay period” until my wife starts her pension at 65 and social security at 70, so for peace of mind I would like to be conservative with it.

Here are my initial thoughts:

I’m thinking of investing it in either laddered TIPS or Treasury STRIPS. My initial thought was to go with TIPS, but I feel inflationary risks are lower over a 10-year period vs a longer period, and I have assets to cover any unexpected inflation.

Right now I am leaning towards Treasury STRIPS. I’m considering purchasing 10 bonds in equal cost now. Each year’s corresponding PAR value would increase, which could (hopefully) somewhat track inflation. I like the simplicity here, as I wouldn’t need to deal with interest payments along the way. Plus, if something were to happen to me, my DW would easily comprehend that each year’s maturing bond is for the next year’s spending.

I would consider this strategy as part of our fixed income allocation and plan to allocate the other portions of our portfolio to equities, maintaining our current asset allocation.

I wanted to ask the community for feedback. Does anyone see any glaring issues with my plan? Or perhaps other strategies or considerations I should think about?

 

[Koolau]

Hard to make a "mistake" since it's more or less "found" money and you don't actually "need" it.

I generally like the idea of a conservative investment, but this is a time you could be a bit more speculative since you don't really "need" the money.

Just thinking out loud here. YMMV

 

[wmc1000]

How is the IRA currently set up by your former friend?

 

[FREE866]

If you don't "need" the money for awhile then why go super conservative with all TIPS?
Just curious.
Also, yes the account needs to be depleted after ten years, but you could transfer whatever securities you invest in "in kind" to a taxable account. You will pay taxes on each and any withdrawal so you could just do yearly withdrawals to lessen the tax it as opposed to taking it all at once after year ten.

 

[Hopeful]

How is the IRA currently set up by your former friend?

It is currently 100% equities.

If you don't "need" the money for awhile then why go super conservative with all TIPS?
Just curious.
Also, yes the account needs to be depleted after ten years, but you could transfer whatever securities you invest in "in kind" to a taxable account. You will pay taxes on each and any withdrawal so you could just do yearly withdrawals to lessen the tax it as opposed to taking it all at once after year ten.

While we don't need the money, we do currently need income, which amounts to about 1/10th of the inherited IRA. We currently receive that income from DW's 403b account, as we have no other sources of income. Taking withdrawals from both tax-deferred accounts may not be wise from a tax standpoint. To me, it made sense to allocate the dollars that will be used in the near term to fixed income, especially since they are in a tax-deferred account.

 

[Diogenes]

Hard to make a "mistake" since it's more or less "found" money and you don't actually "need" it.

That's a good point. This being an unanticipated windfall, one can afford to be more cavalier with it, than one might have been with essential and expected funds. We have to balance desire for safety (fear) with desire for growth (risk). Where that balance falls, is an intensely personal decision. I personally would keep the money 100% in equities. Others might do 100% the opposite.

One crucial consideration is taxes. Not only will the tax burden be high, but it might affect the OP's tax bracket and eligibility for various credits, breaks and so on. The resulting marginal rate might be very high indeed... and if that's so, then perhaps the problem of how/where to invest is somewhat obviated. The would-be investment is simply handed over to the tax man.

Put another way, instead of worrying about how to invest, I'd first consult a tax professional.

 

[pb4uski]

I like your idea of a TIPS ladder with the amounts calibrated to your estimated spending/cash flow needs.

 

[Dalton]

That sounds like a plan. I, too, invested my inherited IRA in fixed income because it's a) my short to mid spending money, and b) to keep it from growing too fast for tax purposes (I adjusted other accounts, that I'm not forced to withdraw from in the next 10 years, to have more equities to meet my AA).

 

[Hopeful]

That sounds like a plan. I, too, invested my inherited IRA in fixed income because it's a) my short to mid spending money, and b) to keep it from growing too fast for tax purposes (I adjusted other accounts, that I'm not forced to withdraw from in the next 10 years, to have more equities to meet my AA).

That is exactly what I was thinking, you were just able to put it into words more understandable than I.

 

[engineernerd]

Apparently you can get Treasury-STRIPS created from TIPS, according to the TIPS at a Glance table here (last row): TIPS — TreasuryDirect

I am not hugely familiar with Treasury products and have no idea what's the best choice. Since TIPS only come in 5-year or longer maturities, buying them directly at issuance could only fund years 5-10 so you'd have to buy them on the trading market or buy something else for the first 5 years.

I agree with your idea to convert this account to fixed income and increase your equity holdings in other accounts to make up for it.

 

[walkinwood]

Can you buy a 10 year immediate annuity in an IRA? I don't know if it would make financial sense - just wondering.

 

[RetiredHappy]

Can you buy a 10 year immediate annuity in an IRA? I don't know if it would make financial sense - just wondering.

You can buy a 10-year term fixed income annuity that starts paying immediately.

 

[pb4uski]

^^^ in an IRA.

 

[38Chevy454]

Maybe just because I am more risk tolerant than many are, but I would think of the inherited IRA as two pots of money: one for short term say 1-4 years, and other for longer term 5-10 years. Short term stay conservative as it is your spending money, and it can be approx 40% of the inherited amount. I don't think taxes are really an issue as you have been tapping your own IRA for money. So no difference in taxable amount from either IRA source.

The longer term I would stay in equities (wide diversified low fee funds) and adjust to more conservative as time goes on. Also, yes you could now increase equities allocation in your own IRA asset allocation since you no longer have this as anything except greater than 10 years money need.

I am not an annuity fan, so I would not be looking into that if I was in your position.

 

[Exchme]

Sorry for your loss.
I would maintain my current asset allocation, with bonds preferentially going to the inherited IRA first (since it is tax protected for the least amount of time) and your 401K/traditional IRAs next.

 

[Koolau]

Sorry for your loss.
I would maintain my current asset allocation, with bonds preferentially going to the inherited IRA first (since it is tax protected for the least amount of time) and your 401K/traditional IRAs next.

I agree. Whatever asset allocation one has been comfortable with would be a good starting point to deal with a windfall IMHO but YMMV.

 

[gauss]

Unfortunately, I recently had a good friend who passed. I wam the sole beneficiary of his estate and a large IRA, which increases our investable assets by about 50%. I’m 52, and DW is 58. We’ve been comfortably retired for the past three years and have been using the rule of 55 to draw down her 403b in lieu of Roth conversions, as we have no children.

I wanted to run my thoughts regarding the inherited IRA by the brilliant minds here. The inherited IRA must be liquidated within 10 years, and the yearly withdrawals would alone fund our current lifestyle. This IRA will fund our “delay period” until my wife starts her pension at 65 and social security at 70, so for peace of mind I would like to be conservative with it.

Here are my initial thoughts:

I’m thinking of investing it in either laddered TIPS or Treasury STRIPS. My initial thought was to go with TIPS, but I feel inflationary risks are lower over a 10-year period vs a longer period, and I have assets to cover any unexpected inflation.

Right now I am leaning towards Treasury STRIPS. I’m considering purchasing 10 bonds in equal cost now. Each year’s corresponding PAR value would increase, which could (hopefully) somewhat track inflation. I like the simplicity here, as I wouldn’t need to deal with interest payments along the way. Plus, if something were to happen to me, my DW would easily comprehend that each year’s maturing bond is for the next year’s spending.

I would consider this strategy as part of our fixed income allocation and plan to allocate the other portions of our portfolio to equities, maintaining our current asset allocation.

I wanted to ask the community for feedback. Does anyone see any glaring issues with my plan? Or perhaps other strategies or considerations I should think about?

That's basically what I am doing with an inherited IRA. Invest in STRIPS to be spent the year of maturity to bridge me to age 70 Social Security.

I then re-balanced my other assets to keep whatever AA I was targeting. Quite a simple setup that batches maturities to liabilities IMHO.

 

[Route246]

Hard to make a "mistake" since it's more or less "found" money and you don't actually "need" it.

I generally like the idea of a conservative investment, but this is a time you could be a bit more speculative since you don't really "need" the money.

Just thinking out loud here. YMMV

I generally agree 100% with your sentiments and highly respect your thinking. On this one topic of "found" money I have a different take. "Found" money has the same value as hard-earned money for me. It is a big picture outlook as money is just a way of keeping score. If I find a $20 bill on the ground in a parking lot it has the same value as $20 sitting in Vanguard or the bank, still buys the same amount of food, etc.

 

[TickTock]

OP,

I think your plan is very reasonable.

Some possible modifications to consider:

1. Split evenly between TIPS and STRIPS
2. Go 1/3 each TIPS, STRIPS, and MYGAs [A-rated insurance companies]
3. Split evenly between TIPS and MYGAs