Author Topic: (UPDATE) What should I do with an inheritance?  (Read 3911 times)

cody1awesome

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(UPDATE) What should I do with an inheritance?
« on: December 23, 2015, 10:05:50 AM »
You can find my original thread here

http://forum.mrmoneymustache.com/ask-a-mustachian/what-should-i-do-with-an-inheritance/msg850262/#msg850262

I was caught between paying off my student loans and buying a house with cash.  What I decided to do was based on a lot of reading on this forum, some advice from my Executive Director, and a whole lot of math. 

I paid off $53,705.44 to have a zero balance on my student loans.
I paid off $56,482.03 to have a zero balance on my wife's student loans. 

I ended up paying $18,202 for my inheritance tax
My lawyer gets $6,800 as a flat fee based on the estate.

The money that we had left over was just enough for 20% down on a 7 year old home.  We shopped around and found a great place that fits our needs and is in a great community.  Our monthly mortgage payment will be ~$750 a month with similar utilities.  Our current rent is $700 a month.  We also have a storage unit currently, which is $60 a month.  That will be gone once we move into the house in January, making up the difference, plus a bit. 

The only other debt we have is our cars, which amounts to ~$24,563.  We plan to take the extra money saved from not having student loan payments and put that towards the cars to pay them off early. 

We tried to be smart when it came to buying a house, and the one we chose was due to the down-payment of 20%.  We didn't want to dip into our emergency fund to pay that, so we shopped around at a lot of places.  We did 20% to avoid the private mortgage insurance, we chose the next city over because it saves a lot of travel for me.  My wife has to drive a greater distance, but it's all interstate travel, and the increase is probably 15 minutes max.  We chose a newer house to avoid the big issues like needing a new roof or heat and air units, and we have a small yard to keep cost of maintenance down.  Once we pay off the cars we will have freed up $1,100 a month, not counting having a zero balance on all credit cards, which we finally have control of.  We've even been cooking meals at home using a crock-pot, which has saved an unbelievable amount of time and stress.  We're going to start planning for side hustles in 2016, and I really can't be more excited to finally be almost completely debt free, a home-owner, and able to start saving for retirement! That leads me to my one question:

We are planning on opening Roth IRAs in January, but without having the full $5,500 for this year, would it still behoove me to open one this year with just $1,000? 


MgoSam

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Re: (UPDATE) What should I do with an inheritance?
« Reply #1 on: December 23, 2015, 10:36:12 AM »
We are planning on opening Roth IRAs in January, but without having the full $5,500 for this year, would it still behoove me to open one this year with just $1,000?

Yes

dandarc

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Re: (UPDATE) What should I do with an inheritance?
« Reply #2 on: December 23, 2015, 10:37:51 AM »
We are planning on opening Roth IRAs in January, but without having the full $5,500 for this year, would it still behoove me to open one this year with just $1,000?

Yes
Also - since you're doing this in January, make sure it is a 2015 Roth IRA.  You have until your tax filing deadline, so anything you put in between now and April 15th, you're better off counting towards 2015.

Mother Fussbudget

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Re: (UPDATE) What should I do with an inheritance?
« Reply #3 on: December 24, 2015, 09:44:07 AM »
We are planning on opening Roth IRAs in January, but without having the full $5,500 for this year, would it still behoove me to open one this year with just $1,000?

Yes!
Also - since you're doing this in January, make sure it is a 2015 Roth IRA.  You have until your tax filing deadline, so anything you put in between now and April 15th, you're better off counting towards 2015.

To put this another way...

At year end - and from Jan 1-thru-April-15, you have a 'window of opportunity' where you can contribute toward the prior year's IRA/Roth-IRA contribution limits.  The limit is $5,500/year (+$1,000 if you're over 50).  Use that 'catch up window' to attempt to max-out your 2015 Roth IRA contribution.  Once you reach either April 16th or $5,500 in IRA/Roth-IRA contributions for 2015, then begin maxing out your 2016 contribution... keeping in mind you have the same window from 1/1-to-4/15. 

Once you've started contributing to an IRA/Roth-IRA, it becomes easier to setup an automatic deposit from your checking account to your retirement account of $458.33/month (total remaining IRA contribution / months remaining in the year).   

For myself, I max out my 401K ($2,000/month pre-tax), and on payday, transfer any balance into my investment account - usually around $2-3K/month.  [I max out my IRA contributions early in the year to take advantage of a full year's stock & bond growth].  It's something I had to 'work up to' - I increased the withholding amount gradually by $50 each month until I found an amount I felt comfortable with. 

SunshineGirl

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Re: (UPDATE) What should I do with an inheritance?
« Reply #4 on: December 26, 2015, 07:29:04 AM »
I believe you have to open the account by Dec. 31 in order to make a 2015 contribution, but then you have until April 15, 2016, to fund it.

Nice use of the inheritance money!


terran

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Re: (UPDATE) What should I do with an inheritance?
« Reply #5 on: December 26, 2015, 10:55:05 AM »
I believe you have to open the account by Dec. 31 in order to make a 2015 contribution, but then you have until April 15, 2016, to fund it.

Nice use of the inheritance money!

Nope. This is true of a Solo 401k, but t.IRA, r.IRA, SEP IRA can all be opened after the start of the new year and funded for the previous year until the tax filing deadline.

Rubic

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Re: (UPDATE) What should I do with an inheritance?
« Reply #6 on: December 27, 2015, 09:10:50 AM »
At year end - and from Jan 1-thru-April-15, you have a 'window of opportunity' where you can contribute toward the prior year's IRA/Roth-IRA contribution limits.  The limit is $5,500/year (+$1,000 if you're over 50).  Use that 'catch up window' to attempt to max-out your 2015 Roth IRA contribution.  Once you reach either April 16th or $5,500 in IRA/Roth-IRA contributions for 2015, then begin maxing out your 2016 contribution... keeping in mind you have the same window from 1/1-to-4/15.

+1

OP: It's great that you're knocking off so much debt with your inheritance, but please consider maxing out your IRA if possible, esp. since you have another 3.5 months (~$1500/month) to accumulate the funds.  You only get this chance to fully fund your 2015 contributions until April 15th, so consider taking advantage of it.

TomTX

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Re: (UPDATE) What should I do with an inheritance?
« Reply #7 on: December 28, 2015, 06:45:47 PM »
I find it weird you would pay off lower-interest student loans that are above-the-line deductions on your taxes and keep paying the higher interest (4.7%) car loan. I would have paid that and kept the 3.4-3.86% student loans.

Congratulations on paying down debt, though!

wintertell

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Re: (UPDATE) What should I do with an inheritance?
« Reply #8 on: November 28, 2016, 09:05:13 PM »
Just saw the update. What a great use of the inheritance! How is it feeling a year later?