Take a big tax hit to invest immediately??

[danag]

Hello all!

What do you think about taking a big tax hit with an unexpected inheritance, in order to invest immediately? One aspect of the inheritance is over 500K which can be disbursed however we choose over a ten year schedule. While my first thought was to space out payments over ten years very carefully in order to minimize tax payments (as we'd move higher up in the brackets than ever before), it dawned on me tonight that, perhaps, taking a big hit next year might actually be better in that, with access to the bulk of the funds, we could invest in an ADU, buy another property outright with plans for an air bnb in a tourist location, and put about 100K into an index fund.  We would also donate a portion. I know this is all very speculative, and assumes these investments will pan out nicely, but part of me thought that possibly the opportunity to hit FIRE (assuming our air bnb performs similarly to another in the same area) years earlier than ever imagined is *definitely* worth taking a hit on taxes up front...by buying us the priceless gift of *time*. Also, could the money made in the investments over the ten years be far more than the taxes paid the first year?  Other years, I anticipate our tax burden will be far lower, yet we might possibly have investments that immediately pay off which is something we've never had before. I haven't spoken with a tax preparer yet, but a financial planner I spoke with recently said something that stuck with me, which is basically, "don't focus so much on avoiding taxes, when in many cases you can pay your taxes but invest the money and make much more on it than what you'd save by avoiding taxes".  (I didn't share this idea of taking the money and investing immediately with him, he was just speaking generally).


 What do you think?

[ixtap]

Are you accounting for the step up in basis or is this an IRA? If it is an IRA, why not invest according to your IPS and make steady withdrawals?

If this is a trust, I have nothing, I know nothing.

[danag]

I probably need to get more details, but from what I initially understood, this is from an IRA, and will count as income every time we receive it.  I don't think we avoid taxes even if we invest it into another IRA. It must be disbursed within ten years, though the amount each year is up to us.

[ixtap]

I probably need to get more details, but from what I initially understood, this is from an IRA, and will count as income every time we receive it.  I don't think we avoid taxes even if we invest it into another IRA. It must be disbursed within ten years, though the amount each year is up to us.

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But you can invest this how you want, ie the index fund idea within the IRA, and use any other money for some of those property dreams you mention  You don't have to take it out of the inherited IRA to put it into an index fund.

[danag]

In response to "you don't have to take it out of the IRA".  In this situation, it's been made clear to us that we do.  The money has to be disbursed out of the IRA within ten years. We can do it all on year one, space it out, wait till year ten, or whatever, but leaving it in the account after ten years is not an option.  When it's paid out to us during those ten years, it is counted as "income" and taxed accordingly along with our other income.

[MDM]

In response to "you don't have to take it out of the IRA".  In this situation, it's been made clear to us that we do.

You don't have to take it out of the IRA immediately.  You may keep it in the IRA and invest it in whatever index funds you choose.  Then you do have to take withdrawals, at your discretion, so the inherited IRA is depleted by the end of the tenth calendar year after you received the inheritance.

Other than some unusual scenarios for Using Your IRA to Buy Real Estate (and as that article notes there are many pitfalls there, so don't take this as a recommendation to do so), any individual property investments will need to come from taxable funds.

Before you run off to invest in housing, do check the tax bite you would suffer by withdrawing all $500K at once.  The case study spreadsheet happens to be set up to chart the marginal rates on tIRA withdrawals by default.  You'll need to enter other income you expect for this year, and change cell P83 to 1000 to see the whole $0 to $500K picture.

[danag]

Very helpful, thank you very much!

[Catbert]

Definitely get some professional tax advice.  If your tax preparer is just a guy who does taxes part time definitely get someone more knowledgeable (i.e., CPA or enrolled agent).  Or spend time playing with a a version of this years tax software.  It's not just what the rate is at 500K level its deductions or credits you may lose that you don't realize.  Even if you decide to take out a lot up front at least consider spreading out over 2 or 3 years.  Or maybe not if it will fuck with ACA credits you were counting on in FIRE.

Don't be in too big a rush to take it out.