How to invest my inheritance?

Question

I was very fortunate last year and received over $300,000 from my grandmother as an inheritance when she passed away. I still have the money sitting in a bank account and I don’t know how to invest it. Also, some people say that I need to pay tax on the inheritance and some say I don’t need to pay tax on it?

I’m 28 years old with an ok job that I will be at for at least 5 to 7 more years. I make around 85,000 a year and I don’t currently have any debt except for a remaining student loan of $18,000. Payments are low and the interest rate on the loan is also low.

I’m also currently renting and have no interest in buying a place given how expensive the housing market is currently.

Any advice on how I should be investing the money?

Answer

Obviously I can’t give out investment advice over email, however I should be able to provide some general comments that should be useful and will provide some “food for thought”. Also, if you simply received cash as an inheritance you will not need to pay tax on this lump sum amount.

Given your age and small amount of debt it does make sense to invest the money you’ve received instead of leaving it in cash. Generally speaking young investors should be investing extra capital to ensure, at the very least, they stay ahead of inflation. And considering how much inflation is rising at the moment holding cash has not worked out very well for many.

That being said, you do need to understand both your risk tolerance and time frame. If for some reason you feel like you’ll need access to the capital in the next 3 to 5 years you’ll want to be fairly conservative with your investment choice. It does however, from the information above, sound like you have a fairly long time horizon.

I would likely not suggest simply investing the full amount in one lump sum, but rather average in your investing purchases over time. That will allow you to take advantage of any market pullbacks that could happen. Of course the market could simply just continue to move higher and investing the full lump sum would have been the right decision. You’ll need to decide for yourself the level of risk you’re comfortable taking on first establishing your investment positions. For the purposes of this email I’ll simply discuss investing in the equity markets, but of course there are many other alternative to consider such as real estate.

The conversation around what to actually invest in is beyond the scope of this email, however many non-active investors simply choose to invest in broad market ETFs as a diversified and low cost way of investing. This approach however will only track the return of the broad market and unlike picking individual stocks, will not lead to potential higher single stock outperformance.

Once you’ve decided what you’ll be investing in you’ll need to consider through which account vehicle you’ll be using to house your investments. The main choices are as follows:

Regular non-registered investment account

Investing in a regular investment account will not allow you any additional tax deductions or the ability to earn investment income or capital gains tax free. However, preferential tax rates on Canadian source dividends and capital gains will be available.

Registered Retirement Savings Account (RRSP)

Contributions to an RRSP are tax deductible for Canadian tax purposes. Given you’re income is relatively high right now any contributions could be used as a tax deduction, assuming you actually have RRSP contribution room. You also don’t want to contribute too much, as getting a deduction at a low rate of tax would not be beneficial. Also, most stock market securities would be eligible for RRSP purposes.

Tax Free Savings Account (TFSA)

Although you won’t get a tax deduction for any amounts contributed to the TFSA you won’t pay any tax on internal earnings of the TFSA and any distributions from the TFSA will not be taxable

Once again, these are general comments only and should not be used to make investment decisions. You’ll want to engage a competent financial advisor to review your individual situation and investment needs.

Hope that helps and please let me know if you have any questions.

Cheers

Phil