Seeking some sage, financial advice.

JM Aggie08

Diamond Member
Jan 3, 2006
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#1
The wife and I will be inheriting a sizable chunk of money due to a family member's recent passing. This will be comprised of life insurance as well as a portion of a 401k. I am planning to meet with an adviser to get a plan in place, but thought I'd first start here:
  • I do not know what kind of 401k this was, and therefor do not know what taxes have yet to be taken out (or what tax implications come with inheriting such an account)
  • The sum will in all likelihood be greater than our mortgage balance -- this is just north of 5% interest (still pissed about the rate, but it was out of my control)
  • We have no other debts -- student loans have been paid off, no car notes, etc -- wife is however due for a new (used) car at this point
  • We have our first kid on the way
  • We have company managed 401k/roths that we already contribute to

First inclination would be to pay off the house, however, it would make more sense to invest if I stand to make a larger return than my current interest rate. Admittedly, this is not something I've ever looked much into, other than shifting around funds for our personal retirement accounts.

Let me know if there is any additional information that would be helpful -- thanks in advance.
 

JM Aggie08

Diamond Member
Jan 3, 2006
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#2
We also have a 6-8 month emergency fund established.
 

dasherHampton

Golden Member
Jan 19, 2018
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#3
I can't stress this enough: Do NOT spend any money until your kid is born happily and healthy (I'm sure it will be).

A friend of mine's wife had minor complications during childbirth and it ended up costing $65,000 fracking dollars. Luckily they are pretty well off and could absorb it.
 
Oct 12, 2009
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#4
Debt free is the way to be, imo.... depends on your aversion to debt and risk.

529 plan.

and the stand by, H&B.
 
Feb 14, 2002
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#5
Pay off the house and live same as before.
 
Sep 13, 2001
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#6
I'd definitely splurge on something and go on some exotic vacation or something. Too many people are worried about saving and not living in the now, but you need to have balance because you won't be able to do nearly as much physically when you retire as you can now.

But obviously use most of the money for something responsible like you are looking to do.
 

Cepak

Platinum Member
Apr 6, 2001
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#7
How old was the person that passed away?

From thebalance.com:

If you are the beneficiary of someone’s 401(k) plan and they were not your spouse, there are three possible choices covered below.

If the Person You Inherited From Was Over Age 70 ½

If the person you inherited the account from was over age 70 ½, and thus had already started taking required minimum distributions at the time of death, the rule is that you must, at a minimum, continue to take out at least these required minimum distributions, and if you desire you can take out more than this amount, but not less. You can take these distributions out over the longer of either the decedent's life expectancy or your own, according to the IRS required minimum distribution life expectancy tables.

You should have the option to do this by leaving the money in the plan or by rolling it over to an account titled as an Inherited IRA.

If They Were Not yet Age 70 ½

If the person you inherited the 401(k) plan from was not yet age 70 ½, the 401(k) plan will allow one or both of the options below:

  • The 401(k) plan may require you to take all of the money out of the plan no later than December 31 of the fifth year following the year of the person’s death. You could take a little out each year, or wait until the last year to take it all. You will pay regular income taxes on the amount withdrawn, so you may want to take more out in years where you expect to be in a lower tax rate.
  • The plan may allow you to take the money out in annual amounts over your life expectancy according to the required minimum distribution life expectancy tables. You may be able to do this by leaving the money in the plan or by rolling it over to an account titled as an Inherited IRA. This option is often referred to as a "stretch IRA" because if you are much younger than the person you inherited from, you can stretch the distributions out over a long period of time.
 

JM Aggie08

Diamond Member
Jan 3, 2006
7,309
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#10
Current lead case is paying off the house, reverting mortgage payments (sans taxes :)) to other investments.
 
Oct 12, 2009
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#11
Assuming you want to stay where you are and the hood isn't going to turn into one.
 

Cepak

Platinum Member
Apr 6, 2001
2,071
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#12
Current lead case is paying off the house, reverting mortgage payments (sans taxes :)) to other investments.
Since there is really no way to claim mortgage interest, property taxes, and state income taxes as itemized deductions on your federal income taxes anymore, pay off the house and save yourself all the money on your mortgage interest payments. My wife and I originally got a 15 year loan on our home, but with all of the overtime I was working, we paid the house off in 8 years. I haven't been able to take anything but the standard deduction in over 10 years. But, my wife and I also saved over $100K in interest on this home loan.
 

LurchFrinky

Senior member
Nov 12, 2003
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#13
Since there is really no way to claim mortgage interest, property taxes, and state income taxes as itemized deductions on your federal income taxes anymore, pay off the house and save yourself all the money on your mortgage interest payments. My wife and I originally got a 15 year loan on our home, but with all of the overtime I was working, we paid the house off in 8 years. I haven't been able to take anything but the standard deduction in over 10 years. But, my wife and I also saved over $100K in interest on this home loan.
I was going to mention something similar, but not quite the same.
Right now is tax time and you should be able to tell if you itemize or take the standard deduction with the new tax rules. I still itemize, and so I would have to do some math on the difference in taxes between paying off the house or not. If you take the standard deduction, then I am pretty sure you will make out much better by paying off the mortgage like Cepak suggests.
 
Nov 8, 2012
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#14
I think a lot of it depends on the market.

So right now - the market doesn't look like it's going to do THAT great over the next 5 years or so. Statistically speaking, we have had market ups over the last 9.5 years - which is basically a record amount of time. Do you think saving 5% APY from paying off your mortgage will be more than if that money was invested in the stock market? Personally, I would think so.

Obviously if we just got done with a huge recession (e.g. Housing crisis) the market was very likely to go up - to which I would advocate keeping the money invested instead of paying off the mortgage.
 

Cepak

Platinum Member
Apr 6, 2001
2,071
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#15
S&P 500 annual returns as of December 31st of each year:

Dec. 31, 2018 -4.38%
Dec. 31, 2017 21.83%
Dec. 31, 2016 11.96%
Dec. 31, 2015 1.38%
Dec. 31, 2014 13.69%
Dec. 31, 2013 32.39%
Dec. 31, 2012 16.00%
Dec. 31, 2011 2.11%
Dec. 31, 2010 15.06%
Dec. 31, 2009 26.46%
Dec. 31, 2008 -37.00%
Dec. 31, 2007 5.49%
Dec. 31, 2006 15.79%
Dec. 31, 2005 4.91%
Dec. 31, 2004 10.88%
Dec. 31, 2003 28.68%
Dec. 31, 2002 -22.10%
Dec. 31, 2001 -11.89%
Dec. 31, 2000 -9.10%
Dec. 31, 1999 21.04%
Dec. 31, 1998 28.58%
Dec. 31, 1997 33.36%
Dec. 31, 1996 22.96%
Dec. 31, 1995 37.58%
Dec. 31, 1994 1.32%
Dec. 31, 1993 10.08%
Dec. 31, 1992 7.62%
Dec. 31, 1991 30.47%
Dec. 31, 1990 -3.10%
Dec. 31, 1989 31.69%
Dec. 31, 1988 16.61%

Average return for the past 5 years is 8.9%
Average return for the past 10 years is 9.05%
Average return since 1988 is 11.62%

BUT, even though I'm REALLY big on investing for the long run, I'd still pay off the mortgage first.
Since brokerage fees are so low today (around $5 a trade), I'd then invest by Dollar-cost averaging any extra cash you receive, and invest what was once your mortgage payments.

Dollar-cost averaging (DCA) is an investment technique which involves buying a fixed dollar amount of a particular investment (say an S&P 500 ETF) on a regular schedule, regardless of the share price. As a result of this approach, the investor more often ends up purchasing more shares when prices are low and fewer shares when prices are high.

So invest the maximum you are allowed by law into both you and your wife's Roth IRAs, and invest the rest in a standard brokerage account. On your Roth IRA, you won't be taxed or penalized on distributions unless you withdraw funds prior to age 59 1/2 as long as you’ve met the five-year holding requirement.

Also, when you do sell shares in your normal brokerage account, you'll only be paying long-term capital gains (investments held over a year), which most likely in your case, unless you are ultra rich, will be at a 15% tax rate (ultra rich pay 20%). The exception to this is dividend income from stocks which will usually be taxed at your normal tax rate.

Long opinion short, pay off your house, invest the rest.
 
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Exterous

Super Moderator
Super Moderator
Jun 20, 2006
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#16
I would do a Roth IRA with the money and avoid the tax man completely on the principle and all gains on $11,500 invested this calendar year or $23,000 of it with a spouse. You have until sometime April to make your 2018 contributions so can make both the 2018 and 2019 contributions with it assuming you haven't maxed both out. Potentially repeat Roth IRA maxing in 2020 and beyond. One thing to keep in mind is that, in some states, life insurance payouts don't fall under the 'shared assets' category of marital assets and cannot be claimed during divorce filings. However if you move those savings into an account that is considered marital assets (checking, joint savings, her tIRA\rIRA etc) that exemption goes away

After that and depending on your tax bracket, current retirement plan savings and retirement plan options you could use the money to fund tax deferred savings and greatly reduce your taxable income - potentially over a number of years. Life insurance payouts are generally tax free. If you're not maxing tax deferred savings vehicles (401k, HSA, etc) you could do so and use the life insurance money to cover any income shortfall maxing those savings would otherwise create. So instead of realizing income taxed at your highest eligible tax bracket (24%? 32%?) you are using income taxed at 0%. If you invest it it would likely last longer and would only face a 15% LTCG tax on the appreciation.

Where I would go after that would depend on your current retirement savings, retirement goal date, mortgage interest rate, satisfaction with your existing quality of life and risk tolerance
 
Jul 20, 2001
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#17
Why, Confederate bonds, of course.
 

squirrel dog

Diamond Member
Oct 10, 1999
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#18
putt it one year cd's . After a year then decide .
 
Nov 30, 2004
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#20
I have sage, and I have financial advice. You should invest in a good knife, and cases of MREs. When you see your neighbors, duck behind a bush. If you make eye contact, they'll assume dominance, and try to take your MREs.

That's what I do anyway.
 

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