My husband has stage 4 esophageal cancer with a very short life expectancy. We just received an inheritance of $200,000 when his mom passed. This comes in the form of two inherited IRAs. We are trying to figure out what best to do with the money. We’re in our mid-50s. We have about $7500 in credit card debt, a $14,000 car loan and two kids who we would like to give about $10,000 each to. Our mortgage is about $139,000 and has 15 years left. I’d also like to put about $20,000 in an emergency fund. My question is, what amount of tax will we have to pay if we withdraw $100,000 of the money? My husband gets $1500 monthly SSDI checks (after tax is withheld) and I make about $40,000 a year. His total permanent disability will exempt us from the 10% early withdrawal penalty, I think. We have ongoing medical expenses. We’ve been able to maintain everything on our current income but have been using savings to do so. Any suggestions would be greatly appreciated.
I’m so sorry that these times are so difficult for you and your husband. I have some suggestions. Your credit card debit probably has the highest interest rate. I would pay this first and pay it off entirely.
Your home mortgage will qualify tax deductions, so this is the last loan to pay off.
The emergency fund is also very important to do at this time. Six to twelve months of emergency funds in a liquid vehicle would be appropriate. In view of this, you might want to beef up your emergency funding to $29,000 or even as much as $50,000. Consider a money market fund (such as a low-cost Vanguard money market fund), a high-yield savings account (check out nerdwallet.com for ideas), staggered CDs, a Roth IRA, or a combination of these things. Doing these things require a withdrawal of $36,500 - $57,500.
If the kids really need the money now and more than you need the money, then this will require a withdrawal of $56,000 - $77,500 (depending upon how much you put into your emergency fund). Remember though, taking care of yourself and your financial needs is also relieving some pressure from your children.
As far as the rest of the funds, I recommend that you do nothing with them for several months after the death of your husband. This will be an emotional time for you and it’s best not to make quick and sometimes irreversible decisions. This shouldn’t stop you though, from meeting with a financial advisor in a reputable firm that serves as a fiduciary (fiduciary is important). This is generally best to manage accounts of more than $100,000. You might consider Vanguard or TIAA-CREF because of their low costs and reliable reputations. I use both of these firms for my personal investments and feel quite comfortable with them. They can also work with your accountant (even give some recommendations if you don’t have one) to see what the best situation would be regarding your car loan (depending on the interest rate) or even your home mortgage. The accountant will advise you about your tax situation and give you ideas about how much and how to withdraw funds in the most tax advantageous way. Your financial advisor will work with your accountant in order to advise you about investments that can generate income for you (avoid annuities for the most part because they are too expensive and inefficient).
I advise you to contact a financial advisor and have a meeting even before actually receiving your inheritance funding so that he/she can arrange all the paperwork for transfer and allocations.
Good luck to you, and please know that you’re not alone because others are thinking about you.
I am so sorry to learn your husband is fighting a life-threatening disease. I know your question about taxing the inherited IRA is specific and I think you should discuss your options with a CPA and financial adviser to review some points:
Does your health insurance cover cancer treatments and care?
Is your IRA inheritance a standard IRA or a Roth? And when did the inheritance become available? The new SECURE act has made some changes to inherited IRAs for beneficiaries effective Jan 1 of this year but it appears if the inheritance occurred before the new SECURE act, many of the previous guidelines can stay in place. Also, since your husband is disabled, you may be exempt from the newer RMD requirements from the SECURE act.
If the inherited IRA is a standard IRA you will be taxed on those funds as you withdraw them, and if you take a large sum it will probably throw you into the next one or two tax brackets as you combine your annual incomes with the withdrawn funds.
Respectfully, I would definitely consult with both a trusted financial adviser and a CPA. I think your current financial situation needs expert guidance to avoid paying unnecessary taxes if possible.
Thankfully our health ins is great. We pay copays for everything of course but I’m grateful to not be in a deductible plan. I know the account was created in 2019 but I don’t know that the money was transferred in until 2020 or not…we were just able to see the amounts (standard IRAs) last week.
We will be meeting with our advisor on Friday and I emailed the accountant this morning to set up an appointment so we’re on the right path I think. Thanks for your input!
Thank you so much Gretchen for your advice. Everything you suggested makes the most sense. We are meeting with our financial advisor on Friday and I will call my accountant today to get his input. The money is ready for transfer as soon as we get the account set up with advisor. These are difficult times and I realize how much of a blessing this inheritance is, especially now. I will post again when we get this all sorted out. Again, thanks very much for your insights.