My wife and I are middle class or maybe upper middle class. I make pretty good money. I pay all of our bills, mortgage, both cars, insurance and healthcare bills (which is $2,000 per month). She is a social worker and only makes enough to cover her personal needs and spending money.
We have a modest savings account (about $50,000) and a small retirement account ($200,000). We also have some real estate holdings, which will fund our retirement when liquidated in 15 years. We are in our early 40s.
She inherited about $60,000 from her grandfather. She asked me what I thought she should do with it. I told her that she should do whatever she wants with it. But I told her my advice is to come up with a plan. She should figure out how much she would want to save. She had mentioned putting some in our son’s college fund and some travel. My advice was not to waste it and to have a budget and stick to it.
Without telling me, she put about $40,000 into an IRA and $10,000 into our child’s college account (529 plan). So about $50,000 of the $60,000 she put into accounts that we can’t get to for 20 to 30 years.
Knowing her grandfather well, that is not how he would have wanted her to spend the money. He would have anticipated her traveling and spending it on stuff that makes her happy, not locking it up for years.
This all happened this calendar year. My question is: Is there a way to get the money out of the IRA without paying a penalty? A financial mulligan?
Is this really about what Grandpa would have wanted? Or are you saying that you’re disappointed that your wife isn’t spending her inheritance on fun stuff?
Regardless, it sounds like your wife followed your advice. She didn’t let the money go to waste. Investing money when you don’t have a pressing need for it sounds like a solid plan.
And to be clear, this is her decision, not yours. Inheritances are treated as separate property, i.e., belonging to the spouse who got the inheritance, rather than marital property.
But if your wife’s plans change and she wants her money before retirement age, the “financial mulligan” you’re seeking may be possible, depending on what type of individual retirement account (IRA) the money is in.
With most IRAs, people under 50 can’t contribute more than $6,000 to an IRA in 2022, while people 50 and older can kick in an extra $1,000. Since your wife put $40,000 into an IRA, I’m guessing this is an inherited IRA.
An inherited IRA is a special type of IRA that you can open when you inherit someone else’s retirement account. The rules for withdrawing money from inherited IRAs are a lot different from the rules for regular IRAs. They also changed significantly with the passage of the Setting Every Community Up for Retirement (SECURE) Act in 2019.
Follow trends affecting the local economy
Subscribe to our free Business by the Bay newsletter
You’re all signed up!
Want more of our free, weekly newsletters in your inbox? Let’s get started.Explore all your options
Under the SECURE Act rules, if you inherit an IRA from a non-spouse who died in 2020 or later, you aren’t required to take annual distributions. But you must deplete the entire account within 10 years of your loved one’s death unless one of a handful of exceptions applies.
You can withdraw this money at any time, either all at once or in increments. You won’t pay a 10% early withdrawal penalty. But unless the inherited account was a Roth IRA, you’d owe ordinary income taxes on any withdrawals. So assuming your wife put this money into an inherited IRA, she hasn’t locked up the $40,000 for decades. And she’ll only have 10 years to withdraw that money, even though she won’t have reached retirement age.
Because of the complexity surrounding inherited IRAs and the potential for a huge tax bill, I’d suggest your wife consult with a tax professional. But overall, I like how she’s managed her inheritance so far. Investing the money primarily for retirement and your son’s education means more money for fun stuff down the road. And let’s not forget, there’s still about $10,000 left from this inheritance that your wife could use on a splurge.
When you receive a windfall, it’s tempting to spend the money on things that will make you happy right now. If you’re on track for your financial goals, it’s fine to indulge a bit. But if you don’t have a short-term need, the best plan is often to do next to nothing by parking the money in a low-cost index fund and letting it grow.
If you’re disappointed by how your wife is spending her inheritance, try to focus on the benefits of delayed gratification. My guess is you’ll still want fun money a decade or two from now. And you could have a lot more of it thanks to your wife’s decisions.