“Is there a way, with their permission, that I can oversee these funds at least until they are a bit older?” (Photo subjects are models.) - Getty Images/iStockphoto Dear Quentin, My college-age kids are inheriting $150,000 each, mostly from a 401(k) so the money is taxable. I am still going to pay for college, so this money is likely to be saved for the purchase of homes in 10 years or so. My thought is they should start withdrawing it from the 401(k) now while they have little or no income and taxes will be low.
Where would you invest it? Is there a way, with their permission, that I can oversee these funds at least until they are a bit older?
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If you were to take control of your children’s finances, you would need to ask them to grant you a power-of-attorney document. - MarketWatch illustration Dear Mother, It may be time to let go of these reins, given that your children are now adults.
They have the opportunity to learn about investing, saving and how $150,000 can help them get a headstart in life. And, yes, they also have room to make the odd mistake. You can, along with a financial adviser, teach them how to evaluate risk and assess long-term gains, or offer to hold their power of attorney. Both are options. But they must first deal with the legalities of their bequest.
Inherited retirement assets under the Secure 2.0 Act are fairly complex, says Neil V. Carbone, trusts-and-estates partner at law firm Farrell Fritz. The options for beneficiaries depend on the beneficiary’s relationship to the original account owner and whether the beneficiary qualifies as an “eligible designated beneficiary” (which does not apply in this case), among other factors like whether the owner had started their RMDs.
As a nonspouse of the deceased, your kids have three options: 1) Transfer the assets into an inherited IRA in their name (RMDs must begin no later than Dec. 31 of the year after death of the deceased if they had started taking RMDs); 2) Open an inherited IRA with the 10-year method (the money is available until Dec. 31 of the 10th year after the year the account holder died); or 3) Take a lump sum (with a high tax bracket).
If the late owner had already started taking RMDs, new rules, which went into effect in 2025, state that your children, as the beneficiaries, must take an RMD each year, beginning the year after the original account owner’s death. This applies to accounts that have been inherited since 2020. These RMDs are subject to the 10-year distribution rule, meaning the account should be emptied by the 10th year after the owner’s death.
繼續閱讀“Failure to take an RMD could result in a substantial excise tax of 25% of the amount of the missed distribution, but that can be reduced to 10% if corrected within two years,” Carbone says. “Of course, the beneficiaries could take one or more lump-sum distributions while they are still in college and presumably have little or no other income. This approach could avoid pushing them into a higher income-tax bracket.”
Learning the ropes togetherIf you were to take control of your children’s finances, you would need to ask them to grant you a power-of-attorney document — but I’m not sure how this helps them in the long run, unless one of your children is particularly reckless with money and/or has addiction issues. If you’re unsure about where and how they should invest this money, the most logical option would be for you to all learn together.
While you plan to cover all or most of their college expenses, if your children are also receiving any type of financial aid, they may want to consider delaying or minimizing any distributions that could impact their eligibility for aid, adds Martin Schamis, head of wealth planning at Janney Montgomery Scott in Philadelphia. “The resulting distribution rules depend on what type of beneficiary your children are,” he says.
“For longer-term investments, you’ll typically want to build a well-allocated diversified portfolio with an appropriate mix of holdings,” Schamis notes. “That process should look at their current risk tolerance and help enumerate their goals, both short and long term, which will help you and the adviser determine the appropriate mix of investments.” Given their ages, they can afford to go heavy (80% or more) in stocks.
If they invested $100,000 in the S&P 500 SPX, with a 7% average return, they could reasonably expect to have $387,000 in 20 years. They could also put a small portion aside for an emergency fund (at least six months’ worth of expenses) and could even put a portion of that into CDs or high-yield savings accounts, splitting the money into higher- and lower-risk vehicles, while ensuring it at least keeps pace with inflation.
As Charles Schwab states: “When you’re in your 20s, time may be your most valuable asset. Consider saving 10% to 15% of your pretax income for retirement, but even if you only have a smaller amount to invest each month, it may still be worth it. Time in the market is key. Get started as soon as you can. Consider automating as much as possible so that you don’t have to test yourself and your discipline each month.”
Learning smart financial habits could be the best part of this $300,000 inheritance.
Related: ‘I fear a significant decline in the S&P 500’: Do I sell my tech stocks before it’s too late?
Previous columns by Quentin Fottrell:
‘I’m furloughed due to the government shutdown’: Do I pull money from my Roth 401(k) or $450K home?
My father’s estate was awarded $50K in a class-action lawsuit. My brother, as executor, kept the money. What can we do?
‘I’m in the home stretch’: I’m 80. Do I leave my kids a ‘Magnificent Seven’ dynasty trust or a brokerage account?
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