Ask Liz Weston

Get smart with your money

Retirement Savings

Q&A: When temptation to spend an inheritance strikes, what’s the right move?

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Dear Liz: My brother is 54 and has always worked low-wage jobs. He owns a condo thanks to the help of our parents, and his monthly expenses are very low. He’s in a stable position. He does not have any retirement savings or really any other savings to speak of. Recently, he came into an inheritance of $62,000. He has asked my sister and I to help him make that grow and be secure until he retires and chooses to draw on it. What is the best way to help him grow this money in a safe way? We’d like it to be somewhat secured as we all are aware that the temptation to spend it now is strong.

Answer: The first step in investing is understanding your goal for the money and your timeline (how long until you may need the cash).

Your brother likely has at least two goals: an emergency fund and retirement savings.

Financial planners typically recommend an emergency fund equal to three to six months of expenses. A smaller amount can work for people with a lot of other resources, such as stocks they can sell, lines of credit they can borrow against or generous relatives who are willing to help. A larger amount might be smart for people with fewer resources or who might be out of work for extended periods.

Emergency funds need to be accessible, so the money should be in a safe, liquid place such as a bank account. To make the cash less tempting, your brother could consider opening a savings account with an online bank. These banks typically have no minimums and no fees, plus they pay a higher interest rate than their brick-and-mortar kin. Transferring the money to his checking account would typically take a few days, making it less easy to spend on impulse. Another option is to buy certificates of deposit to tie the money up for a set period of time. He can break into the CDs in an emergency but would have to forfeit some interest.

He can take more risk with his retirement funds, as he is likely at least a decade away from retirement. One option is to invest in a low-cost target date retirement fund, which gradually gets more conservative as the retirement date approaches.

Your brother can contribute up to $7,000 this year to an IRA or a Roth IRA. A Roth IRA may be the better option, since he’s unlikely to get much tax benefit from an IRA’s deductible contribution and Roth IRAs don’t have minimum distribution requirements.

He doesn’t have to limit his retirement savings to that annual contribution, however. He could consider investing more with a regular brokerage account and just mentally earmarking it for retirement.

Q&A: Old inherited IRA is safe from “drain it in 10 years” requirement

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Dear Liz: You have written that non-spouse beneficiaries are now required to drain their inherited IRAs within 10 years. Is this requirement retroactive?

I inherited an IRA from my mother in 2015. I have been taking out the minimum required each year. If I must drain the account within 10 years, will the increase in yearly income affect my Social Security benefits?

Answer: The 10-year requirement applies only to accounts inherited from people who died after Dec. 31, 2019.

IRA distributions don’t affect Social Security benefits, but could affect Medicare premiums if the withdrawal is large enough. Taxable income above certain limits triggers a Medicare surcharge known as an income-related monthly adjustment amount, or IRMAA.

Q&A: I’ve got a 457(b), not a 401(k). Are they insured the same?

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Dear Liz: As an employee of a public agency that offers a 457(b) account, it would be helpful to know if these accounts are insured in a manner similar to a 401(k).

Answer: Employer-provided, tax-deferred 457(b) accounts are quite similar to 401(k)s. Both allow employees to make pretax contributions to a retirement account that can be invested for future growth. The accounts aren’t insured the same way bank accounts are, but the money is kept in a separate trust that’s protected from creditors.

Q&A: Is it wise to have all your accounts under one roof?

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Dear Liz: I’m setting up accounts post-divorce, while learning personal finance on the fly. Is it “safe” or advisable to have all of my larger accounts — IRAs, 401(k), cash management — with the same institution, or should I spread them around? I have smaller checking and savings accounts with a good credit union.

Answer: Using a single investment firm is certainly convenient, and most people will be just fine having all their accounts in one place.

The Securities Investor Protection Corp. covers accounts up to $500,000, including up to $250,000 in cash. This insurance protects you if the brokerage fails and your cash or securities go missing.

Customers with multiple accounts often get more coverage. For example, IRAs and Roth IRAs would each get up to $500,000 in coverage, as do individual and joint brokerage accounts. A person with all four types of accounts would have $2 million in coverage. Accounts for corporations, trusts, estate executors and guardians of minors also get separate coverage. For more details, see SIPC’s brochure, “How SIPC Protects You.”

Your 401(k) has its own protections. Assets in 401(k)s are placed into trust accounts, separate from the investment firms that administer the plans and the employers that sponsor them. The money can’t be touched by creditors of either one.

Q&A: Finding a fiduciary advisor

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Dear Liz: I am having difficulty finding a fiduciary, fee-only financial advisor. I have inherited considerable investments from my parents’ trust and now that their house is sold, there will be a payout in excess of $1 million. I believe that my parents’ money manager has done an excellent job of investing and managing their money, so I want to stay with him. My IRA is with another money manager. Without any personal recommendations, I do not know how to go about selecting a financial advisor from a list of advisors on the internet. Interviewing and selecting one based on likability makes me uneasy.

Answer: If anything makes you uneasy, it should be that an advisor isn’t required to look after your best interests.

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard. That means they’re allowed to recommend investments that are more expensive or that perform worse than available alternatives, simply because the recommended investments pay the advisor more.

You can start your search for fiduciary, fee-only advisors by getting referrals from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the XY Planning Network or the Garrett Planning Network. LetsMakeAPlan.org has a list of questions to ask.

Q&A: How to reduce the tax penalty from an IRA distribution goof

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Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.