Dear Quentin,
I’ll soon be inheriting about $600,000. Do you have any suggestions on where I should invest it? What online bank account should I look into? Should I go for a high-yield account or a money-market for savings? I already have 401(k), IRA, and brokerage accounts, and laddered CDs. I just want to park it for a bit and earn some interest.
This is my big chance to secure my future. Any ideas would be appreciated. Thank you in advance.
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Coming into a Windfall
Dear Windfall,
You have a lot of dough to work with.
Or put another way: You have a lot of liquidity, and will have many options for investing your money. Diversification, as always, is key. If you are married, think carefully about where you deposit this cash. If you put it into a joint account, it will become commingled and, therefore, become marital property. Inheritance is generally considered separate property.
A money-market account traditionally gives you a lower interest rate than a high-yield savings account, and it allows you greater access to your money. However, based on current annual percentage yields for both — and the elevated climate for interest rates — there’s very little difference in rates. You can get 5%-plus for both types of account.
I appreciate that you are not put off by online banks. Some people prefer a brick-and-mortar bank where they can build a relationship with the bank manager and get to know the staff; it makes them feel like their money is in a safe place. Just make sure the institution has insurance through the National Credit Union Administration or the Federal Deposit Insurance Corp.
The FDIC and NCUA are government agencies that protect deposits up to $250,000 per depositor. Because you have more than that, you would want to deposit portions in accounts in different ownership categories or different banks. FDIC insurance covers most deposit accounts, although it does not cover investment accounts. Credit-union accounts are covered by the NCUA.
I don’t recommend individual accounts, as a rule, but your goals should cover long-term investments, short-term savings, an emergency fund of up to 12 months worth of expenses and, ideally, a downpayment on a house if you are a renter and can afford to buy. Ultimately, you should beat inflation, which hit 3.3% on the year in May — down from a recent peak of 9.1% in June 2022.
The Federal Deposit Insurance Corporation covers deposits up to $250,000. Some companies work with financial advisers and a network of banks to maximize deposit insurance coverage as well as interest rates on cash balances. Among companies that help spread your cash are StoneCastle Cash Management, MaxMyInterest and IntraFi Network.
You can also learn about I-bonds here. They are U.S. savings bonds issued by the government. You can buy up to $10,000 worth of I-bonds per individual each calendar year, so the new calendar year reset on Jan. 1, opening up purchases again. The current interest rate on Series I Savings Bonds is 4.28%.
Nate Ahlberg, senior wealth advisor at wealth-management company Prosperity in Minneapolis, Minn., suggests intermediate-term investment-grade bonds with yields near 15-year highs as an alternative to money-market mutual funds. “Those rates will be fixed until maturity, regardless of Fed action. If you wait until rates start coming down, you might miss the opportunity to lock-in higher intermediate term rates.”
Bonds and brokerage accounts
As interest rates go up, bond prices typically go down and, although inflation has cooled, Series I bonds still beat inflation and come with tax advantages. As MarketWatch reporter Beth Pinsker writes, there are no state and local taxes on interest, and federal tax is deferred until you cash in and they make a good conservative long-term investment option.
Their fixed-rate component is unique to I-bonds and makes them attractive for long-term savers. “You can continue to earn interest on I-bonds for up to 30 years, getting the fixed rate assigned to you at purchase plus the prevailing variable rate, which changes every six months,” she says. “You don’t have to pick a term like you would with Treasurys or CDs.”
Something else to think about: A brokerage account allows you to purchase CDs from multiple banks at the same time. You can read more about Liquid Insured Deposits here; they are a kind of CD that enables you to withdraw your cash without paying a penalty. They are offered by investment professionals and brokers, and insured in aggregate by up to $2.5 million.
And consider an additional strategy: health-savings accounts enable you to save money in a tax-advantaged account and withdraw it tax-free for qualified medical expenses. You can also use that cash to reduce your out-of-pocket medical expenses in retirement. That is one way to build up a medical nest egg, depending on how much of the funds in the account you use during your working life.
“To be able to have an HSA, you must be enrolled in an eligible high-deductible health plan, which is a health insurance plan that has low premiums, but high deductibles,” according to the Baldwin Group, an advisory firm. “To offset the costs of higher deductibles, HDHP participants can use HSA funds to pay for medical expenses. You can contribute to your HSA with pretax dollars, much like with a 401(k).”
An individual can contribute up to $4,150 to an HSA in 2024, while a family with a high-deductible plan can contribute $8,350 this year, Ahlberg adds. Those aged 55 or older can make a catch-up contribution of an additional $1,000 in 2024. “HSAs are unique in that they have three distinct tax benefits: Contributions reduce your taxable income (pre-tax), growth is tax-deferred and withdrawals are tax-free if used for eligible medical expenses.”
“Unlike other retirement savings accounts, HSA assets will never be taxed if used for medical expenses in retirement,” he adds. “A Roth IRA distribution is also tax-free, but the contribution is made on an after-tax basis. A 401(k) contribution is also pre-tax, and growth is tax-deferred, but you pay taxes when distributions occur. The HSA combines the benefits of both.”
You don’t have to make all of these decisions on the day you receive your inheritance, and when you do make decisions, take your time, and seek professional advice from a CPA or CFP — make sure they are a fiduciary who is required to put your best interests first. Don’t allow anyone to push you into products that you don’t understand.
Whether you’re buying property, stocks or bonds, patience is your friend.
Other columns from Quentin Fottrell:
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