Dear Quentin,
I am inheriting about $600,000 soon. Any suggestions on where I should invest it? What online bank account should I look into? Should I go for a high yield or money market savings account? I already have a 401(k), IRA, brokerage accounts, and laddered CDs. I just want to park it for a while and earn some interest.
This is my big chance to secure my future. All ideas are welcome. Thanks in advance.
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To receive a windfall
Related: I want to leave more than $600,000 to my adult children. How do I make sure they don’t lose that money if they get divorced?
Dear Windfall,
You have a lot of money to work with.
Or to put it another way, you have a lot of liquidity and a lot of options to invest your money. Diversification, as always, is key. If you are married, think carefully about where you put this money. If you put it in a joint account, it will be commingled and therefore 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 gives you more access to your money. However, based on the current annual percentage yields for both — and the elevated interest rate environment — there is very little difference in rates. You can get 5%-plus on both types of accounts.
I appreciate that you are not put off by online banks. Some people prefer a physical 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 is insured through the National Credit Union Administration or the Federal Deposit Insurance Corp.
The FDIC and NCUA are government agencies that protect deposits of up to $250,000 per depositor. If you have more than that, you will want to deposit portions into 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 generally don’t recommend individual accounts, but your goals should include long-term investments, short-term savings, an emergency fund of up to 12 months of expenses, and ideally a down payment on a home if you’re a renter and can afford to buy. Ultimately, you should be able to beat inflation, which hit 3.3% annualized 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 advisors and a network of banks to maximize deposit insurance coverage and interest rates on cash balances. Companies that help you spread your money include StoneCastle Cash Management, MaxMyInterest and IntraFi Network.
You can also learn more about I-bonds here. These are U.S. savings bonds issued by the government. You can buy up to $10,000 worth of I-bonds per person each calendar year, so the new calendar year resets on January 1, making purchases possible again. The current interest rate on Series I Savings Bonds is 4.28%.
Nate Ahlberg, senior wealth advisor at wealth management firm Prosperity in Minneapolis, Minn., suggests investment-grade bonds with average maturities and yields near 15-year highs as an alternative to money market funds. “Those rates are locked in until maturity, regardless of what the Fed does. If you wait until rates start to fall, you could miss the opportunity to lock in higher interest rates on the average maturity.”
Bonds and securities accounts
As interest rates rise, bond prices tend to fall, and while inflation has cooled, Series I bonds still beat inflation and have tax advantages. As MarketWatch reporter Beth Pinsker writes, there are no state and local taxes on interest, and federal taxes are deferred until you cash them in, making them a good conservative long-term investment.
Their fixed-rate component is unique to I-bonds and makes them attractive to long-term savers. “You can continue to earn interest on I-bonds for up to 30 years, where you are assigned the fixed rate at the time of purchase plus the prevailing variable rate, which changes every six months,” she says. “You don’t have to choose a term like you do with Treasurys or CDs.”
Another thing to consider: With a brokerage account, you can buy CDs from multiple banks at the same time. You can read more about Liquid Insured Deposits here , which is a type of CD that allows you to withdraw your money without paying a penalty. They are offered by investment professionals and brokers and are insured up to $2.5 million in total.
And consider an additional strategy: Health savings accounts let you save money in a tax-advantaged account and withdraw it tax-free for qualified medical expenses. You can also use that money to reduce your own medical expenses during retirement. That’s one way to build up a medical savings pot, depending on how much of the account’s funds you use during your working life.
“To have an HSA, you must be enrolled in a qualifying high-deductible health plan, a health insurance plan with low premiums but high deductibles,” according to Baldwin Group, a consulting firm. “To offset the cost of higher deductibles, HDHP participants can use HSA funds to pay for medical expenses. You can contribute to your HSA with pretax dollars, just like you would to 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. People 55 or older can make a catch-up contribution of another $1,000 in 2024. “HSAs are unique in that they have three distinct tax advantages: contributions reduce your pre-tax income, growth is tax-deferred, and withdrawals are tax-free if used for eligible medical expenses.”
“Unlike other retirement savings accounts, HSA assets are never taxed when used for medical expenses during 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 are made. 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 has your best interests at heart. Don’t let anyone push you into products you don’t understand.
Whether you are buying real estate, stocks or bonds, patience is your friend.
Other columns by Quentin Fottrell:
‘It’s the saddest thing’: I’m happily retired and my friends in their 60s want to know how I did it. Should I tell them my secret?
‘A few motherly words of wisdom can go a long way’: My two adult sons each inherit $100,000. What should they do with it?
I have $68,000 in credit card debt and $50,000 in a 401(k). How can I get out of this trap with a $55,000 salary?
