Inheritance, EIC, and investing

[HSH Princess Grace]

I'm looking for solutions for an unusual situation a friend is in.  She is 49, debt free, living rent free while caring for an elderly aunt, and has $200k set aside for retirement: $150k in various mutual funds (that she bought years ago with proceeds from the sale of a house,) $30k in mutual funds in a traditional IRA and $20k in mutual funds in a Roth.  She has three children (the dad ran off and never paid child support) and works part-time making $15k a year.  Her mother died years ago and now her father died leaving her $150k. She wants to invest the money but she has these limitations:
1.  She can't invest in anything that will pay capital gains or dividends or she risks losing her $6,000 per year in Earned Income Credit.
2.  Her employer doesn't have any kind of retirement vehicles. 
3. She already maxes out her Roth (using the EIC refund) each year.
4.  Between her aunt, her kids, and her job she can't take on anything complicated.
5.  She wants something not very liquid because the rest of her family are moochers who will constantly be hounding her for money, but she also doesn't want the money completely locked in in case one of her kids gets sick or something.

I've suggested she buy a parcel of bare lamd and plan to hold it indefinitely. Other than that, her situation is beyond the scope of my knowledge. 

Does anyone have any ideas to share? 

[dandarc]

VTSAX.  100% qualified dividends.  Generally doesn't distribute capital gains.

Learn something new every day.

[dandarc]

Also, if she needs to manage her income for tax-credit purposes, she can always do some traditional IRA instead of Roth.

[Gin1984]

Also, if she needs to manage her income for tax-credit purposes, she can always do some traditional IRA instead of Roth.

That won't matter here.  It is not amount of income here but amount coming from investments that would stop her from getting the EITC in this case.

[Tremeroy]

VTSAX.  100% qualified dividends.  Generally doesn't distribute capital gains.

Qualified dividends count as "Investment Income" for the purpose of the EITC, so this option is unlikely to help.

[Financial.Velociraptor]

BRK-B?

[beltim]

BRK-B?

This is what I was thinking.  You could pick a few similar very safe, diversified companies that also don't pay dividends.

[GoodStash BadStache]

VTSAX.  100% qualified dividends.  Generally doesn't distribute capital gains.

Part of the inheritance could go into an index fund, but it sounds like she's well aware that the EITC has a flat cutoff of $3,350 (as of 2014) for investment income.  The current 1.90% VTSAX dividend yield on $150,000 would be under that amount, but the annual dividend income would also presumably grow each year (and selling shares to keep the dividend low enough then results in personal capital gains).

Putting a portion into a 529 for education expenses might be an option.  Using part of the windfall to make some lifestyle investments would be helpful in reducing spending; something like buying a bikes for the family, replacing incandescent light bulbs with CFL's/LED's, moving to a more efficient vehicle.

[johnny847]

BRK-B?

Yea I think this is the closest thing out there to an "anti-dividend" fund.


I wonder though if these pushes for anti-dividend strategies might be sacrificing long term gains for short term benefits. I do not think this is the case because as I understand it, you are completely disqualified from the EIC once you reach $3350 in investment income for the year. However, it is still something for the OP's friend to keep in the back of her mind.

[HSH Princess Grace]

I will suggest the 529s to her, but given that she is seeing her aunt linger with no real retirement assets, I think she is more focused on providing for her own retirement.  Plus she has the whole, --turning 50, all of a sudden realizing she's not got enough for retirement-- thing going on.

Because she already has the $150k in a taxable account she is already close to losing her EIC because of the earlier purchased funds.  I had her do loss harvesting last year that saved her from losing the credit, but even a little more this year and I think it would push her past the cut off. 

I agree that focusing on not losing the EIC could be leaving money on the table, but to an unsophisticated investor she sees the EIC as more of a sure thing. 

I've tried to get her to see a fee only advisor but for someone who only makes $15k a year she has the mindset that she can't afford to pay someone $200/hour. I've tried to explain the concept of being "penny-wise and pound-foolish" but you can only push a friend so far. 

[teen persuasion]

I still have lots of questions. 
Could the inheritance from her father possibly be an IRA? 
How long is the  situation with the elderly aunt likely to continue?  Free rent is allowing her to live on the low income, but buying a house might be a reasonable investment for the future.
How old are the children?  I.e., eventually the EITC will decrease as kids age out.
As another poster alluded, will the children attend college, and would 529 accounts be a reasonable option?  I'm inclined to say no, the 529 accounts could hurt financial aid for this low income family.
Do they have health insurance?  There was mention of access to the funds if a child got sick.

[HSH Princess Grace]

The inheritance is cash sitting in a savings account.  It was her father's but they put her name on the account so I don't think there are any issues there.

The kids are 15, 10, and 8, so she still has a few more years to get EIC.

The aunt has no assets but the house is big enough for all of them and in a good school district.  As I understand it, the hospital has some liens on the house for unpaid medical bills so I don't think anyone I'll get anything from the house.  The aunt has a bone disease so there is no time line for how long they can live there.  Most likely at least a few more years.

[HSH Princess Grace]

I think the kids are on the state insurance plan and she is on Medicaid but I'll have to ask to be sure. 

[Tremeroy]

. . . she is on Medicaid but I'll have to ask to be sure.

Isn't there some sort of asset limitation for Medicaid recipients? If she truly is on Medicaid, I worry that your friend might be skirting / avoiding some rules. Perhaps she is just receiving heavily subsidized insurance under the PPACA? I would verify that she's on the right side of this, as Medicaid can be tenacious with asset recovery.

[dandarc]

. . . she is on Medicaid but I'll have to ask to be sure.

Isn't there some sort of asset limitation for Medicaid recipients? If she truly is on Medicaid, I worry that your friend might be skirting / avoiding some rules. Perhaps she is just receiving heavily subsidized insurance under the PPACA? I would verify that she's on the right side of this, as Medicaid can be tenacious with asset recovery.

A lot of states have gone to an income-only test for general Medicaid.  But I'm sure not all.  Certain programs within medicaid could have asset requirements - I'm thinking long-term care facilities in particular.

[zephyr911]

If she picked the right rental investment she could earn money but show a taxable loss (or minimal income) after depreciation. And it doesn't get much less liquid than real estate. Then she can move into it later as needed.

Even better, if she could do this with a 4-plex, she could keep 3/4 of the income after moving in.