How to best spend a windfall/inheritance? Need help, please advise.

[MrsIMDoc]

phw wrote:

Neither.  Pretend you didn’t get it.  Do not let it inflate your spending or living expenses.  Decrease your spending to match your decreased income for the very short amount of time until you’re done with residency.  Number one rule for rich people to stay rich “Never spend the principle”.  Think of this inheritance as a tool to make future money, not as money to spend.

For instance, you “need” a $20-25k used car as a resident?  How about a really nice $5-8k car to keep living as a resident?

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It sounds like he is planning to use this inheritance to invest/pay off loans, so how is "pretending you didn't get it" good advice?  He is asking for the best way to as you say, "use the inheritance as a tool"?

Regarding the car, if he is purchasing a reasonable car in cash for $20,000 why would you fault him? They have a combined income of $150,000 and have the cash for the car. With a growing family it would make sense if he wanted to purchase either a "newer used" car or a new car at that price.  As long as he is not financing the car, which it sounds like he is not, I do not think that is a bad decision.

[phw]

Neither.  Pretend you didn't get it.  Do not let it inflate your spending or living expenses.  Decrease your spending to match your decreased income for the very short amount of time until you're done with residency.  Number one rule for rich people to stay rich "Never spend the principle".  Think of this inheritance as a tool to make future money, not as money to spend.

For instance, you "need" a $20-25k used car as a resident?  How about a really nice $5-8k car to keep living as a resident?

[The White Coat Investor]

False dichotomy. You can do both. Invest it in taxable now and gradually move it into the tax-protected as able.

[JK]

Here is my current financial situation:
-I am a current 29yo, PGY-2 medical resident (soon to be PGY-3) with annual salary ~53k/yr with about another 26 months until residency completion. Expected earnings ~350-400k/yr upon graduation with likely salary increases afterwards.
-My spouse currently works full time and earns ~100k/yr.
-We are very frugal thus far and have a great savings rate around 30-50% (post-tax) the past couple years. For the first time, last year we maxed out both our 401ks (18k each), Roth accounts, and HSA as well as have been paying down my student loans.
-Current financial situation: approximately 114k in student loans (refinanced at 3.2% variable rate), 150k in combined investments (all tax protected). 20k in combined checking/savings emergency fund.
*We just received an inheritance of 225k and need to decide how to best utilize it.
*Upcoming expenses: likely need to purchase a new/used car within the next 3-4 months (20-25k). My wife is pregnant and due with our first child in November. That will undoubtedly result in a large uptick in our annual expenses, but the biggest contributor will be my wife decreasing to 1/3 or 1/2 time.

I am having a dilemma as to how best to deploy the 225k inheritance and would appreciate insight because I know we will not be able to max out all our retirement accounts with her at part time. I'm trying to decide between two options.

-Option #1: Pay off student loans first thing leaving approximately 110k left. Max out both Roth IRAs for 2015 resulting in 100k left. Put the balance into a high yield savings account (such as in an online bank account like "Ally bank") which will be used for upcoming purchases. We will then utilize this extra money to help pay for living expenses over the next two years. This will then allow us to take advantage of all our tax protected accounts because we will be eating into the savings, thus allowing us to put more of our salary into the tax sheltered accounts.

-Option #2: Still pay off student loans and max out 2015 Roths leaving 100k remaining. Only difference in this scenario would be to add to our emergency fund (additional 20k or so) and invest the rest into a taxable account. This would have the benefit of getting money into the market now and allowing it to grow. The downside is that we likely wouldn't be able to max out our tax protected accounts over the next two years because we would be using our paychecks to pay for typical expenses.

Essentially, the question boils down to...invest in taxable accounts today, or have the ability to invest in tax advantaged accounts over the next couple years? Personally, I'm leaning towards option #1 so I can continue to max out tax advantage accounts. Any and all thoughts would be appreciated!