Couple With $1.5M And 2 Inherited IRAs Asks Reddit: 'Is It Crazy to Take a Lump Sum and Invest It Somewhere With a Slightly Higher Yield?'

Inheriting a substantial sum of money, especially within tax-advantaged accounts like individual retirement accounts, can be both a godsend and a financial challenge.

Many beneficiaries face the decision of whether to withdraw the money as a lump sum, reinvest for higher yields, or consider a more conservative strategy to reduce taxes, especially since beneficiaries need to withdraw all the money in 10 years. For those thinking about reinvesting inherited funds, the main questions circle around tax efficiency, long-term growth, and how much cash they need at hand.

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This is what a couple with a $600,000 portfolio and two inherited individual retirement accounts, one worth $500,000 and the other worth $400,000, is faced with. They want to keep the $400,000 in a money market fund for emergency liquidity but wonder if this is a good move, and are also contemplating taking a lump-sum withdrawal to reinvest for a higher yield but are uncertain about the tax implications.

“My husband and I would really like to (and I have no idea if this is possible) roll one of them into a money market fund where we bank just for more easily accessed emergency funds. Is this a thing? Would you do it? Is it crazy to take a lump sum and invest it somewhere with a slightly higher yield? I know it's better to use the market funds but we consider the $400,000 to be sort of a bonus and want to keep our stocks and bonds,” the poster wrote.

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The Reddit community in which the investor posted her concerns has come up with plenty of advice and suggestions, so let’s analyze those.

Should They Invest $400,000 In High-Yield Assets? Reddit Debates Their Plan

Avoid Lump-Sum Withdrawals Due to Tax Consequences

Several commenters cautioned against withdrawing the whole sum from the inherited individual retirement accounts at once because of the steep tax effects. Instead, they suggested spreading out withdrawals over the 10 years to reduce tax drawbacks.

“I wouldn’t take the lump sum as that’s going to result in a huge increase in your taxable income for the year. You have 10 years to empty the account. Keep taking a portion of it each year to minimize the tax liability,” a commenter recommended.

A Redditor mentioned that the poster can adjust investments within the individual retirement account without paying taxes.

“You should be able to change the investments in the individual retirement account if you want something more aggressive without withdrawing the funds. You will have to empty the accounts within 10 years. If you keep the money in the accounts, withdrawing a percentage every year, it can continue to grow without the heavy tax burden all at once,” he wrote.

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Invest in Low-Cost, Broad Market ETFs

Many Reddit users advised the couple to consolidate the inherited investment retirement accounts at a well-known brokerage and allocate funds to liquid assets and growth-focused investments.

“I would consolidate the inherited investment retirement accounts (assuming they can be combined) into a single inherited investment retirement account at a major brokerage, such as Fidelity (or Vanguard or Schwab). There, you can invest a portion into a [money market fund] or perhaps a [certificates of deposit] ladder to receive a bigger premium than what your local bank offers. The remaining amount within the inherited investment retirement account can be invested in a broad, low-cost ETF,” a piece of advice reads.

Sharing a growth strategy, this commenter mentioned that growth assets can compound inside the investment retirement account: “You could place that money in broad index funds and enjoy the growth as you remove it bit by bit. Even then, you could be padding an emergency [money market fund] in your own taxable brokerage while benefiting from the growth on the lump sum.”

“While inherited investment retirement accounts generally cannot be rolled into a money market fund directly, you may be able to allocate the funds within the inherited investment retirement account to a [money market] fund offered by the investment retirement account custodian,” a Redditor suggested.

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