Inherited IRAs are nice. They’re found money…right? Someone else worked hard and built up their IRAs so you could inherit them. Sweet.
What’s not to love?
But there are big problems too. It’s so easy to make mistakes. A few weeks ago I received a question that illustrates the issue from Z, a loyal Pilgrim.
The first e-mail I received asked which are the best investments for inherited IRAs. He was considering putting the money into an annuity. While I generally dislike annuities, I needed more information before I could respond.
I assumed that Z was concerned about investing his money safely, and of course I respected that. But I learned that this wasn’t Z’s money at all.
Turns out it was his daughter Jenny’s money. She had inherited IRAs from her grandmother. Jenny is 29 years old. She turned to her father for advice and Z was concerned about the market. That’s why he sent me the question.
Z has every right to be concerned about his daughter – and the market. He wants to make sure Jenny makes intelligent investments. But Z is a different person from his daughter. She is 29 and has a much longer investment horizon than Z.
While Z’s daughter will be forced to take a small distribution out of the account, she can stretch that money for decades and decades. Assuming she’s not in debt or has no other immediate need for the money, the smartest thing for her to do would be to take the smallest distribution possible from those inherited IRAs and allow the money to work as long as possible. She should be focused on creating wealth with that money.
How should inherited IRAs be invested?
In Z and Jenny’s case, a portfolio made up with at least 60% equity would likely be smart. Of course there will be years where Z and his daughter will be sorry they ever heard of Wealth Pilgrim because the market will be terrible. But if they both remember that she is investing for many decades, there is no question that a portfolio made up largely of equities makes the most sense.
Again, this is not about providing the most comfort over each and every quarter or year over the next 50 years. This is about maximizing the income and growth of these inherited IRAs over the next several decades. The price of this decision will be discomfort in the short term and unfortunately, nobody knows how severe that discomfort will be or the timing of it.
But as uncomfortable as it may be to sail through those rough storms, Jenny should invest that money for growth.
Would your advice be any different for someone with an Inherited IRA?