Author Topic: Case Study: What to do with inheritance  (Read 4964 times)

curlycue

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Case Study: What to do with inheritance
« on: January 31, 2015, 08:09:52 AM »
I am 36, single, a student, and will be receiving an inheritance of $10,000 soon.

My income is about $20,000/yr from part time work.

Assets: miniscule IRA. So miniscule I'm not wanting to put the number here, almost negligible.

Debt free except for student loans. No credit card debt, etc.
Monthly expenses:
Rent and utilities $850
Health and dental: $300
Travel: $100 (I take free shuttle or bike most days, however when need to pay for bus or if late at night take Lyft for safety)
Groceries and incidentals: $200
Monthly total: $1450
I don't have to pay my student loans while I am in school and still a student, and it isn't even really possible with me working part time. Any extra money I save seems to be eaten up by the big expenses that pop up like buying a new computer when mine crashes, buying a used bike, moving to grad school, etc.

So options for what to do with my inheritance:

1. Use it to pay for grad school. Very unlikely option. Since I work in the NGO/government sector if I make minimum payments for 10 years my loans can be forgiven. Since I am not in a high income/business field the 10 payment plan with forgiveness seems best.
2. Buy a house. I like this option as I could rent out rooms to other grad students and essentially have them cover my rent/mortgage. Two concerns: am I in a financial place where I can afford to buy? I travel a lot for my job, may be employed or temporarily overseas, so that can make managing a property tricky, but not impossible. It may be hard to manage if problems, but always gives me a home to return to. and Big advantage: I live in a place where it would be great to put down roots, tons of job opportunities, basically the epicenter of my field, cheap real estate that is rapidly gentrifying so I could get in on the ground and see a good return on that investment. This option would also eliminate the most expensive item in my monthly budget (rent).
3. Simply put in savings.
4. Invest - not sure where to begin here.

Thanks in advance!

Note: despite the fact that I was abroad for a few years and had absolutely no financial activity, my credit score is amazing, and keeps going up. This astounds me and I can't say the system is logical, but I have good "credit".


« Last Edit: January 31, 2015, 09:55:14 AM by curlycue »

CowboyAndIndian

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Re: Case Study: What to do with inheritance
« Reply #1 on: January 31, 2015, 08:15:53 AM »
Put it in a Roth IRA, since I assume you pay little to no taxes.

Cannot recommend buying a house, since we do not know the cost of houses in your area and if you can swing it with your present income. The house also might become a millstone around your neck if you travel.


caliq

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Re: Case Study: What to do with inheritance
« Reply #2 on: January 31, 2015, 08:16:55 AM »
You didn't include your monthly student loan payment in your budget.  Also, do you have any sort of emergency fund?

I wouldn't invest it in a taxable account before maxing out your IRA. 

I also wouldn't buy a house in your semi-transient situation.  And a 10k down payment would likely require you to pay PMI unless you can get a house for 50k.

curlycue

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Re: Case Study: What to do with inheritance
« Reply #3 on: January 31, 2015, 08:25:20 AM »
Put it in a Roth IRA, since I assume you pay little to no taxes.

Cannot recommend buying a house, since we do not know the cost of houses in your area and if you can swing it with your present income. The house also might become a millstone around your neck if you travel.

Re: IRA - I know this could be a good option, however, if I can't buy a house now, would it be better to save up for a house and use the money to begin that savings, or to put it in other investments like a CD that would earn some money so that once I'm working full time I could buy a house? I'm hesitant to put it in retirement and then not be able to purchase any property. Cost of property in my area can be about $100,000 for a modest three bedroom. You are correct, I am currently in an extremely low tax bracket.

« Last Edit: January 31, 2015, 08:28:08 AM by curlycue »

curlycue

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Re: Case Study: What to do with inheritance
« Reply #4 on: January 31, 2015, 08:27:05 AM »
You didn't include your monthly student loan payment in your budget. 

I updated the case study - since I'm a student I don't make student loan payments until I graduate. And currently as a student and working part-time I'm not in a financial position to do so.

CowboyAndIndian

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Re: Case Study: What to do with inheritance
« Reply #5 on: January 31, 2015, 08:37:52 AM »
Put it in a Roth IRA, since I assume you pay little to no taxes.

Cannot recommend buying a house, since we do not know the cost of houses in your area and if you can swing it with your present income. The house also might become a millstone around your neck if you travel.

Re: IRA - I know this could be a good option, however, if I can't buy a house now, would it be better to save up for a house and use the money to begin that savings, or to put it in other investments like a CD that would earn some money so that once I'm working full time I could buy a house? I'm hesitant to put it in retirement and then not be able to purchase any property. Cost of property in my area can be about $100,000 for a modest three bedroom. You are correct, I am currently in an extremely low tax bracket.

Not just any IRA, a Roth IRA. Major advantages with your low/no tax situation.

Since you are finishing grad school, are you sure that you will be in this area when you finish? Buying a house, might not make sense if you have to move. Just playing devils advocate here.

frogger

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Re: Case Study: What to do with inheritance
« Reply #6 on: January 31, 2015, 09:34:35 AM »
With a Roth IRA you can take the contribution portion out without a tax penalty. So you can stick your money in there now, hopefully earn better than you would in a CD, and take it out again (if you have to) for a down payment. That's why I chose the Roth as my IRA in grad school (that and making little money). Or maybe you'll find you don't need to take it out again and you'll have that many more years of compounding interest. I'd go with that option for the most flexibility.

terran

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Re: Case Study: What to do with inheritance
« Reply #7 on: January 31, 2015, 10:35:19 AM »
I believe you can also take out up to $10000 of any gains out of a Roth without penalty as long as it's used for a first time home purchase (among other things like medical costs I think).

Bicycle_B

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Re: Case Study: What to do with inheritance
« Reply #8 on: January 31, 2015, 01:00:06 PM »
Consider Series I Federal Treasury savings bonds, also known as "I bonds", if you are a US citizen.  These can be purchased in amounts of your choice from $100 to $10,000.  They have guaranteed interest above inflation, and no fees whatsover.   After a year, you can cash them at will, or receive the interest for up to 30 years.  Their advantage in your situation is safety, considering that your income is modest and future includes many unknowns.  After that year, you are able to cash them in and buy something else if you eventually decide to.

You may be able to put them in that Roth IRA that is such a good option; you'll have to check on that. 

Official details on I bonds are at treasury.gov.  PBS finance columnist Paul Solman recommends them highly; http://www.pbs.org/newshour/rundown/americas-best-kept-financial-secret-i-bonds/


Future Lazy

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Re: Case Study: What to do with inheritance
« Reply #9 on: January 31, 2015, 01:57:25 PM »
Not sure what you're going to school for, and what your prospects are as a professional afterwards - but from your post, it certainly doesn't sound like you're starving. I would go with option #4 - throw it in an index fund or retirement account and look the other way. It's not money you were expecting to get - it's a windfall - and the best thing to do with it is to not let it rock your boat.

My second pick would be option 2; it sounds like you're willing to manage the income/expenses around a house - but it might not be a good idea to do this until you're ready to put down roots for sure.

My DH (and his 8 siblings) and my best friend from high school have all gotten large unexpected inheritances, and so far the happiest ones are the ones that invested it - either in buying a home, or by investing it in their retirement or health. The rest have said, at one point or another, "Man, I wish I still had that..."

LadyStache

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Re: Case Study: What to do with inheritance
« Reply #10 on: January 31, 2015, 02:05:53 PM »
I believe you can also take out up to $10000 of any gains out of a Roth without penalty as long as it's used for a first time home purchase (among other things like medical costs I think).

You can take out $10,000 of contributions, not gains. Also, the account must be open for at least 5 years before you can withdraw the contributions penalty free.

NICE!

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Re: Case Study: What to do with inheritance
« Reply #11 on: January 31, 2015, 03:11:58 PM »
This is purely out of curiousity since you are 36, single, and a student...what'd you do the rest your adult life? I feel like I've walked into the middle of the movie and have no context.

I vote for saving the cash, likely in a Roth IRA. I believe it is best to pretend like you never even received the inheritance - lock it up and throw away the key.

GizmoTX

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Re: Case Study: What to do with inheritance
« Reply #12 on: January 31, 2015, 03:16:02 PM »
$5,500 in a Roth IRA, invested in Vanguard Total Stock Market index fund or the Schwab equivalent.
$4,500 for an emergency fund, stashed in an online savings account earning at least 1%.

Do not buy a house. I don't think you'd even qualify, but first-time homeowners usually greatly underestimate the associated expenses, & you need to have a buffer fund in addition to a 20% down payment saved up when you do buy one. Your current travel requirements dictate a lock it & leave it rental lifestyle, but you do not need "a home to return to" if you are living overseas.


frogger

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Re: Case Study: What to do with inheritance
« Reply #13 on: January 31, 2015, 05:06:58 PM »
You can take out $10,000 of contributions, not gains. Also, the account must be open for at least 5 years before you can withdraw the contributions penalty free.
Not with a Roth.

"Direct contributions to a Roth IRA (principal) may be withdrawn tax and penalty free at any time."

"Up to a lifetime maximum $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence for the Roth IRA owner."

Source. (Wikipedia, because it was easiest, but I checked on this several times before opening my account.)