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Inheriting a substantial sum of money, especially within tax-advantaged accounts like individual retirement accounts, can be both a godsend and a financial challenge.
Many beneficiaries face the decision of whether to withdraw the money as a lump sum, reinvest for higher yields, or consider a more conservative strategy to reduce taxes, especially since beneficiaries need to withdraw all the money in 10 years. For those thinking about reinvesting inherited funds, the main questions circle around tax efficiency, long-term growth, and how much cash they need at hand.
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If there was a new fund backed by Jeff Bezos offering a 7-9% target yield with monthly dividends would you invest in it?
This is what a couple with a $600,000 portfolio and two inherited individual retirement accounts, one worth $500,000 and the other worth $400,000, is faced with. They want to keep the $400,000 in a money market fund for emergency liquidity but wonder if this is a good move, and are also contemplating taking a lump-sum withdrawal to reinvest for a higher yield but are uncertain about the tax implications.
“My husband and I would really like to (and I have no idea if this is possible) roll one of them into a money market fund where we bank just for more easily accessed emergency funds. Is this a thing? Would you do it? Is it crazy to take a lump sum and invest it somewhere with a slightly higher yield? I know it's better to use the market funds but we consider the $400,000 to be sort of a bonus and want to keep our stocks and bonds,” the poster wrote.
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The Reddit community in which the investor posted her concerns has come up with plenty of advice and suggestions, so let’s analyze those.
Should They Invest $400,000 In High-Yield Assets? Reddit Debates Their Plan
Avoid Lump-Sum Withdrawals Due to Tax Consequences
Several commenters cautioned against withdrawing the whole sum from the inherited individual retirement accounts at once because of the steep tax effects. Instead, they suggested spreading out withdrawals over the 10 years to reduce tax drawbacks.
“I wouldn’t take the lump sum as that’s going to result in a huge increase in your taxable income for the year. You have 10 years to empty the account. Keep taking a portion of it each year to minimize the tax liability,” a commenter recommended.