Author Topic: FIL will be getting a $200k inheritance soon. What to do with it?  (Read 1918 times)

VioletVixen

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Hi,

My retired 63 year old FIL will be getting a $200k inheritance soon. He already has $40k in an IRA account, but that's all he has in savings. What is the best way to make this money work for him? Add it to the IRA? He is currently living on a small SS income, though I'm not sure how much he gets each month.

Also, how does withdrawing from an IRA in retirement work? How old do you have to be to withdraw without penalty, and how much can you withdraw at a time? Can you set it up to direct deposit a certain amount into your bank account each month?

Dicey

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #1 on: November 10, 2019, 11:23:13 PM »
Hi,

My retired 63 year old FIL will be getting a $200k inheritance soon. He already has $40k in an IRA account, but that's all he has in savings. What is the best way to make this money work for him? Add it to the IRA? He is currently living on a small SS income, though I'm not sure how much he gets each month.

Also, how does withdrawing from an IRA in retirement work? How old do you have to be to withdraw without penalty, and how much can you withdraw at a time? Can you set it up to direct deposit a certain amount into your bank account each month?
Does he have any debt? Drive a reasonably decent car? What is his housing situation?

jim555

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #2 on: November 11, 2019, 06:25:46 AM »
You can't add an inheritance to an IRA.  IRA contributions need to come from earned income.  If the 200K is from the deceased IRA then he may have an inherited required minimum distribution requirement.

frugaldrummer

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #3 on: November 11, 2019, 07:15:37 AM »
Yes whatís his housing situation like? Whatís his life expectancy? (Is he retired at 63 on a small SS check because of poor health?)

$200k invested gives him a 4% withdrawal of $8000 a year or $666 a month. If rent is substantially more than that it might pencil out for him to use that money to buy a home in some inexpensive part of the country, especially if he could rent a room to a roommate for more income.

Another consideration is, what is he doing for health insurance right now since heís too young for Medicare? If he doesnít have any use some of that inheritance to buy him a plan ASAP.


VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #4 on: November 11, 2019, 10:19:30 PM »
Hi,

My retired 63 year old FIL will be getting a $200k inheritance soon. He already has $40k in an IRA account, but that's all he has in savings. What is the best way to make this money work for him? Add it to the IRA? He is currently living on a small SS income, though I'm not sure how much he gets each month.

Also, how does withdrawing from an IRA in retirement work? How old do you have to be to withdraw without penalty, and how much can you withdraw at a time? Can you set it up to direct deposit a certain amount into your bank account each month?
Does he have any debt? Drive a reasonably decent car? What is his housing situation?

No debt. No car. He was living with his father until recently when his father passed away. He is living in a motel at the moment, thinking about getting an apartment or small house with the inheritance, but Iím not sure what the smartest thing to do with that money would be and heís looking for advice.

VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #5 on: November 11, 2019, 10:21:26 PM »
You can't add an inheritance to an IRA.  IRA contributions need to come from earned income.  If the 200K is from the deceased IRA then he may have an inherited required minimum distribution requirement.
It is from a deceased personís IRA, but I think the IRA is being ďcashed outĒ because itís being split between four people.

VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #6 on: November 11, 2019, 10:25:30 PM »
Yes whatís his housing situation like? Whatís his life expectancy? (Is he retired at 63 on a small SS check because of poor health?)

$200k invested gives him a 4% withdrawal of $8000 a year or $666 a month. If rent is substantially more than that it might pencil out for him to use that money to buy a home in some inexpensive part of the country, especially if he could rent a room to a roommate for more income.

Another consideration is, what is he doing for health insurance right now since heís too young for Medicare? If he doesnít have any use some of that inheritance to buy him a plan ASAP.

Rent around here would probably be more than that. Iím thinking buying a small house might be the way to go.

Heís on Medicaid right now. Retired because of some poor life choices in the past that make him essentially unemployable.

Again, heís getting by on his SS income at the moment, so it sounds like a house would be the best use of his inheritance?

Dicey

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #7 on: November 12, 2019, 12:20:03 AM »
You can't add an inheritance to an IRA.  IRA contributions need to come from earned income.  If the 200K is from the deceased IRA then he may have an inherited required minimum distribution requirement.
It is from a deceased personís IRA, but I think the IRA is being ďcashed outĒ because itís being split between four people.
I'm thinking he's going to owe taxes on that IRA. First step is to find that out. Granted, with his low income, it probably won't be much if he does it right, but doing it wrong could be costly.

Frankies Girl

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #8 on: November 12, 2019, 12:41:58 AM »
If he is inheriting a traditional (pre tax/tax deferred) IRA, then he has two choices: take it all out now (his share is $200K?) and it will be taxed ALL as income, meaning he'll end up paying a buttload of taxes on it, likely lose his medicaid eligibility and need to purchase insurance for that tax year, etc (hint: this is a very bad idea). This counts as income. Not EARNED income, but TAXABLE income. It is not a smart move for larger accounts, especially since this person needs to keep their benefits.

The second choice (hint: this is the good idea): stretch IRA or inherited IRA (also titled a BDA).


It MUST be set up correctly ASAP, and a few conditions must be done.

https://www.forbes.com/sites/ashleaebeling/2017/07/10/what-to-do-if-you-inherit-an-ira/#3ef5f8df2ae2


Very first thing is to make sure his father took his distribution for this year. Executor needs to take care of this before end of 2019 if it wasn't done.

Then, your FIL needs to set up an account (vanguard/fido/t rowe - one of the good brokers in other words). Make sure it is an INHERITED IRA account, usually says something about BDA with the deceased's name attached, and get the funds transferred over into this account and make sure the place currently holding it understand it is to be a stretch/Inherited IRA. NOT A DISTRIBUTION.

Then before the end of 2020, your FIL needs to take the required minimum distribution (RMD), and make sure to do so each year after that. Most places (I know FIDO does) can set up an automatic withdrawal for the RMD and can calculate it, withhold taxes for state/federal if wanted, and will make sure it's done properly. If this is NOT done, then the account can be forced to liquidate the entire amount in a 5 year period - again, you don't want that. RMDs are calculated based on age and amount at year end of the account.

The advantage of the inherited IRA is twofold: 1. The money is safe in a tax deferred account so it only gets taxed when money is withdrawn. Selling/buying inside this incurs no taxable events. and best of all 2. You can ALWAYS take additional money out any time, but as long as the RMD is satisfied, you don't have to take a penny more. You just can't add more to it.

VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #9 on: November 12, 2019, 07:25:49 AM »
Thank you for this great information! Yes, his share is 200k, but I may have misspoke. Itís the chunk of the entire estate that heís getting, not an IRA. Iím gathering it wonít be possible to put this chunk into an inherited IRA because it wasnít earned income?

So if he had received all the money in an inherited IRA, he could still take out any amount (say a chunk for a house down payment) and not be penalized (just taxed on that amount)?
« Last Edit: November 12, 2019, 07:40:08 AM by VioletVixen »

VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #10 on: November 12, 2019, 07:27:07 AM »
You can't add an inheritance to an IRA.  IRA contributions need to come from earned income.  If the 200K is from the deceased IRA then he may have an inherited required minimum distribution requirement.
It is from a deceased personís IRA, but I think the IRA is being ďcashed outĒ because itís being split between four people.
I'm thinking he's going to owe taxes on that IRA. First step is to find that out. Granted, with his low income, it probably won't be much if he does it right, but doing it wrong could be costly.

Who could give us that info, the attorney?

Dicey

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #11 on: November 12, 2019, 08:41:20 AM »
You can't add an inheritance to an IRA.  IRA contributions need to cmome from earned income.  If the 200K is from the deceased IRA then he may have an inherited required minimum distribution requirement.
It is from a deceased personís IRA, but I think the IRA is being ďcashed outĒ because itís being split between four people.
I'm thinking he's going to owe taxes on that IRA. First step is to find that out. Granted, with his low income, it probably won't be much if he does it right, but doing it wrong could be costly.

Who could give us that info, the attorney?
The attorney, the IRS (try their website), or the institution where the money is. Better still, a good CPA. In my family's case, we were told we were going to have a huge and immediate tax liability on our inherited IRA's by the institution and an attorney. It was a CPA, who formerly worked for the IRS, who got it straightened out, for a fraction of the cost of the attorney.

If the other 40k is also inherited, does this mean he has zero money that he's saved on his own? That is worrisome. If he buys a house, how will he keep it up? Is keeping his father's house and buying out his siblings an option?

Note: @Frankies Girl's response is pure gold, as usual. Start by reading it until you understand every word.

Frankies Girl

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #12 on: November 12, 2019, 12:04:58 PM »
Thank you for this great information! Yes, his share is 200k, but I may have misspoke. Itís the chunk of the entire estate that heís getting, not an IRA. Iím gathering it wonít be possible to put this chunk into an inherited IRA because it wasnít earned income?

So if he had received all the money in an inherited IRA, he could still take out any amount (say a chunk for a house down payment) and not be penalized (just taxed on that amount)?

Short answers to your questions:

No, not possible to put anything into any form of an IRA as he isn't making any earned income. Inherited money isn't earned money. There are several forms of IRAs, but all require working EARNED income, not just taxable/simple income from investments/inheritances/etc...

And yes about any withdrawals from an inherited IRA (as long as the deceased was over 70.5 and had started taking their own required distributions) any moneys taken from an Inherited IRA are not subject to any penalty no matter what the age of the heir - and just taxed on the money as if it was income (again, like investment income, not working/earned income).

Just as a quick anecdote: I personally pay zero in tax and I live off my inherited IRA and cap gains/dividends thrown off a taxable brokerage account. That's why I'm so enthusiastic about any money that is still inside an IRA to STAY in there as an inherited IRA - it's a GREAT hybrid account that shelters you from tax and you can still take money out of as needed and if a person isn't a high spender, literally won't ever pay ANY tax again... why pay it if it isn't necessary?


IRA stands for Individual Retirement Account. There can be (technically) 2 types: before or deferred tax which is called a Traditional IRA, and the other which is an after tax (meaning it was funded using money you already paid taxes on to receive from a paid source for your work) called a Roth IRA (named for the Senator that spearheaded the creation of this type of IRA). Advantages on both sides for using either of them, but in your FIL's case none of them are accessible for creating since he isn't working at all and can't fund them using his inheritance.

If he is receiving any portion in an IRA (usually it's a traditional IRA, this is a simple question to ask about when gathering details - is it a traditional or Roth IRA that is being inherited?). He should absolutely try to ensure the steps I outlined above as that prevents the huge tax hit of being forced to take a large chunk of money at once. Besides the fact that he can't put it back into any tax sheltered account once it's out, he also will lose a large chunk of it to paying on taxes he wouldn't have had to pay if he'd just done the RMDs and take out smaller controlled amounts as needed.

It does not need to be cashed out to split between beneficiaries. I personally had zero issues getting this done at two different financial companies. It was literally, open account (on phone/internet) confirm new empty account was set up correctly as my BDA (Beneficiary Distribution Account, or BDA, is another name for an Inherited IRA). Send letter of instruction to the institution that currently held my father's IRA, stating I was a 50% beneficiary of said account (number), I would like my share transferred to my BDA account (number provided), please refer to sibling NAME's letter for the certified death certificate (sister sent it in with her letter so I just had to refer to it and her name stating death certificate was mailed in with sibling's paperwork and agent handing was coordinating so he was already aware).

If FIL is being told he has no choice and must cash out - that is absolute bull and someone needs to put the brakes on immediately because this is NOT reversible once the IRA is cashed out. Alert the institution (through the executor or attorney) that the IRA of the deceased should be split with FIL's share to go into an inherited IRA, and get their procedure for setting that up ASAP after that, each person that is named as beneficiary can then choose to cash out THEIR inherited portion, but FIL's share should be placed into the inherited IRA - proceed as I outlined above.

https://www.thebalance.com/beneficiary-distribution-account-bda-ira-4159896
^another good link for basics. Whomever is in charge is trying to force a lump sum distribution, when what he should go for is the Inherited IRA With the Life Expectancy Method (another way of saying Stretch IRA).

VioletVixen

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #13 on: November 13, 2019, 07:37:44 AM »
So I was incorrect in what I said before. The 200k is NOT from an IRA, itís the total he is getting from the estate. I imagine this will be a cash lump sum. The 40k is his share of the inherited IRA. What can he do with the 200k to minimize taxes he must pay?

The house he and his father lived in was part of the estate, so it has been sold. Maybe getting him on a list for low cost senior housing would be a better idea? He has no savings. Again, poor past life choices. He has been homeless in the past.

LaineyAZ

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #14 on: November 13, 2019, 07:47:58 AM »
Yes, get him on the list for subsidized senior housing, but don't be surprised that it could take months for a space to open up.  Check with your local Area Agency on Aging to help you get all of the senior benefits he would be entitled to.

Dicey

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #15 on: November 13, 2019, 08:27:03 AM »
In that case, the $200k won't be taxable, but it most certainly will be spendable. Given what you've said, what's to keep him from blowing through the money?

dandarc

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #16 on: November 13, 2019, 08:36:12 AM »
For a person who is bad with money ($0 saved, living off "small social security" at 63 isn't the worst ever but not great either) who has suddenly received $200K, might consider a Single Premium Immediate Annuity. Looks like he could get a monthly payment of $600 to $1,000 depending on how much inflation adjustment is desired.

Villanelle

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Re: FIL will be getting a $200k inheritance soon. What to do with it?
« Reply #17 on: November 13, 2019, 09:32:21 AM »
You said that rent would be more than the amount listed so you think buying a small house is the way to go.

Are you so sure that a house will cost less?  He'll likely have to put down a lump sum.  He can do less than 20%, but then some of his money is eaten by PMI and you have to account for that.  But whatever he puts down, subtract that from the money he has and change the 4% number accordingly.  Then figure in property taxes, homeowners insurance and maintenance.  People tend to grossly underestimate that last one and this will be even more of an issue if he's buying an older, cheaper home.  New roof, water heater dying, A/C unit needing replacement, appliances crapping out, etc., in addition to regular maintenance. 

There are rent vs. buy calculators on the internet.  Find one and use it to figure out which will truly cost less in the long run.

But I suspect his best bet is to get on a list for low income senior housing and rent the absolute cheapest place he can until then, and/or live with roommates. 

Generally I think investing the money in mutual funds (stocks and bonds) would be the way to go, but keeping his hand off hte money may be a concern. 

A guy that is terrible with money (and since he's reach 62 with zero savings, he definitely qualifies) is every likely to blow through this money.  So even though annuities are generally not cost-effective, they do have the benefit of keeping the money out of his hands, and of giving him a predictable amount of money.  He wouldn't have to worry about cutting back if the market is down, and he can't just go blow the cash on new consumer items or a craps table one night. 

Lastly, contact the local agency that deals with senior benefits and find out what other programs for which he might qualify.