Question: Clint – Hi Andi, I recently received an inheritance of $100,000. I’ve been a letter carrier since 1993 and have both Roth and traditional versions of the Thrift Savings Plan. I currently have a combined $300,000 invested into my TSP. I have a current TSP loan of $35,000 at 2.25% for my residential home down payment from 2017. I max out the Roth each year at $6,500 but fall short of maxing out the traditional. I probably invest closer to $6,000 into the traditional TSP. My first thoughts are using my inheritance of $100,000 to first pay back the TSP loan of $35,000 and increase my traditional contributions to max out my traditional TSP. I will probably work another 20 years. I also recently refinanced mortgage to a 15 year 1.9%. Where would you invest a $100,000 inheritance?

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Asset Location: Where Should I Invest a $100K Inheritance?

Receiving a $100K inheritance can be both a blessing and a responsibility. Whether it’s from a loved one or a distant relative, investing this sum of money wisely can set a solid foundation for your financial future. But with so many investment options available, it can be overwhelming to decide where to put your money. One key factor to consider is asset location – the art of strategically placing your investments in different types of accounts to maximize tax efficiency and long-term growth.

Understanding Asset Location:
Asset location refers to the process of carefully distributing your investments across various account types, such as tax-deferred retirement accounts (401(k) or IRAs) and taxable brokerage accounts. The aim is to minimize tax obligations both during the investment period and when accessing the funds later. By considering the tax advantages, withdrawal rules, and investment options of each account type, you can maximize your overall investment returns.

Prioritize Retirement Savings:
One common strategy is to first allocate a significant portion of your inheritance to tax-advantaged retirement accounts, such as an employer-sponsored 401(k) or an Individual retirement account (IRA). These accounts offer tax benefits, whether it’s up-front tax deductions with traditional contributions or tax-free growth and withdrawals with Roth accounts. By maximizing your contributions to these accounts, you not only benefit from tax advantages but also prioritize long-term retirement savings.

Diversify Your Investments:
Diversification is a fundamental principle of investing, and asset allocation plays a crucial role in achieving it. Consider spreading your inheritance across various asset classes, such as stocks, bonds, and real estate, to manage risk and potentially boost returns. Within each asset class, diversify further by investing in different sectors and geographies. This way, you can mitigate the impact of market volatility and increase the probability of long-term growth.

Tax-Aware Investing:
Being tax-conscious when investing your inheritance can significantly impact your overall portfolio value. Tax-efficient investing involves placing tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts. For example, high-dividend stocks or taxable bond funds are better suited for tax-deferred accounts, while tax-efficient index funds or ETFs might be more appropriate for taxable accounts. Balancing your investments in this way can help minimize your tax liabilities and maximize your after-tax returns.

Consider Your Time Horizon:
Your investment time horizon, or how long you plan to keep the money invested, is another crucial aspect to consider when determining asset location. If you have a long time until retirement, you can afford to take on more risk and allocate a larger portion of your inheritance to potentially higher-growth assets like stocks. However, if you have a shorter time horizon or have other financial goals in the near term, investing in more stable assets like bonds or cash might be wiser. Aligning your investment strategy with your time horizon can help you achieve your financial goals while minimizing unnecessary risk.

Seek Professional Advice:
Investing a substantial sum of money can be complex, especially if you lack investment experience. Seeking professional advice from a Certified Financial Planner™ or a financial advisor can provide valuable guidance tailored to your specific circumstances. They can help you navigate the intricate world of investing and asset location, considering your unique goals, risk tolerance, and tax circumstances.

In conclusion, receiving a $100K inheritance opens up various opportunities for building wealth and securing your financial future. By understanding asset location, you can strategically divide your investments across different account types, diversify your assets, and be mindful of tax implications. Remember to consider your retirement savings, diversification, tax efficiency, time horizon, and seek professional advice when necessary. By making informed decisions, your $100K inheritance can flourish into a solid foundation for long-term financial success.