This caught my eye on Scott Burns' blog today, figured this was the place to share it:
Q. My wife recently inherited $200,000 and we are struggling with how to best use the money. First, let me tell you our financial status. My wife is 60 (not working) and I am 57. I make about $190,000 a year. I have an IRA valued at $230,000 and my current 401(k) is worth about $180,000.
Our home is mortgaged for $170,000 at 3.75 percent interest and it is worth about $375,000. Our cars are also financed for about $40,000 at interest rates of 3 to 4 percent. We also have about $13,000 in credit card debt at 6 percent interest.
My financial advisor at Wells Fargo is saying we should open a separate IRA for my wife to invest in Black Rock. My wife and I want to make best use of this windfall. Please help. ---R.G., Houston, TX
A. That’s a good suggestion from your advisor, but you need to look well beyond a spousal IRA. Also, with your income at $190,000, the spousal IRA contribution won’t be tax deductible since your income exceeds the Modified Adjusted Gross Income (MAGI) limit of $118,000. You need to increase your retirement assets quickly, which means saving more.
The inheritance, kept in tax-efficient investments in a taxable account, can be a major help in lining up your total retirement assets with your longer-term retirement income needs.
Before the inheritance, your savings were just a bit over 2 years of gross income. Now they are more than 3 years. Fortunately, you’ve still got time to eliminate your debt and build your IRA and 401(k) plans assets to a larger multiple of your earned income.
Hopefully, your advisor will see the importance of investing this money in low-cost index funds, and of some amount of diversification. With that done you can focus on paying off your debt. While $13,000 in credit card debt is small compared to your income, there’s just no reason to have any credit card debt at all. You should be just racking up the credit card travel miles and paying no interest.