- At age 27, my dad passed away and I inherited a retirement account from him worth $50,000.
- I could have used the money to pay off my student-loan debt, but I would have had to pay penalties and taxes on the entire balance.
- Instead, I took out just $10,000. Combined with $10,000 from my own Roth IRA, my husband and I bought our first home.
- Looking back, it was the right decision for our family because it gave us a jumpstart on building wealth.
- This article is part of “Money That Lasts,” an ongoing series about generational wealth from Personal Finance Insider.
When I was 27 years old my dad passed away after a few year battle with liver cancer. Years prior he had taken an early retirement and moved to Ireland to live out the rest of his time after diagnosis.
While in Ireland he was able to travel, and took my two brothers with him for a three-month long trip around Europe. Because of the diligent saving in his 401(k) while employed, he had plenty of disposable money while retired for those few short years.
After he passed, he left the remainder of his 401(k) to me and my two brothers. Although I inherited around $50,000 and had roughly the same amount of student-loan debt, I decided to keep most of that money invested instead of paying off my loans in full, and I’m glad I did.
I was working as a teacher at the time of my dad’s passing and was making more than the minimum payments to more aggressively pay down my student loans. I knew I could pay off the loans on my own within the next few years, and wanted to start establishing equity in a home with some of the inheritance money rather than paying the same amount to a landlord while renting.
I used my inheritance for a down payment, and later made a profit on the sale
After receiving my dad’s 401(k), I had to spend some time sorting through the paperwork and roll it into an inherited IRA, which is a retirement account specifically for beneficiaries. Before I rolled it over, however, I decided to take a $10,000 withdrawal to put towards a future home purchase.
My then-boyfriend and I were renting a small one-bedroom apartment and before our lease was up we needed to decide if we were signing on for another year or purchasing a home. I had been saving in my own Roth IRA and knew there was a special rule that allowed me to withdraw $10,000 without penalty or additional taxes to put towards a first-time home purchase.
Combined with a $10,000 withdrawal from my dad’s 401(k), that gave us $20,000 for a down payment, which ended up being roughly 10% of the purchase price of our first home. Although I could have taken out more from the 401(k) before rolling it over to have a full 20% down payment and avoid paying private mortgage insurance, I didn’t want to pay more in penalties and wanted to make sure that I was keeping the majority of it invested for long-term growth.
When we bought our first home we paid $210,000. Five and a half years later we sold it and netted roughly $80,000. That money helped us purchase our next home as well as put extra money in savings, which ended up being great timing with the COVID-19 pandemic a few months around the corner.
At the time of this writing, my IRA is valued at $46,900, which means it has grown to almost the original amount before I took out the $10,000.
It didn’t make sense to use the money to aggressively pay off my student loans
With roughly $50,000 of undergraduate and graduate student loans, I also could have also cashed out the balance of the 401(k) and put the rest of the inheritance towards my student loans. While it would have felt great to be debt free, I knew that it wasn’t the right choice for several reasons, the first being I would have to pay a 10% withdrawal penalty on the entire balance, which is a lot of wasted money.
Also, taking the money that was invested in the stock market to pay off loans that had much lower interest rates than the rate the market was returning seemed like an irresponsible thing to do. I wanted the money to continue to earn and know that if I needed it down the line for something else I could access it.
My decision set my growing family on the right path
Although I had to pay interest on my student loans over the next five years that it took me to pay them off, and I had to take a 10% penalty on the $10,000 I took from the 401(k) inheritance, I am still happy with my decision.
I’m not a real-estate investor by any means, but my husband and I were pleased that we were able to sell our home for that much more than we bought it for. I could have kept that money invested or cashed it out to pay off the rest of my student loans, but there were trade-offs to those options as well. I still feel that using part of the inheritance to help purchase a home outweighed whatever potential the money could have had invested or the interest I would have saved on my low-interest student loans if put towards debt.
When it comes down to inheritance decisions, it’s important to consider the financial trade-offs, but also the emotional ones as well. Taking money out of my inheritance to pay off student-loan debt didn’t feel like the right decision for me for several reasons, but using the money my dad left me to jumpstart our homeownership journey was a decision that felt right.
It also set my family on the path to where we are now. We were able to sell our first home before having kids and made enough to purchase the perfect house for our now family of four.
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