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Hello all,

I recently received a life insurance death benefit check, and I'm looking for some advice. My first question is: is this money taxable at the federal or state (PA) level? The best answer I've found online so far is that only the interest it earned ($19) is taxable. However, the info I've found is quite dated.

Beyond that, I'm looking for advice on what kind of account to put it in. Although I'm aggressive with my 401k, I don't want to risk this money in the stock market. I know interest rates are terrible on savings accounts, money market accounts and CDs right now. Are there other options?

Thanks,
~snail
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I recently received a life insurance death benefit check, and I'm looking for some advice. My first question is: is this money taxable at the federal or state (PA) level? The best answer I've found online so far is that only the interest it earned ($19) is taxable. However, the info I've found is quite dated.

Probably because the law hasn't changed since the Earth cooled. The death benefit is not taxable at the Federal level. See IRS Publication 525. I doubt that it's taxable in PA, but you'll have to check the state instructions. Check in the "Additions to Federal AGI" section.

Beyond that, I'm looking for advice on what kind of account to put it in. Although I'm aggressive with my 401k, I don't want to risk this money in the stock market. I know interest rates are terrible on savings accounts, money market accounts and CDs right now. Are there other options?

Here's my take, which is 100% personal opinion. This is found money with a sentimental twist, at least for me. When I've been in this situation I've done something with the money that I think the person whose death triggered it would approve of. My best friend and I had talked for years about a Transatlantic crossing on a ship. When he died and left me some money, that's what I did, raising more than one glass to his memory in the process.

That's me. From a strictly practical standpoint, this money is no different from any other. Invest it in accordance with your asset allocation.

Phil
Rule Your Retirement Home Fool
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You are right. Only the interest on delayed payment is taxable to you. As for where to put it, how much you have is pertinent. Up to about $25,000 look at Vanguard high-yield municipals VWALX. Currently paying about 4% tax free. You can get over 5% on individual Municipal Bonds, but you must purchase at least $5,000 and preferrably $25,000 of each issue. If you have *some* risk tolerance, look at stock TEG or fund HIX. for better than average dividend yield. Yes, there's risk, but minimal.

ed
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VWALX is an Admiral share class fund requiring a $100K investment. The corresponding Investor share class for the High Yield Tax Exempt fund is VWAHX.

Bob
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Thanks Phil.

I checked the PA income tax instruction book, and you're right:
INCOME NOT TAXABLE FOR PA PIT PURPOSES: Inheritances, death benefits, and income in respect of a decedent (IRD) as defined for federal income tax purposes

And I'm thinking a trip to Wimbledon might be in line with your Transatlantic crossing.

Thanks!
~snail
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You are right. Only the interest on delayed payment is taxable to you. As for where to put it, how much you have is pertinent. Up to about $25,000 look at Vanguard high-yield municipals VWALX. Currently paying about 4% tax free. You can get over 5% on individual Municipal Bonds, but you must purchase at least $5,000 and preferrably $25,000 of each issue. If you have *some* risk tolerance, look at stock TEG or fund HIX. for better than average dividend yield. Yes, there's risk, but minimal.

Thanks ed - I'll take a look at those tomorrow.
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Snail:

The one thing that the inheritance will affect is the Tax Forgiveness for PA. That income could prevent someone from receiving Tax Forgiveness (schedule SP).

Dusty
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Snail:
The one thing that the inheritance will affect is the Tax Forgiveness for PA. That income could prevent someone from receiving Tax Forgiveness (schedule SP).
Dusty


Thanks Dusty - that's a good callout.
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So a life insurance pay out is non-taxable but a state retirement plan pay out is? I got hammered on my 2007 taxes when the feds came back and said I didn't claim a $5K payout of my mother's death benefit from SRTS. I thought I had rolled it into the estate but I couldn't find the records and just went ahead and payed the tax and fees (total of $1400 - ouch).

BD

Still confused when it comes to estates and taxes...
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So a life insurance pay out is non-taxable but a state retirement plan pay out is?

Sounds about right. My mother's death benefit from her state of Kansas retirement was taxable at the Federal level but exempt from state tax.

Phil
Rule Your Retirement Home Fool
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So a life insurance pay out is non-taxable but a state retirement plan pay out is?

Sounds about right. My mother's death benefit from her state of Kansas retirement was taxable at the Federal level but exempt from state tax.


Isn't the rationale that the retirement contributions were originally made with pre-tax dollars, but the life insurance premiums were originally paid with post-tax dollars?

(Not that anything to do with taxation is necessarily rational.)

ETR
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Isn't the rationale that the retirement contributions were originally made with pre-tax dollars, but the life insurance premiums were originally paid with post-tax dollars?

Beats me. That was not the fact pattern in my mother's case. It could be as simple as the fact that the people who sell life insurance have lobbyists who raise campaign funds and the state retirement systems don't.

Phil
Rule Your Retirement Home Fool
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