[USER]

My husband and I are 44. We have 1.8 million in assets. 1 million in equity. 800k in 401k and Roth IRA’s. My uncle just informed me that I will be given a portion of his inheritance of 1.6 million this next week.

Both my husband and I have pensions (government employee and teacher).

We also have a rental property that makes us about 1k a month. We bring in 10-12k a month and spend between 5-6k a month.

No debt besides our small mortgage 190k that has a small interest rate.

We weren’t expecting a large inheritance so what can we do now to reduce our tax rate in retirement. And what would you do with a large inheritance at our age?

I obviously know how to budget and invest.

We have 2 sets of twins they are 4 and 10. But this is new territory!

Thanks

[Tonia]

Purchase more property to build generational wealth and let the dollars bless you long term.

[Jodi]

Inheritances are INDIVIDUAL and not MARITAL property (in most states), please do NOT comingle the inheritance— be sure to keep it separate and in your name only— to ensure that it remains your asset should anything happen to your marriage.

[Furman]

Inheritance is off-limits in a divorce if never co-mingled with marital assets. I thought my marriage was good and my ex blindsided me with an affair.

Thought I put it out there to have it as an off-limits nest egg for yourself.

[Lynn]

I received a much smaller but still windfall for us inheritance 8 years ago.

I used it to accelerate FI plans. Paid off mortgage and car notes. Did a substantial kitchen renovation.

Put the rest to investments (not all registered).

If I were you with your current assets I would pay the mortgage and ditch the rental. The income on rental doesn’t contribute enough to your bottom line to be worth the hassle.

Take that money and add to the pile. Pay off the mortgage and any car loans etc.

Then take a nice nice trip. Give some of it away to family in need and a charity and invest the rest.

[Smith]

Immediate temp. Solution for that 1.6MM:
Shop for a couple of HYSA asap and transfer that 1.6MM over once it’s in.

The interest is SUBSTANTIAL!

[Cody]

Maybe start looking at strategic roth comversions. Definitely convert portions of the pre-tax 401(k)/IRA assets to Roth IRAs before RMD age 73.

Use a tool like NewRetirement or Pralana to model cash flows, taxes, and drawdown strategies.

[Sandra]

If it were me, I’d invest in my family. Are there nieces or nephews struggling with a down payment for a house or college?

Boom I’d be that aunt that would start the conversation about the family legacy.

[Patrick]

You didn’t say what size the inheritance is going to be. It can be read two ways. One way is your portion is $1.6 million.

I read it as your uncle is receiving a $1.6 million inheritance and is gifting you a portion of it.

[Ron]

Why do you think it will impact tax rate inn retirement? For this I think you’d have to tell us more about what form the inheritance is in and when you are planning to retire.

If it’s in traditional retirement vehicles, won’t you have to unwind it over a number of years starting now?

If it’s a home or taxable side investments, with the step up basis you don’t have any tax burden now and who knows where you’ll be whenever you retire.

Say you move it to tax efficient index funds say with no more than 2% dividend yield, that’s $30K in extra dividend income, likely mostly qualified.

This doesn’t seem like a big tax rate change, now or in retirement.

So, I’ll stop making speculations, but what are you getting at concerning your tax rate in retirement?

Obviously, you could also spend much of it before retirement if your retirement is far off and you want to.

If your retirement FI number is fixed and this just gets you there more quickly, again no retirement tax rate change.

Okay, I’m back to speculatiing now …

I’m done

[Rick]

Start mapping out retirement taxes. Do you expect to have years for Roth conversions, cap gains harvesting, etc.

Pension income will likely reduce to maybe eliminate no/low tax years. Low balance and rate mortgages likely wont provide much in way of tax deductions during any future timeframe.

This points to two things to manage.

Additional taxable interest and dividends. They aren’t evil just not overly helpful tax wise. Dividends can be qualified dividends and that helps, a little.

You can put higher dividend etfs in your Roth and lower ones in brokerage.

Your pretax balances. $800k is solid. But contribute for 5-10 more years….and have just average market returns over than time and you will see it double and even double twice….that is $3.2m pretax.

And if then untouched for years and years, double again and again.

And that, with the nice to have concerns noted above, is no-fun RMDs in your future. So soon roths and brokerage contributions may become your focus (beyond getting employer matches).

Is mega backdoor Roth available via either of your work based retirement plans because if so, this opens a lot of Roth contribution room each year?

So, you have not one but a couple of the main caveats to the “all pretax all the time” wise adage.

And that very likely means you will need to slow pretax contributions. And that means more taxes paid now and along the way.

Which seems counterintuitive….unless you do this retirement taxes map I mention and then you see this can be helpful.

Food for thought. Enjoy your journey.

[Matt]

You are in a better place now, not a worse place. Stick with your plan, whatever it is.

You might have accelerated your timeline, but don’t let the tax tail wag the planning dog.

[Jeff]

If your uncle is still living and it is coming from him, for tax purposes it is not an inheritance, but actually considered a gift.

Depending on what it is, the basis on the assets would not be stepped up.

[Kerri]

Are you maxing out Roth IRA’s every year? You could also contribute to college funds if you are planning to help pay for your children’s college education.

How much longer do you and your spouse have before you’re vested or are you already?

[Lindsay]

My suggestion is to put the cash I. A HYSA and take your time deciding how to move forward.

I chose Wealthfront for my HYSA because it is insured for over $5M with a good rate.

I’ve been with them a few years and am really happy with how easy things work.

They are constantly improving the platform too.

After that, I would suggest reading the Psychology of Money and the Simple Path to Wealth and then consider talking to a few fiduciaries while you take your time and consider all your options

[Jeremy]

What is your portion going to be? It makes a big difference if you’re getting 100K or 1M.

Just my opinion, if the amount is over 250K, I’d hire a professional on a fee for service basis (not assets under management) to help you develop a plan for this money to match your goals.

If it’s under 250K I’d probably just keep doing what you’re doing and apply it to the plan you already have in place.

I also really like someone else’s suggestion of using this money to pay it forward with other family members.

From your description, your uncle sounds pretty awesome and that he did some amazing things for you to help you learn about investing and even matched some of your early investments.

Do you have other family members that you could do the same for? Choose some amount of your windfall (10 percent, 25 percent, whatever you want) and see if you can help the next generation lever up.

Maybe you match their investments or you match whatever they put towards student debt to help get it paid down faster.

Or you fund 529s for some kids. Lots of good options to follow your uncle’s example.

And lastly, I’d take some amount and do something with your family that you’ve always dreamed of.

It sounds like you work hard, save and invest well, make good decisions, enjoy a little of this incredible gift and remember the person that gave it to you.

You’ve got four little kids and you’re at an amazing stage of life to make memories with them.

Take them to Disney, book the super VIP package that gets you to the front of every line for every ride, as many times as you want.

They’ll never forget it!

[Justin]

You did it. You can stop saving and can just spend all of your income on things you enjoy or retire and continue to live a good lifestyle.

Congrats.

[Author]

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