Receiving an inheritance can create an unusual financial situation: suddenly having an important decision to make at a time when you may not feel particularly ready to make one.
There may be grief involved. Family dynamics. Paperwork. Tax questions. And then the bigger question:
What should I actually do with this money?
The answer doesn't have to come immediately.
If you've received an inheritance, or expect to receive one, here are eight things to consider before making major financial changes.
1. You Don't Have to Do Anything Right Away
One of the first decisions you can make with inherited money is to temporarily make no decision at all.
Unless there's a deadline or another reason requiring action, giving yourself time can be valuable.
A large inheritance can make previously distant possibilities suddenly feel available: paying off the mortgage, investing a lump sum, buying a house, retiring earlier or helping family members. Those may all be reasonable choices.
They don't have to be made in the first few weeks.
Keeping cash somewhere appropriate while you understand what you've inherited can give you time to make a deliberate decision instead of an emotional one.
2. Figure Out Exactly What You Inherited
An "inheritance" can mean many different things. You might receive:
- Cash
- A taxable investment account
- An IRA or other retirement account
- Real estate
- Life insurance proceeds
- Business interests
- Personal property
Each comes with different considerations. Before deciding what to do with an inheritance, start by creating an inventory of what you've actually received and how each asset is titled.
That matters because $100,000 in cash and $100,000 in an inherited retirement account aren't necessarily financially equivalent.
3. Understand the Tax Situation Before Moving Money
A common question is: Do I have to pay taxes on an inheritance?
The answer depends on what you inherit, where you live, how the asset is structured and what you eventually do with it.
Receiving cash, inheriting investments, selling inherited property and taking money from an inherited retirement account can all have different tax consequences.
Inherited retirement accounts deserve particular attention because distribution rules can vary depending on your relationship to the original account owner and other factors.
Before taking distributions or selling assets, it can be helpful to understand the potential tax consequences with your financial advisor and tax professional.
4. Look at High-Interest Debt
If you have debt, an inheritance may create an opportunity to reduce it.
But "pay off all debt immediately" isn't necessarily the automatic answer.
Start with the type of debt.
High-interest credit card debt may deserve very different consideration than a low-rate mortgage. Interest rates, available cash, taxes and your other financial priorities can all factor into the decision.
The goal isn't simply to become debt-free as quickly as possible. It's to determine where the inherited money can have the greatest impact on your overall financial position.
5. Revisit Your Emergency Savings
An inheritance can also provide an opportunity to strengthen your cash reserves.
If your emergency fund has been thinner than you'd like, setting aside part of an inheritance can create a stronger financial cushion before you consider longer-term uses for the money.
How much cash you need depends on your expenses, income stability, household and comfort level.
And remember: money intended for emergencies generally has a different purpose than money intended for long-term investing.
6. Decide How Much, If Any, Should Be Invested
One of the most common questions after receiving an inheritance is how to invest it.
There isn't a universal portfolio for inherited money.
The right investment strategy depends on what you want the money to accomplish.
Money you may use for a home purchase in two years probably shouldn't be treated the same as money intended to support retirement decades from now.
Before choosing investments, determine the purpose and expected timeline for the money.
Then the investment strategy can follow.
7. Give Yourself Permission to Use Some of It
Not every dollar of an inheritance has to be optimized.
Depending on your financial situation, you may decide to use some of the money for something meaningful: a family trip, home project, charitable gift or another priority.
Creating a specific amount for spending can sometimes make the rest of the decision easier.
You know what you're comfortable enjoying now, and what you've intentionally reserved for the future.
8. Consider What the Inheritance Changes
Perhaps the most important question isn't "What should I buy or invest in?"
It's: What does this make possible that wasn't possible before?
- An inheritance might allow you to pay down debt.
- It could strengthen your retirement outlook.
- It could help fund education.
- It might make charitable giving possible at a different level.
- Or it may simply provide additional financial security.
Looking at the inheritance alongside everything else you own can help you understand its actual impact.
Should You Hire a Financial Advisor After Receiving an Inheritance?
You don't necessarily need a financial advisor simply because you've inherited money.
Professional guidance can become useful when the inheritance introduces decisions involving investments, taxes, retirement accounts, real estate or competing financial priorities.
An advisor can also help coordinate with an attorney or tax professional when their expertise is needed.
The goal isn't to find something to do with the money.
It's to understand your options before doing something that's difficult to undo.
Making an Inheritance Part of Your Bigger Financial Picture
An inheritance often comes from someone important to you.
That alone can make decisions about the money feel different from decisions involving your regular paycheck or investment account.
There's rarely a need to turn it into a financial project immediately.
Understand what you received. Understand the rules attached to it. Give yourself time. Then decide how - or if - it should change what comes next.
FREQUENTLY ASKED QUESTIONS
Do I have to pay taxes on an inheritance?
In many cases, receiving an inheritance itself does not create federal income tax. However, taxes may apply depending on what you inherit and what you do with it. For example, inherited retirement accounts can have different tax rules than cash, and selling inherited investments or property may create tax consequences.
State laws can also vary, so it's important to consider both federal and state rules and consult a qualified tax professional for advice specific to your situation.
What should I do first after receiving an inheritance?
Before making major purchases, investments or other financial changes, start by understanding exactly what you've inherited. Identify the types of assets involved, determine if there are any deadlines or distribution requirements, and understand potential tax consequences.
If immediate action isn't required, you may decide to keep the money somewhere appropriate and accessible while you consider your options.
Should I pay off my mortgage with an inheritance?
It depends. Paying off a mortgage can reduce monthly expenses and provide peace of mind, but it also means using money that could potentially serve another purpose.
Your mortgage interest rate, available savings, other debt, taxes, investment strategy and personal preferences can all factor into the decision.
Should I pay off debt with inherited money?
Paying down high-interest debt may be worth considering after receiving an inheritance. But not all debt is the same. Before using a significant portion of an inheritance to eliminate debt, consider interest rates, your available cash reserves and the other opportunities for the money.
Should I invest an inheritance all at once?
There isn't one approach that's appropriate for everyone. How and when inherited money is invested should reflect when you expect to need it, your risk tolerance, your existing investments and the purpose you've assigned to the money.
Some people may invest a lump sum, while others may be more comfortable investing gradually. The important part is having a strategy rather than making the decision based solely on current market headlines.
Where should I keep inherited money while I decide what to do?
If you're not ready to make a long-term decision, consider where the money can remain relatively safe and accessible in the meantime. Depending on the circumstances, options might include an FDIC-insured savings account, money market deposit account or other cash-management option.
Pay attention to account protections, limits, interest rates and accessibility when deciding where to temporarily hold a large amount of cash.
What happens when you inherit an IRA?
Inherited IRAs have specific distribution and tax rules. Those rules can depend on several factors, including your relationship to the original account owner, when the owner died and the type of IRA involved.
Because taking a distribution can have tax consequences, it's particularly important to understand the rules that apply to your situation before withdrawing or moving inherited retirement assets.
Can I give some of my inheritance to my children or family members?
You generally can give inherited money to someone else, but doing so may introduce gift-tax or estate-planning considerations depending on the amount and circumstances.
If you're considering a significant gift, it can be helpful to speak with your financial advisor, CPA or estate-planning attorney before transferring the money.
How much of an inheritance should I save?
There isn't a standard percentage that everyone should save. Someone with high-interest debt and little emergency savings may approach an inheritance very differently from someone who already has substantial savings and investments.
Instead of starting with a percentage, consider what the money needs to accomplish and how it fits with your existing assets, liabilities and goals.
Do I need a financial advisor if I receive an inheritance?
Not necessarily. However, an advisor may be helpful if the inheritance involves multiple types of assets, investment decisions, inherited retirement accounts, tax considerations or a significant change to your financial situation.
A financial advisor can also help you evaluate the inheritance alongside the assets you already have rather than treating it as a completely separate pot of money.
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