← HerMoney with Jean Chatzky
HerMoney with Jean Chatzky
“I inherited money in the form of an IRA, should I cash out now or keep it invested?”
00:28:24
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Jean Chatzky
This episode is brought to you by Lifelock. Not everyone is careful with your personal.
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Lori
Information, which might explain why there's a.
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Jean Chatzky
Victim of identity theft every five seconds in the U.S. fortunately, there's LifeLock. LifeLock monitors hundreds of millions of data points a second for threats to your identity. If your identity is stolen, a US.
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Lori
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Jean Chatzky
Or your money back. Save up to 40% your first year by visiting lifelock.com podcast terms apply. Any money that you spend out of pocket on health care can be used when you decide to pull the money out of this account to write off against those expenditures so that 10 years from now you decide that you're going to start pulling the money out. And over that time you've spent $100,000 on medical expenses. That's $100,000 that out that you can use for anything. Hey everyone, I'm Jean Chatsky. Thanks so much for joining me today on HerMoney. Today's episode is a special one. It's another live mailbag. I love these because I get to talk to you directly to hear your stories and we get to work through your most pressing money questions together. This time we are zeroing in on two thoughtful questions about where you should park your retirement funds. I get these a lot because with so many options out there, it can feel, well, overwhelming to make the best choices for your future self. First up, we've got Pam. Pam recently lost her mom and inherited a small ira. She's wondering if she should just cash out and pay the taxes or invest it and let it grow. She's also got health Savings account money just sitting in a money market account. So we're going to work on fixing that. And then Lori's on the line. She's asking what to do with her thrift savings plan now that her husband is retired from the military. If there's no reason for her to have to stay in the tsp, is it wise for her to move it? Plus, she's recently self employed. So we talk about how much she should be socking away for retirement when no employer is matching those funds for her. Before we get into it, if you've got any questions about your money, talk to me. Let's jump on the phone. Reach out to me@mailbaghermoney.com we'll set up a zoom and we'll get it going. Here's my conversation with Pam. Pam, nice to, nice to meet you. Nice to talk to you. How are you doing in Texas?
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Pam
I'm doing just fine. Just fine.
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Jean Chatzky
Amazing. Amazing. How can I help? Sure.
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Pam
Well, first of all, Jean, thank you so much for all that you do. I've been watching you since the days where you were on the Today show. Like, I, I was so excited to find the Hermoney show. So thank you for what you're doing.
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Jean Chatzky
Thanks. My pleasure.
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Pam
Let me jump into my questions. I have two questions. So, unfortunately, my mom passed away last year in May.
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Jean Chatzky
I'm sorry.
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Pam
Thank you. Yeah, it's been tough. And I've thankfully kind of been going through her accounts. And the last account that I'm going through was a relatively small amount of money, so it's about $3,000, which was transferred, it had to be transferred to a fidelity inherit ira, which I wasn't really familiar with. But this type of account requires me to take an annual RMD and to withdraw all the funds within 10 years. And currently the funds that are in the account are taxable, so they're all taxable. And I'm just trying to figure out what's the best thing to do. So I'm wondering, like, do I withdraw the funds, pay the taxes and then put the money somewhere else, or do I keep the funds here and then if so, like, what's the best way to invest them? So I'd love your thoughts on that.
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Jean Chatzky
So I am, as it happens, going through the exact same thing with the exact same timing. My, my mom too, passed away in May. My brothers. Oh, thanks. No, I know. It's. It is. Boy, it's. It's been really rough. My brothers and I are the recipients of an inherited IRA from her. And we too, just as all inherited IRAs these days, we too are on the 10 year clock. So essentially what that means is, is that as you pull the money out of this account, just like any other required minimum distribution from a retirement account, you've got to pay taxes on it at your current income tax rate. So you can do this all at once. Now if you have a need or a use for the money, or the money retains its ability to grow tax deferred while it's in the IRA. So you could invest it and pull it out 10 years from now and that would be okay too. Or you could just pull it out over 10 years. It's really your call. You said it's a relatively small amount of money, around $3,000. And I think for $3,000, it doesn't pay to tie yourself into knots. It doesn't necessarily pay to try to stretch it out a hugely long time unless you have some use for the money every year. Unless you have some purpose for the money down the road. How are you thinking about this chunk of money in the scheme of your life?
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Pam
Yeah, so the money itself is not something that I need immediately. Honestly, the reason for keeping it in here for me would be that's a bucket of money. That was something that my mother wanted me to have. And so the other piece of my inheritance, we actually used to buy a condo at a place that she would have just loved that we were like doing that. So this money is just. It's not money that I need immediately, it's money that I'd love to. So when I thought about like the minimum distribution every year, I thought that could be almost like a little present that like mom's giving me each year. And so it just, that was really my rationale for keeping it there. But if I do keep it there, I want to set it up from an investment perspective to earn as much as it can with the understanding obviously after 10 years I'd need to remove all of it. So really it was more an emotional thing than really there isn't anything specific that I have planned for the money, at least not yet.
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Jean Chatzky
I like thinking of it in that way. When my husband inherited his mother's IRA and this is going back well over a decade, as the distributions rolled out, he used the money to take his kids on a trip. He used the money for something special each year. I haven't really thought about what I'm gonna do with mine, but I do like, I do get this emotional response that I think I'm sensing from you is in that it's like she's remembering your birthday for another decade. Right. So I think that's fine because you're on the 10 year clock. You could just put it in an s and P500 fund. You could put it in a total stock market fund. I wouldn't do anything. If there are any, I guess, individual stock that you have been thinking about buying, you could do that. But with all of these stock oriented solutions, you just need to understand the markets can go down as much as they can go up. And if it goes down in a particular year, you may want to put off taking a distribution so that the money has time to recover. Or you could invest it in something where you know it's going to produce a more modest but a safer return. You could put it into, into some kind of bonds. But that said, I would look at how the rest of your money is invested. I would think about how are you going to feel if the portfolio shrinks in a year rather than goes up. And I would also look at how your other money is invested and just sort of line it up so that it makes sense within the context of the rest of your life.
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Pam
Okay, that's super helpful.
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Jean Chatzky
Yeah. But I would, you know, take it out over time, do a little something with it each year, Go to a show, go to a special restaurant. I like that idea.
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Pam
Yeah. Thank you. Thank you so much for that. So I've got. I have a second question, and this one's a little bit different. So my husband and I, we both have HSA accounts, and we save the maximum there every year. And we're not using the money now. We're planning to save it for later. We know we'll have healthcare needs, so we're planning to kind of set it aside. And really, when I was going through and reviewing, I realized that we had never set that up with any investment. So it's literally just in a money market account. And so I'm wondering about your thoughts about how best to invest that. And it's at Fidelity, so there are lots of different options of types of accounts that it could go into. I'm just wondering if you have any advice. And then sort of the second part to that is just, can I immediately move the majority of that money into that investment vehicle, or can I only set aside a portion?
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Jean Chatzky
No, you should be able to. And different accounts and different firms have different rules as far as the money being invested. Some places don't offer investment options at all. Some HSA banks don't offer investment options at all. But Fidelity does, which is great. Once again, you want to take a look at when you think you're going to use this money, how many years down the road is it, and invest in line with that. If you think that this is not money that you're going to use until you're in retirement and you're 15, 20 years away from retirement, you know, maybe you put it in a balanced fund or something that gives you that sort of 60, 40 exposure that is going to, in general, provide you with the same sort of a portfolio that you might get in a pension fund. I wouldn't go crazy with the risk that you're taking with these investments. I'd keep the general asset allocation that you have for your retirement accounts in this account, and you should be able to put all the money into it. It shouldn't be an issue. The other thing that you want to do, because you're not using the money now is to make sure that you are keeping really, really good records of all money that you're spending on health care. Because any money that you spend out of pocket on healthcare can be used when you decide to pull the money out of this account to write off against those expenditures. So that if you've got, let's say, I don't know, 10 years from now, you decide that you're going to start pulling the money out and over that time you've spent $100,000 on medical expense, that's $100,000 that can come out that you can use for anything. You don't have to use it for health care now you can. The way the rules work, once you're in retirement, the money can come out for any health care related need, any medical need, including your Medicare premiums, tax free, no issue. If it comes out and is used for something that's not related to health care, the withdrawals get treated like a 401k withdrawal. So no penalty. But you would have to pay income tax. But if you've got a stack of receipts, you can pull against those for any expense that you want. So just set up a really good filing system and know that you are by spending your money now, sort of paying yourself later.
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Pam
That's great. So if I understand correctly what you're saying is health care costs that I have now, even though I'm not using dollars from the hsa, I could set aside those receipts so that in the future I could sort of look back on expenses that I had and kind of get some of that money back. Is that how it works?
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Jean Chatzky
Get the money out of the account without having to worry about what you are planning to use that money for. So let's say you get down the road and you've got more in your HSA than you think you'll need for health care in general. That would allow you to get a money, a chunk of the money out of the HSA that has already been used for health care without having to worry about using it for healthcare. You could use it for whatever you want.
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Pam
That's great.
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Jean Chatzky
That's great.
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Pam
Thank you so much. I did not know that and I, I will definitely start doing that.
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Jean Chatzky
Yeah, it's a pretty nifty tool, right? When they talk about health savings accounts being triple tax free, you're still going to get the tax deduction for putting the money in, you're still going to get the tax free growth on the investments. But there are a number of ways that you can actually get the money out So I like them. I think that they're misunderstood and also underused. But it sounds like you guys are doing really well with yours, so that's great.
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Pam
Yeah. Thank you. Thank you. That was so helpful.
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Jean Chatzky
Oh, my pleasure. Thank you so much for the good questions.
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Pam
Thank you for being there and thank you for answering these questions for me. And I've referred your show to my friends too. So we're all really enjoying it and I, I appreciate it so much.
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Jean Chatzky
We appreciate that.
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Pam
All right. Thank you.
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Jean Chatzky
We are going to take a quick break. Hey everyone, it's Jean Chatzky. And this spring I have been all about refreshing my routines. Closet cleanout check, Budget rebalancing? You betcha. Meal Prep. That's where EveryPlate comes in. With EveryPlate, I'm getting vibrant, healthy meals like the Banh Mi style chicken lettuce wrap with pickled veggies and Sriracha mayo. It's light, it's flavorful. It's exactly the kind of boost that my week needed. I spend less, eat better, and most importantly in my house, avoid the dinner rut that I fall into so often. Thanks to their rotating weekly menu, every meal takes 30 minutes or less. So what are you waiting for? Dig into these flavor packed meals your household will love. New customers can enjoy this special offer of only $1 90ameal. Go to everyplate.com podcast and use code HERMONEY199 to get started. It's applied as a discount on the first box. Limited time only. You know, I have learned a lot of lessons from running, about pacing and resilience. And yes, getting older. My hips are very honest with me these days. The main lesson I've learned Our bodies are capable of some pretty incredible things, but they also need a little more support as we rack up the miles and the birthdays. Which is why I've been loving Ancient Nutrition's Multi Collagen Advanced Lean. Whether I'm lacing up for a quick 5k or just trying to keep up with life, this collagen supplement has been part of my routine right up there with my morning coffee. And collagen is not just about beauty. It also promotes fat loss, it helps build lean muscle, and it supports joints. Right now, Ancient Nutrition is offering 25 off your first order when you go to ancientnutrition.comhermoney that's ancientnutrition.comhermoney for 25% off your first order ancientnutrition.comhermoney and Lori is calling in with a question about her TSP or her husband's tsp. That's the Thrift Savings Plan, the retirement plan for folks in the military. Hey, Laurie, how are you?
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Lori
Hi, I'm good.
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Jean Chatzky
Where are you calling from? I know you've probably had a military life and moved around a lot.
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Lori
Yeah, so my husband was in the military from 2009 to 2014. And so we've had a TSP since then. And so my question is regarding keeping his retirement in the tsp. So we've kept it in there because I did some research a while ago that showed that it was. That it was okay. Typically you would put it in a rollover just because it has lower fees and more investment options. However, at the time, I did some research that said the TSP has some. Has some other investments that maybe the private sector doesn't have, and the fees are also low as well. So my question is just pertaining to that and what your professional educated opinion is on that and if it would be more advantageous to keep it there rather than transferring to a rollover ira.
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Jean Chatzky
And how is the rest of your retirement life situated? Part of the answer to this question is, is an administrative answer. When we work for a lot of different places, we end up with a lot of different retirement accounts scattered around. And when you take them in combination, it can be a real bear to manage all of those different things. So tell me about the rest of your retirement life.
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Lori
Okay, so my husband and I have about. It's about 50, 50 mix of what we have in retirement. He has that tsp, which is the largest amount that he has. And then he does have a rollover from a job that he did for a short time, a rollover ira. So we do have the account open. And then he just moved to a different job like two weeks ago. And so we still have to put that into that rollover. So it's a 401k with the company, and then I have a rollover IRA from my previous employer, and then I have a Roth ira, I believe. But the majority of what I have is in a rollover Ira.
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Jean Chatzky
Okay. And he has a current 401K. Do you have a current 401K?
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Lori
I do not know. Everything's been rolled over. I switched from working for someone and now I work for myself. So.
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Jean Chatzky
Okay, we're going to talk about that too. So just a quick calculation on my hands, we're talking about already six different accounts. Ish. At this point. Part of the reason that we roll over into one place is to help us with making sure that A, we keep track of everything, and B, when we're trying to keep an asset allocation in place, that makes sense for us, we don't have to do it bit by bit. We have it all in one place. And that makes that challenge easier. It's easier to manage your mix of stocks and bonds and cash if you're doing it from one pool of money rather than from six separate pools of money. And so that is essentially why I'm such a big fan of aggregating accounts or rolling over in general. I've just seen little 401ks and little 403bs get orphaned and left behind. And you certainly worked hard for this money. You don't want to leave it by the wayside at any point. The TSP is a little different. The Thrift Savings Plan is known for having incredibly low fees. And you're right, there are also some options that you have available to you to invest in that you don't have in IRAs. On the flip side, IRAs have a lot of options that you don't have in the tsp. So I probably would roll it for administrative reasons. I'd make sure that you are comparing fees and you're looking for a place where the fees are low and where the options are things that you want to put your money in. There are so many different places to do that these days, especially if you're going essentially the fairly boring route to retirement that many people go, which is using a mix of index funds and ETFs and other low cost investments, so that you are essentially covering the market as a whole. So that's how I would look at, at that challenge. What's the second part of your question?
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Lori
Okay, so the second part is a little more timely, I guess.
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Jean Chatzky
Okay.
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Lori
Just with my husband having a government retirement plan, I just find it concerning that there's certain entities that are not civil servants or elected officials that have access to information and offices that manage Social Security, Medicare, et cetera. I'm trying not to sound alarmist, but I just want to make sure that we are protected since I'm not sure that if they have the best people's best interests in mind. So since you've kind of answered the question about the TSP already, and I kind of know where we're going to go with that. Is moving the TSP into a rollover a good move considering these potential issues?
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Jean Chatzky
Look, I think that there are a lot of people who are feeling alarmed, and if you're feeling alarmed, then you want to move your money someplace where it's a non political entity. Right. I mean, it sounds like you would feel more comfortable if that money was no longer in the tsp. You have that choice. And I would just use this, you know, as if you're, if you're doing a list of pros and cons to roll it over. From your perspective, getting it out of there is something that it sounds like you want to do. I think these days the threat of people, government, non government gamsters, fraudsters, having access to our information is greater than it has ever been. And what that calls for in general is being incredibly vigilant with passwords, locking down your credit if you haven't locked down your credit and paying attention. Right. We are the ones who have to pay attention to the flows of our own money. So it's up to all of us to just keep our eyes on our money and make sure that nothing is going awry. Because time is one of the best allies that we have in any sort of incident incidence of fraud. The quicker you notice it, the quicker you are able to do something about it and hopefully, hopefully shut it down. And the final thing that I want to talk about with you, even though you didn't ask it, is your status as a self employed individual and what that means for your retirement. One of the frustrating things that I see is that a lot of people who work for themselves or who are gig workers, or who have a side hustle or are not socking any of that money away for retirement when the options to do that are actually really vast and effective. So let's just start at the very beginning. Even if you had no income, because your spouse has an income, you're eligible to open a spousal IRA or Roth IRA depending on what that income is and fund that fully every single year. And what that means for this year is up to $7,000 into the IRA if you're 50 or over, up to $8,000. So that's just a start. But then there's something called a sep ira which allows you to put in up to 25% of your self employed income on a tax sheltered basis and save that for retirement, which is huge. There are other vehicles. Simple IRAs and Solo 401Ks each have their own tax advantages and benefits. But the one thing I want you to come away from this conversation knowing is that you can save for retirement. And I hope that's something that you'll do on your own behalf.
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Lori
Okay. Yeah, I hadn't thought about it. We're starting a new shift with my husband's new job, he's going from a lower pay to a much higher pay. And so we haven't really thought much about it. So it's good. I appreciate you adding that little part of it to it because now that gets kind of my gears turning as far as that part of it, because we're just trying to not survive, but just get to the next chapter in sort of that career. So.
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Pam
Mm.
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Jean Chatzky
Yeah. No, and look, I know that we stop and start when it comes to retirement savings. We like to think that it's just one line straight up and to the right for many, many people. It's not that it's a series of, well, we can put in more now, we'll put in a little bit less later. When you get to the next rung of the ladder with your husband and things ease up a bit and you've got a little bit more free cash. Just know you've got the ability to save not just for him, but under your own name as well. And I think that's important for women in particular to remember.
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Lori
Oh, yeah, for sure. Yeah. Thank you for the reminder, kind of. Yeah, I'm just trying to get. Get everything started on my end, but it's like, oh, yeah, that's right, I can save too. And I do have that. That Roth opened up, so it would be just really easy to plug that in once I get rolling or like you said, look into some of the other options that are out there.
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Jean Chatzky
Yeah, no, the Roth is a really, really great place to start if you think you're not going to be able to save more than $7,000 for the year. And by the way, $7,000 for the year is a really great place to start again. You've got that account. You don't have to open another one administratively. It's easy to keep your eyes on. By all means, just do that. Well, thanks, Lori, for calling in. Yeah. If you love this episode, please give us a five star review. On Apple Podcasts, we always value your feedback. And if you want to keep the financial conversations going, join me for a deeper dive. HerMoney has two incredible programs. Finance Fix, which is designed to give you the ultimate money makeover, and Investing Fix, which is our investing club for women that meets bi weekly on Zoom. With both programs, we are leveling the playing fields for women's financial confidence and power. I would love to see you there. Her Money is produced by Hailey Pascalides. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks for joining us, and we'll talk soon.