Optimize the Benefits of an Inheritance

Physician's Money DigestJanuary15 2004
Volume 11
Issue 1


Waiting for that large inheritancefrom your parents tohelp fund your retirement?You may be waiting in vain. According toa recent AARP study, only 17% of babyboomers have received an inheritance ofsome kind, the median amount being$47,909. Moreover, physicians, perceivedas already wealthy, are even less likely tobe on the receiving end of a bequest.The overall problem, an article in notes, is that longer life expectancies,rising health care expenses, and thecost of long-term care have eaten awaymuch of retirees' savings.

Avoid Cashing Out

Double trouble:

A study by Hewitt Associates indicatesthat more than 40% of workers whoswitched jobs last year cashed out their401(k) plans rather than rolling themoney into another retirement savingsaccount. In addition tolosing out on years of tax-deferred compounding,you have to pay income taxon the amount you withdraw as well asa 10% penalty if you're under age 591/2.

The Hewitt study found that approximatelyone third of those who changedjobs and cashed out their 401(k) planswere between ages 50 and 59. The reason,many say, is that they just don'twant to go through the trouble of transferringtheir money to an IRA.

Advisors suggest several options. Employersare allowed to force departingworkers with less than $5000 in their401(k) plan to move their savings. But ifyour account contains more than $5000and you like the investment choices theplan offers, consider leaving the moneythere. A second option is to set up an IRAwith the financial institution that managesyour former 401(k) plan. That firmmay offer an easy method for you to rollover your savings into an IRA.

Invest an Inheritance

Wall Street Journal

Whether it's $1000, $10,000, or more,there are ways to maximize your windfall,an article in the suggests. If you receive an inheritance,your first reaction may be to spend it. Inreality, you're better off using thosefunds to pay down, or even pay off, anyhigh-interest debts you may have.

If high-interest debt is not a problem,you may want to consider funding anemergency savings account. Also consideropening a 529 savings account tocover your children's or grandchildren'scollege expenses.

WallStreet Journal

If your inheritance falls into the$10,000+ category, you could possibly puta dent in your savings plans. If you haveshort-term plans, such as purchasing ahome or vacation residence, the article suggests puttingabout 40% of the inheritance into a diversifiedstock mutual fund and stashing theremainder in a CD for stability.

If your goals are more long-term,advisors believe that a stock index fundmakes the most sense for a portion ofyour inheritance. For the conservativeside of your investment, they suggestthat you open a tax-advantaged accountlike an IRA.

If your inheritance is a true windfall,exceeding $100,000, your best bet is tocontact a professional financial advisor.When dealing with such a large sum ofmoney, the last thing you want to do ismake a costly mistake.

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