Examples of how to invest an inherited IRA
1. A lump-sum withdrawal in year 10
If you don’t have an immediate need for the money and don’t plan to take required minimum distributions (RMDs) in years 1 through 9, your risk tolerance can help guide how you invest in the account. If you are more risk averse you could consider a lower-risk asset allocation, such as a Conservative, Moderate, or Balanced mix. If you are more comfortable with risk, a more growth-oriented allocation, such as a Growth or even Aggressive Growth mix may make sense. Keep in mind as time passes and you get closer to year 10, you may want to consider reducing the risk of your portfolio’s asset allocation, particularly if your intention is to use the funds for spending and expenses rather than reinvesting it for the long term. Remember also that you will need to take a lump-sum distribution in year 10, which could have important tax implications.
2. Regular RMDs over the first 9 years and then a full withdrawal in year 10
If you’re required to take RMDs in years 1 through 9 or you will need to take a lump-sum distribution of the entire amount within a few years, you may have to balance short- and medium-term needs for cash. This might call for a more conservative portfolio allocation if you are risk averse, since you’ll be selling assets each year to meet withdrawal requirements. If there is a market downturn and you have a more aggressive allocation during a market downturn, your portfolio might not have enough time to recover before you sell assets at lower prices to cover your withdrawal needs. If you are more comfortable with risk, you could consider adding more stock exposure to offer a little more growth potential.
3. Larger RMDs or a lump-sum withdrawal within 3 years
If you plan to withdraw your account balance in a short time frame, for example 3 years or less, then preserving your principal and ensuring liquidity are likely to be top priorities. With a short time horizon, you may want to invest your assets more conservatively, focusing on short-term investments, which could be less volatile and not subject to the short-term risks of stocks.
4. RMDs over an inheritor’s lifetime
There are specific rules that determine when you may take RMDs over your own lifetime, rather than within a 10-year period. People who may be able to take these extended RMDs generally fall into 3 categories: spouses, designated eligible beneficiaries, or beneficiaries who inherited prior to 2020.
If you qualify to take withdrawals over your lifetime, you potentially have a longer period to make withdrawals and remain invested. With this longer investment horizon, you may prefer a Moderate or Balanced asset mix since it could help smooth out any market volatility. However, you may also decide the extra time could lend itself to an allocation containing more stocks, since you will have more time to ride out potential market volatility.
In either case, your asset allocation should also consider when you plan to start taking your withdrawals. For example, if you have an aggressive portfolio and you begin withdrawals during a market downturn, you may be selling more positions than when the market is up, and your balance might be depleted faster as more investments are sold to cover withdrawals. If, however, you plan to take your RMD and reinvest it toward a long-term goal with a longer time horizon, that may justify a more aggressive allocation if you’re comfortable with risk.
