What to do with a 50K inheritance [duplicate]
"The basic optimization rule on distributing windfalls toward debt is to pay off the highest interest rate debt first putting any extra money into that debt while making minimum payments to the other creditors. If the 5k in ""other debt"" is credit card debt it is virtually certain to be the highest interest rate debt. Pay it off immediately. Don't wait for the next statement. Once you are paying on credit cards there is no grace period and the sooner you pay it the less interest you will accrue. Second, keep 10k for emergencies but pretend you don't have it. Keep your spending as close as possible to what it is now. Check the interest rate on the auto loan v student loans. If the auto loan is materially higher pay it off, then pay the remaining 20k toward the student loans. Added this comment about credit with a view towards the OP's future: Something to consider for the longer term is getting your credit situation set up so that should you want to buy a new car or a home a few years down the road you will be paying the lowest possible interest. You can jump start your credit by taking out one or two secured credit cards from one of the banks that will, in a few years, unsecure your account, return your deposit, and leave no trace you ever opened a secured account. That's the route I took with Citi and Wells Fargo. While over spending on credit cards can be tempting, they are, with a solid payment history, the single most important positive attribute on a credit report and impact FICO scores more than other type of credit or debt. So make an absolute practice of only using them for things you would buy anyway and always, always, pay each monthly bill in full. This one thing will make it far easier to find a good rental, buy a car on the best terms, or get a mortgage at good rates. And remember: Credit is not equal to debt. Maximize the former and minimize the latter." "My grandma left a 50K inheritance You don't make clear where in the inheritance process you are.  I actually know of one case where the executor (a family member, not a professional) distributed the inheritance before paying the estate taxes.  Long story short, the heirs had to pay back part of the inheritance.  So the first thing that I would do is verify that the estate is closed and all the taxes paid.  If the executor is a professional, just call and ask.  If a family member, you may want to approach it more obliquely.  Or not.   The important thing is not to start spending that money until you're sure that you have it.   One good thing is that my husband is in grad school and will be done in 2019 and will then make about 75K/yr with his degree profession. Be a bit careful about relying on this.  Outside the student loans, you should build other expenses around the assumption that he won't find a job immediately after grad school.  For example, we could be in a recession in 2019.  We'll be about due by then.    Paying off the $5k ""other debt"" is probably a no brainer.  Chances are that you're paying double-digit interest.  Just kill it.   Unless the car loan is zero-interest, you probably want to get rid of that loan too.  I would tend to agree that the car seems expensive for your income, but I'm not sure that the amount that you could recover by selling it justifies the loss of value.  Hopefully it's in good shape and will last for years without significant maintenance.   Consider putting $2k (your monthly income) in your checking account.  Instead of paying for things paycheck-to-paycheck, this should allow you to buy things on schedule, without having to wait for the money to appear in your account.   Put the remainder into an emergency account.  Set aside $12k (50% of your annual income/expenses) for real emergencies like a medical emergency or job loss.  The other $16k you can use the same way you use the $5k other debt borrowing now, for small emergencies.  E.g. a car repair.   Make a budget and stick to it.  The elimination of the car loan should free up enough monthly income to support a reasonable budget.  If it seems like it isn't, then you are spending too much money for your income.  Don't forget to explicitly budget for entertainment and vacations.  It's easy to overspend there.   If you don't make a budget, you'll just find yourself back to your paycheck-to-paycheck existence.  That sounds like it is frustrating for you.  Budget so that you know how much money you really need to live." First, don't borrow any more money.  You're probably bankrupt right now at that income level.  2k/month is poverty level income, especially in some of the higher cost of living areas of California.  At $2k per month of income, and $1300 of rent and utilities, you've only got 700 a month for food.  The student loans are probably in deferment while your husband is in school.  If so, keep them that way and deal with them when he lands a career track goal after grad school.   The car loan is more than you can afford.  Seriously consider selling the car to get rid of the note.  Then use the cash flow that was going to the car loan to pay off the 'other' debt.  A car is usually a luxury, but if it is necessary, be sure it is one that doesn't include a loan.   Budget all of your income (consider using YNAB or something like it).  Include a budget item to build an emergency fund.  Live within your means and look for ways to supplement your income.  With three of your own, you'd probably make an excellent baby sitter. As for the inheritance, find a low risk, liquid investment, such as 12 month CDs or savings bonds.  Something that you can liquidate without penalty if an emergency arises.  Save the money for if you get into a situation where there is no other way out.  Hopefully you can have your emergency fund built up so that you don't need to draw on the inheritance.   Set a date, grad school + landing + 90 days.  If you reach that date and haven't had to use the inheritance, and you have a good emergency fund, put the inheritance in a retirement fund and forget about it. Why retirement fund and not a college fund for the kids?  The best gift you can give them is to remain financially independent throughout your life.  If you get to the point where you are fully funding your tax advantaged retirement savings, and you are ready to start wealth-building, that is the time to take part of that cash flow and set it aside for college funds. **I would encourage you to clear all your debts and remain debt free, then you can consult a financial manager-for investing purposes that fits your needs and goals.  There are so many investment vehicles out, but the best of all is in real estate which requires lots of money.   For your case I would prefer money market funds.  If don't have time for a specialist you just walk into any stock broker and invest in those shares from well established companies with strong fundamentals.  Buy them when undervalued but with long term goals.  Ask the stock broker about bonds and other ways that the government purposes for domestic borrowings.  Etc.
"As Dilip said, if you want actual concrete, based in tax law, answers, please add the country (and if applicable, state) where you pay income tax. Also, knowing what tax bracket you're in would help as well, although I certainly understand if you're not comfortable sharing that. So, assuming the US... If you're in the 10% or 15% tax bracket, then you're already not paying any federal tax on the $3k long term gain, so purposely taking losses is pointless, and given that there's probably a cost to taking the loss (commission, SEC fee), you'd be losing money by doing so. Also, you won't be able to buy back the loser for 31 days without having the loss postponed due to the wash sale that would result. State tax is another matter, but (going by the table in this article), even using the highest low end tax rate (Tennessee at 6%), the $50 loss would only save you $3, which is probably less than the commission to sell the loser, so again you'd be losing money. And if you're in a state with no state income tax, then the loss wouldn't save you anything on taxes at the state level, but of course you'll still be paying to be able to take the loss. On the high end, you'd be saving 20% federal tax and 13.3% state tax (using the highest high end tax state, California, and ignoring (because I don't know :-) ) whether they tax long-term capital gains at the same rate as regular income or not), you'd be saving $50 * (20% + 13.3%) = $50 * 33.3% = $16.65. So for taxes, you're looking at saving between nothing and $16.65. And then you have to subtract from that the cost to achieve the loss, so even on the high end (which means (assuming a single filer)) you're making >$1 million), you're only saving about $10, and you're probably actually losing money. So I personally don't think taking a $50 loss to try to decrease taxes makes sense. However, if you really meant $500 or $5000, then it might (although if you're in the 10-15% brackets in a no income tax state, even then it wouldn't). So the answer to your final question is, ""It depends."" The only way to say for sure is, based on the country and state you're in, calculate what it will save you (if anything). As a general rule, you want to avoid letting the tax tail wag the dog. That is, your financial goal should be to end up with the most money, not to pay the least taxes. So while looking at the tax consequences of a transaction is a good idea, don't look at just the tax consequences, look at the consequences for your overall net worth." "First off, leaving money in a 529 account is not that bad, since you may always change the beneficiary to most any blood relative.  So if you have leftovers, you don't HAVE to pay the 10% penalty if you have a grandchild, for instance, that can use it.  But if you would rather have the money out, then you need a strategy to get it out that is tax efficient. My prescription for managing a situation like this is not to pay directly out of the 529 account, but instead calculate your cost of education up-front and withdraw that money at the beginning of the school year.  You can keep it in a separate account, but that's not necessary.  The amount you withdraw should be equal to what the education costs, which may be estimated by taking the budget that the school publishes minus grants and scholarships.  You should have all of those numbers before the first day of school.  This is amount $X. During the year, write all the checks out of your regular account.  At the end of the school year, you should expect to have no money left in the account.  I presume that the budget is exactly what you will spend.  If not, you might need to make a few adjustments, but this answer will presume you spend exactly $X during the fall and the spring of the next year. In order to get more out of the 529 without paying penalties, you are allowed to remove money without penalty, but having the gains taxed ($y + $z).  You have the choice of having the 529 funds directed to the educational institution, the student, or yourself.  If you direct the funds to the student, the gains portion would be taxed at the student's rate.  Everyone's tax situation is different, and of course there is a linkage between the parent's taxes and student's taxes, but it may be efficient to have the 529 funds directed to the student.  For instance, if the student doesn't have much income, they might not even be required to file income tax.  If that's the case, they may be able to remove an amount, $y, from the 529 account and still not need to file.  For instance, let's say the student has no unearned income, and the gains in the 529 account were 50%.  The student could get a check for $2,000, $1,000 would be gains, but that low amount may mean the student was not required to file. Or if it's more important to get more money out of the account, the student could remove the total amount of the grants plus scholarships ($y + $z).  No penalty would be due, just the taxes on the gains.  And at the student's tax rate (generally, but check your own situation). Finally, if you really want the money out of the account, you could remove a check ($y + $z + $p).  You'd pay tax on the gains of the sum, but penalty of 10% only on the $p portion. This answer does not include the math that goes along with securing some tax credits, so if those credits still are around as you're working through this, consider this article (which requires site sign-up).  In part, this article says: How much to withdraw -    ... For most parents, it will be 100% of the beneficiary’s qualified higher education expenses paid this year—tuition, fees, books, supplies, equipment, and room and board—less $4,000. The $4,000 is redirected to the American Opportunity Tax Credit (AOTC),... When to withdraw it -    Take withdrawals in the same calendar year that the qualified expenses were paid. .... Designating the distributee -    Since it is usually best that the Form 1099-Q be issued to the beneficiary, and show the beneficiary’s social security number, I prefer to use either option (2) or (3) [ (2) a check made out to the account beneficiary, or (3) a check made out to the educational institution] What about scholarships? -    The 10 percent penalty on a non-qualified distribution from a 529 plan is waived when the excess distribution can be attributed to tax-free scholarships. While there is no direct guidance from the IRS, many tax experts believe the distribution and the scholarship do not have to match up in the same calendar year when applying the penalty waiver. If you're curious about timing (taking non-penalty grants and scholarship money out), there is this link, which says you ""probably"" are allowed to accumulate grants and scholarship totals, for tax purposes, over multiple years." Setting aside for the moment the very relevant issue of whether you need the full amount quickly, I'll just tackle comparing which option gives you to maximum amount of money (in terms of real dollars). The trick is, unless you think inflation will suddenly reverse itself or stop entirely (not likely), $50K today is worth a LOT more than $50K in 20 years. If you don't believe me, consider that just 30 years ago the average price for a mid-level new car was around $3k. When you grandfather says he got a burger for a nickel, he isn't talking about 2010 dollars.  So, how do you account for this? Well, the way financial people and project managers do it to estimate how much to pay today for $1 at some point in the future is through a net present value (NPV) calculation. You can find a calculator here. In your question, you gave some numbers for the payout, but not the lump sum prize amount. Going solely on what you have provided, I calculate that you should take the lump sum if it is greater than $766,189.96 which is the net present value of 20 years of $50K Payments assuming 3% annual inflation, which is fairly a fairly reasonable number given history. However, if you think the out-of-control Gov't spending is going to send inflation through the roof (possible, but not a given), then you almost certainly would want the lump sum. I suppose in that scenario you might want the lump sum anyway because if the Govt starts filching on their obligations, doing it to a small number of lottery winners might be politically more popular than cutting other programs that affect a large number of voters. "How will 45K-60K ""end up in your pocket""?  Are you selling your home?  Where are you going to live?  You talk about moving to Arizona, what is so magical about that place? Congratulations on making a wise purchase.  Some people with new found money use it to correct past mistakes.  However, if they do not change their behavior they end up in the same situation just less them money they once had. While 50K income is respectable at your age, it is below the national average for households.  One factor in having a college education is those with them tend to experience shorter and fewer periods of unemployment especially for males.  Nothing will ever replace hustle, however.  I'd ask you to have a plan to raise your income.  Can you double it in 5 years?   You need to get rid of the revolving debt.  Do that out of current income.  No need to touch the house proceeds for something so small.  Shoot for 9 months. Then you need to get rid of the speeding fines and the vehicle loan.  That is a lot of vehicle for your income.  Again, I would do that out of current income or by selling the vehicle and moving to something more inline with your income.   As far as to moving or flipping foreclosures that is more of a question that has to do with your hopes and dreams.  Do you want to move your children every 3 years?  What if you move to Arizona and it turns out to be quite horrible?  You and your wife need to sit down and discuss what is best for your family." You can play with the numbers all you like (and that's good), however, here is a different way to look at it.  The debt you have is risk. It limits your choices and eats your cash flow. Without the debt, you can invest at a much greater rate. It frees up you cash flow for all the things you might want to do, or decide in the future you might want to do. Right now is the easiest time for you to focus on debt repayment. It sounds like you are not married and have no children. It is much easier now to cut back your lifestyle and concentrate on paying off this $50k of student debt. This will get harder as your responsibility increases. Build up a small amount of cash for emergencies and put the rest at the debt. You can keep contributing to your 401k to the match if you want. This will give you 2 benefits: Patience. When you actually DO start investing, you will have a new appreciation for the money you are using. If you sacrifice to pay off $50k now, you wont look at money the same for the rest of your life.  Drive. If you see the debt as a barrier to achieving your goals, you will work harder to get out of debt.  These are all things I would tell my 23 year-old self if i could go back in time.  Good luck! John - sure, your points are well taken. $500K in cash is preferable to $500K invested in a way I wouldn't choose at the moment.  A friendly warning - inheritances often come in the form of an IRA account. This comes with its own issues, and an IRA shouldn't be confused with the assets it contains. Selling the assets inside is fine, you can reinvest in what you wish, but selling and pulling the money out can result in an horrific tax bill. I was recently interviewed on the radio (and available as a Podcast) discussing Inherited IRA Tax Tips, and it's worth educating yourself as the topic is quite convoluted.  (And thanks, John, for a question that permitted me to sneak this in. I owe you a beverage) When you say: I am 48 and my husband is 54. We have approx. 60,000.00 left in our retirement accounts. We want to move our money into something so our money will grow. We've   been looking at annunities. We've talked to 4 different advisors about   what is best for us. Bad mistake, I am so overwhelmed with the   differences they all have til I can't even think straight anymore. @Havoc P is correct: ...It's very likely that 60k is not nearly enough, and that making the right investment choices will make only a small difference. You could   invest poorly and maybe end up with 50K when you retire, or invest   well and maybe end up with 80-90k. But your goal is probably more like   a million dollars, or more, and most of that will come from future   savings. This is what a planner can help you figure out in detail. TL; DR Here is my advice: My take is that he can avoid a big tax hit by leaving it as and giving   the untouched fund to the heirs. 100% correct. By withdrawing now he'll be subjected to the income tax on the gains. Since his gains are almost the whole value of the account, he'll actually find himself in the highest bracket, not the lowest as Joe suggests. Not only that, but his SS income will become taxable as well. Capital gains are included in the AGI. By leaving as is, the heirs will get stepped up basis, and the whole 700K will not be taxed (its below the estate tax threshold, and the basis for the heirs will be the value at death). My understanding is that when you die, the stocks are sold and then   the money is given to the beneficiary or the stock is repurchased in   the beneficiaries name. This is wrong, and the conclusion you draw from michael's otherwise correct answer follows your false assumption.  You seem to understand the Estate Tax federal threshold. Jersey would have its own, and I have no idea how it works there. If the decedent happened to trade in the tax year prior to passing, normal tax rules apply.  Now, if the executor chooses to sell off and liquidate the estate to cash, there's no further taxable gain, a $5M portfolio can have millions in long term gain, but the step up basis pretty much negates all of it.  If that's the case, the beneficiaries aren't likely to repurchase those shares, in fact, they might not even know what the list of stocks was, unless they sifted through the asset list. But, that sale was unnecessary, assets can be divvied up and distributed in-kind, each beneficiary getting their fraction of the number of shares of each stock. And then your share of the $5M has a stepped up basis, meaning if you sell that day, your gains are near zero. You might owe a few dollars for whatever the share move in the time passing between the step up date and date you sell.  I hope that clarifies your misunderstanding.  By the way, the IRS is just an intermediary. It's congress that writes the laws, including the tangled web of tax code. The IRS is the moral equivalent of a great customer service team working for a company we don't care for. If you have no need for the money. Donate it. Spend the next few years determining what charities make sense and then when the wills are settled, then make those donations. You should get advice how how to best do that, there can be some limitations and complications. Sometimes the source of the money/property makes it more complicated. The form of the inheritance can also make a difference.  You could even setup a charitable trust to spread the donations out over year or decade. You could even make it so that you can live off the interest until you die, and then the rest goes to the charity. Note: just because they have no other children, there is no guarantee that you will receive the money/property. They, at any time, could write a will and cut you out of some, most , or all of the wealth. In today's market being paid 1% for risk and free access money is pretty darn good.  If 50k is what you feel comfortable with an emergency fund, then you are doing a fine enough job. To me that is a lot to keep in an emergency fund, however several factors play into this: We both drive older cars, so I also keep enough money around to replace one of them.   Considering all that I keep a specific amount in savings that for me earns .89%.  Some of that is kept in our checking accounts which earns nothing. You have to go through some analysis of your own situation and keep that amount where it is. If that amount is less than 50K, you have some money to play with.  Here are some options: It's in your interest to pay down these loans (just like any debt) at an accelerated rate, so long as you prioritize it appropriately and don't jeopardize your financial situation. What are your plans for the $50k? Is it a downpayment on a house? Are you already saving for retirement? At what rate are you saving each year? These are all important questions. There is nothing wrong with using some of the $50k to make a dent in your loans, but overpaying a debt at 6% should not be your first priority. Save for retirement, pay off credit cards, make sure you have an emergency fund of between 6-12 months living expenses (depending on your comfort level as well as how stable you think your job is, and how much you could downsize if need be). Then, tackle extra loan payments. Unfortunately 6% is about what you would expect to get in the market these days, so you can't necessarily make more money investing your remaining cash on hand as compared to putting it towards your loans. And you could always make less. Personally, I would divide the $50k as follows. Insert your own numbers/circumstances :) Of the ~$30k that remains... If you are looking to transfer money to another person in the US, you can do do with no tax consequence.  The current annual gift limit is $14k per year per person, so for example, my wife and I can gift $56k to another couple with no tax and no forms. For larger amounts, there is a lifetime exclusion that taps into your $5M+ estate tax. It requires submitting a form 709, but just paperwork, no tax would be due. This is the simplest way to gift a large sum and not have any convoluted tracking or structured loan with annual forgiveness. One form and done. (If the sum is well over $5M you should consider a professional to guide you, not a Q&A board) Rule of thumb: To retire with a yearly income of $X, you need to save $(20*X) -- in other words, the safe assumption is that you'll average 4% returns on your stabilized savings/investments. In the case of retiring with a $50k passive pretax income, that means you need savings of $1M by the time you retire. If you want the $50,000 to be real post-tax spendable dollars, and your savings aren't in something like a Roth 401k or Roth IRA, increase that proportionately to account for taxes. How you get there depends on what you start with, how much you put into it every year, how you invest it and how many years you have before your retirement date. Passive investment alone will not do it unless you start with a lot of money; passive ongoing investment may depending on how much you can make yourself save when. To find out whether any specific plan will do what you need, you have to work with real numbers. Here are my conditions for an emergency account: A compromise would be to have 1,000-2,000 in a very liquid account and the rest in something a little less liquid that maybe has a minimum balance (but no transaction requirements).  The behavioral risk is when you do have an emergency and you don't want to cash out or go through any hassle to get it out, so you just charge the emergency instead of paying cash.