Tips to Handle Your Inheritance

Baby Boomers are currently the wealthiest generation in history. But going forward, the Gen-Xers and Millennials are likely to inherit that crown. Studies have shown that birthrates and the number of children per family have gone down drastically over the last few decades. Fewer children mean inheritances being concentrated and passed down to fewer individuals. In this article, we will discuss a few tips for handling an inheritance.

Ways To Handle Your Inheritance

Inheriting from a Baby Boomer will vary significantly by individual and the amount inherited. It may be best to hire a financial advisor, especially if you have poor savings habits yourself. Let’s break down your options into three categories of inherited assets: Retirements Funds (tax-deferred), Non-Retirement Funds, and Real Estate.

INHERITING RETIREMENT FUNDS (TAX-DEFERRED)

When inheriting retirement funds from a non-spouse Baby Boomer, you have ten years to deplete the account through distributions. One exception that existed for inherited retirement funds was the Stretch IRA. A Stretch IRA was an estate planning strategy that applied to an individual retirement account inherited by a non-spouse beneficiary. By using the Stretch strategy, an IRA could be passed from generation to generation, taking advantage of tax-deferred and/or tax-free growth of the assets within it. (Investopedia) This strategy is no longer an option, however, due to the SECURE Act. Click here to learn more about how the SECURE Act affected retirement accounts. These distributions for retirement funds will differ for everyone depending on your current income and the amount you inherit.

1. Inherited Roth IRA – Because Roth IRAs are after-taxed, consider this your new emergency fund and, potentially, the ultimate retirement fund. Most advisors recommend letting funds grow tax-deferred for as long as you can and taking everything out at year ten to maximize the benefits of an Inherited Roth IRA.
2. Inherited Traditional IRA – Funds in an Inherited Traditional IRA grow tax-deferred, but when you take money out, you need to include it as income for the year. It may be beneficial to take some portion out each year, or, let it grow tax-deferred and take it all out at year ten. The best decision will be determined by the amount you are inheriting, your current income level, and when you plan on retiring.

INHERITING NON-RETIREMENT FUNDS

Inheriting non-retirement funds from a Baby Boomer gives you more options as funds are not in a tax-deferred account. Tax-deferred accounts certainly have their advantages and must be considered, even if you inherit non-retirement funds. Here are some ways you may want to proceed:

1. Pay off any credit card debt. Credit card debt should be the first thing paid off (if you have any) as it carries the highest interest rates. If you do not have excellent money habits, now is the time to find someone to help. You may want to consider hiring a financial advisor to assist you in managing your funds.
2. Pay off loans. You may have an outstanding loan you want to pay off. Being debt-free can certainly feel great, but again, you will want to talk to your financial advisor as everyone’s situation is different.
3. Invest in yourself. With more disposable income, you may be able to afford that personal trainer now, practice mindfulness and meditation with a yoga instructor, read more books, eat healthier, or take that dream vacation.
4. Max out an ESA or 529 plan for your children. Student loans hinder many people from the ability to save. If you can assist your children in any way, paying off school loans can give them a significant advantage over their peers. The earlier you begin saving for your children, the better, as gains in an ESA or 529 plan will compound year over year.
5. Max out your IRAs. As long as you are working, you can contribute up to $6,000 of earned income into a Traditional IRA (potentially tax-deductible, depending on your income level) or Roth IRA (depending on your income level). IRAs grow tax-deferred, which makes them a great tool in saving for retirement. Roth IRAs can also be a great emergency fund. Click here to read about the benefits of “gifting” to a Roth IRA.
6. Max out your 401(k)s. You’ll need to work for a company that offers 401(k)s to be eligible to contribute to one, but you can contribute a whopping $19.5K to a 401(k) per calendar year. Like IRA funds, 401(k)s also grow tax-deferred either through a Traditional 401(k) or a Roth 401(k). With a Traditional 401(k), contributions are tax-deductible. With a Roth 401(k), there is no income limit for contributions. However, withdrawing from a 401(k) is more difficult than withdrawing from your IRA and may not even be possible if you are still working at the company in which you have the 401(k).
7. Max out your HSA. You can contribute to an HSA as long as you have a high deductible health insurance plan. Like IRAs and 401(k)s, HSA contributions are tax-deductible no matter your income level.
8. Invest. Invest. Invest. The importance of investing cannot be stressed enough. If you leave money in cash, you’re losing money each year due to inflation. Put your money to use and have your money work for you. Invest in what you know best, or hire a financial planner to assist you.

INHERITING REAL ESTATE

If inheriting property from a Baby Boomer, sit down for a minute and talk with your financial advisor. Everything can be simplified into three options for inherited real estate:

1. Sell the property for cash and refer back to your options on how to utilize inherited non-retirement funds.
2. If the property is residential or commercial real estate property, you could rent it out for another source of income.
3. You could hold the property, let it appreciate before selling it, or look into doing a 1031 exchange for a different kind of investment property.

Midland specializes in alternative assets such as real estate, LLCs, hedge funds, crowdfunding, private lending, and more. If you have retirement funds or inherited retirement funds and would like more information on your options, please contact us at (239) 333-1032 or visit www.midlandtrust.com. We are here to help!

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.