It’s Your Money Column – What to Do with an Inheritance

Question: I just learned that I will inherit $25,000. I’m 54 and single – any suggestions for what I could do with this money?

Answer: Since I don’t know how well you are prepared for retirement, here are some general suggestions for you to consider.

This would be a good time to look at your entire financial situation including emergency funds, insurance, investments, retirement and estate plans. If you have never been to a financial planner, this may be the right time.

Establish a money market mutual fund account. These accounts often pay higher returns than savings accounts and certificates of deposit at banks and credit unions. There is no maturity date, so you can get your money out any time without paying a penalty. The mutual fund allows you to pay large expenses by writing checks of at least $250 or $500. Your money is invested in safe investments such as Treasury securities. The interest rate that you earn will fluctuate depending upon the going rate for Treasuries and large certificates of deposit. Check the Wall Street Journal for current interest rates.

If your employer offers retirement accounts, especially if your contributions will be matched, establish a retirement account with some of your inheritance. If you have already taken advantage of these retirement accounts, open a Roth individual retirement account, or IRA. Once you establish a Roth IRA, your earnings will grow tax-free. You will not pay tax when you withdraw from this account if you keep it for five years. The current maximum contribution to a Roth IRA in 2002 is $3,000, but because you are over 50, you can add an additional $500. In 2005, the maximum contribution will be raised to $4,000. In 2006, your age allows you to contribute $4,000 plus an additional $1,000; in 2008, the maximum contribution reaches $5,000 (which would be $6,000 for everyone over 50).

I suggest that you use your remaining funds to invest in a balanced mutual fund (also called a domestic hybrid fund). Check out the Morningstar FundInvestor publication at the library. Read it carefully and make sure you understand the criteria that this publication uses to describe the 500 funds covered. Look carefully at the section called "Domestic Hybrid." This category covers funds that generally include both stocks and bonds in their holdings. When you decide which fund is right for you, implement your choice by calling the fund’s toll-free number listed in the back of Morningstar FundInvestor.