Thursday, March 15, 2018

You Just Inherited an Investment Portfolio. Now What?

Inheriting an investment portfolio may come with a wagon load of feelings - sadness at some one's passing, joy of new found money and overwhelm and confusion - not knowing how to handle it.

Several things must be considered before you go on a spending spree or quit your job. Chances are the portfolio belonged to someone older who constructed the portfolio to meet his/her financial goals, like provide income in retirement. An income portfolio generates income for living expenses and along with income comes taxes. If you are working you may not need additional income or the taxes you will ultimately owe Uncle Sam.

I recommend: Stop, Think, Ask and Plan.

Stop: Resist spending that money.
You may incur serious tax consequences. Breathe. There is no hurry. There is much to learn. The stock and bond markets go up and down daily. Take your time.

Think: Review your financial goals and see how this money fills gaps in your overall financial plan. It may allow you to retire earlier or defray education costs.

Ask: talk with a financial professional to learn more about this money.

Is it in an IRA or other tax deferred account?

What are the IRS requirements for taking distributions - within 5 years or over your lifetime?

What are the tax consequences? In a taxable account the original cost (cost basis) gets stepped up to the value on the date of death so you might owe little, if any taxes. Taking money from a tax deferred account creates "a taxable event" where the distribution is taxed as if it were ordinary income (like your pay).

Plan: The urge to spend is part of our culture so plan to spend 10% of that money on anything your heart desires - but only 10%.
Where does this money fit into your financial goals?
Can it - pay down some credit card or student loan debt?
- build the down payment for a house?
- help a son or daughter graduate with less debt?
- bolster your emergency fund?
- help you retire more comfortably?
If you are not a sophisticated investor and prefer to hold mutual funds instead of individual stocks, make a plan for selling the stocks, know the taxes involved and carefully put that money back in the market to work for you.

Be $ Smart - use discipline
with inherited money. Unless you have multiple relatives to leave you money, this might be a one time opportunity to fulfill your financial goals.