You Inherited a retirement account, now what?
It’s unfortunate that you have now inherited someone’s retirement account. Nobody wants to be in that situation.
What a potential blessing for you and your family though!
There are some things to watch out for, and the big investment firms that management these accounts don’t always know or provide the information you need to make smart decisions.
What are things I must do when I get the account?
Assuming that the account designated you as a beneficiary, then it gets to bypass probate and creditors don’t get any access to the funds when the estate is being settled.
So, if you know someone is ill, it would really behoove them to make sure their beneficiaries are in order for all of their accounts, and this is one of the first things we go over as we onboard new clients.
1. Roll the funds into an Inherited IRA.
2. Nothing else.
You are not required to do anything with money for 10 years (if you are a non-spouse inheriting the money). There are different rules for non-spouses and minor children, but that’s a different.
Rolling the funds into an Inherited IRA does a few things:
Saves taxes - If you take the money out and even leave it in the same investments in a normal brokerage account that you open, you have to pay income taxes on all of the money. You want to avoid this. This is something that most big investment firms will not tell you or want to help you with. Open an Inherited IRA/Inherited Roth IRA, and roll everything into it.
Gives you flexibility to control distributions and taxes - You now have 10 years to take the money out. You can take it all out in year one, six, 10, doesn’t matter. You can take some out every month, year, or just as you need it. It allows you to control the taxes you’ll have to pay over the course of time.
Also, if you don’t need the money, you can leave it in and let it grow for the whole 10 years before taking out and paying taxes. This is generally the best strategy to maximize the actual dollars out over time, depending on the amount and your tax situation.
Put out any fires as soon as you can
If there are any immediate financial needs, you should use the money for that. If you are running a negative budget, or you have high interest debt it would make sense to fix those issues. If you have credit card balances, high interest car loans, etc. then paying them off will provide relief and makes sense from a financial standpoint. Relieving this pressure from your monthly budget will allow you the space to breathe a bit more easily and focus on what is important in the nearer term.
I feel like I am ready to put the money to work, what now?
Short answer - follow your Financial Plan. Treat this money like it is any other money that you earned on the job. What is the next thing you have on your list. It may be that it makes sense to pay off a bunch of debt like your cars, or if it is enough, maybe even your house. Might be that you are behind on retirement investing and need to do some catch up by funding Roth IRAs. You certainly should have a solid emergency fund of three to six months of income and this is a good opportunity to fund that.
There are a world of possibilities, but you should make sure that any path that you choose drives you towards achieving your plan goals.
Create a memory
Assuming that you have taken care of your immediate needs, have an emergency fund, paid off any credit cards and high interest loans. Then think about doing something to create a memory. Maybe it is a trip you have been dreaming about, or going somewhere that is special to you and the person that left you the money. If it was your parent or grandparent, was there a favorite trip you would take together growing up, that now you can share with your kids or grandkids?
If it is larger sum of money, and you are in the right financial place to take advantage of it, maybe it is a second or vacation property. If you grew up going to the lake with your family, maybe it is a lake house for you and your family to enjoy.
Memories are one the one thing that will stay with everyone forever, and perhaps the best legacy we can leave. So if it makes sense for you and where you are at in your financial plan, honor the person by creating a legacy of memories for you and future generations. Take lots of pictures, that way every time you look at them you can think about the gift you received and be able to remember them.
Do you have a Financial Plan to help you make smart decisions with your inheritance?
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Snowcap Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
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