I Make $40,000 a Year – What Should I Do With My $800,000 Inherited Roth IRA?

Investing money in a brokerage account is a valuable starting point to building long-term wealth, especially if you’re also capitalizing on retirement accounts. You  can build your own wealth and pass it on to your kids if you stay financially disciplined. 

A low-income Redditor who earns $40,000 per year recently received an $800k Roth IRA and a $400k money market account as an inheritance. The individual is single and has one teenage child. It’s good to speak to a financial advisor if you can, but I’ll give some thoughts as if I were coaching a friend. 

Calculate Your Monthly Expenses

I can’t offer any suggestions on what to do with the money if I don’t know more information about someone’s finances. The advice for managing the $800k Roth IRA and $400k money market account will be different if someone spends $5,000 per month or $20,000 per month. The Redditor is earning $40,000 per year, which comes to roughly $3,333 per month before taxes.

This isn’t the time to get bold and make high-risk investments. Someone who is earning $3,333 per month may be more vulnerable to debt, such as credit card debt. Squaring off those balances first with the money market account may be the best first step to take.

We don’t know the APY on the money market account, and I would want to know that if this person wanted suggestions from me. However, if it yields 3% APY, the $400k account is generating $12,000 per year, which comes to $1,000 per month. The Redditor can consider a CD ladder to lock in a higher rate for a longer period of time, but it may not be necessary right now. The money market provides additional income, but it is taxed as ordinary income, which results in a higher tax bill.

Let The Roth IRA Grow Undisturbed

The Redditor has enough money in the money market account to get out of debt and make expenses more feasible. However, the Roth IRA funds should stay put. Assets in a Roth IRA grow tax-free, and you don’t even pay taxes on any withdrawals. 

If you receive a Roth IRA as an inheritance, you have 10 years to withdraw all of the money from that retirement account. Waiting until the 10th year to withdraw money from the Roth IRA allows more of your money to grow tax-free. It’s the best setup.

Keeping money in the Roth IRA instead of withdrawing from the account also makes the 49-year-old less susceptible to lifestyle inflation. One thing I would mention to anyone in this situation is that they are still only earning $40,000 per year. Receiving a big inheritance doesn’t justify someone who earns $40,000 per year upgrading to an $80,000 per year lifestyle. That’s why most lottery winners end up broke. They upgrade their lifestyles because they don’t have financial discipline, and then end up right back at square one.

Put The Money Right Back Into A Brokerage Account

The 49-year-old will inevitably have to withdraw money from their Roth IRA, especially in the 10th year. However, it doesn’t make much sense for the 49-year-old to use this account for any purchases. It’s better to put the money right back to an index fund in your brokerage account.

If optimized correctly, the $800k Roth IRA can fund the 49-year-old’s future retirement. It does not seem like the 49-year-old has a nest egg of their own, and I would mention this in a conversation about money. Let the money continue to grow after withdrawing it from the Roth IRA so you can give it to your teenage child as an inheritance when the time comes. 

Some brokerage firms can connect you with a financial advisor for free, especially since the Roth IRA has $800k in it. That way, the 49-year-old can speak with an experienced financial professional who can map out a plan.