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Received an Inheritance? Here's What to Do Next.

January 27, 2020

Receiving an inheritance isn’t something you expect or plan for, so if it happens you may wonder what you should do. Here are some strategies you might want to consider.

You may want to consider “parking” your inheritance temporarily in cash while you can think about what to do. Here are a few ideas:

  • Pause and take time to think. First, it’s important to allow time to mourn your loved one. Making financial decisions in an emotional state is never a good idea. This may mean putting the money aside while you grieve.
  • Pay off debt. An inheritance may provide an opportunity to make a fresh start, debt-free. Begin by paying off high interest rate credit cards and loans, including any student loans you may have.
  • Set up an emergency fund. If you’re still working, we recommend having six to 12 months of living expenses in an emergency fund. If you’re retired, we recommend setting aside three months of living expenses for emergencies and 12 months of living expenses for everyday spending. Having these funds in an easily accessible account helps prevent you from tapping in to your investments when unexpected expenses arise.
  • Plan for taxesIf you inherit a 401(k) plan from someone other than your spouse, you’ll likely have to take the money as a lump sum. This means you’ll need to pay federal, state and local income taxes. If you transfer it to an IRA, you can avoid immediately paying taxes. You’ll still have to take annual withdrawals, which are taxable, but the amount will be based on your life expectancy, so you can spread out the taxes. Consult with your tax advisor to see if this may be the right approach for you.
  • Review your financial goals. If your inheritance is large enough, it may have a big impact on your financial strategy and goals. Your financial advisor can help you evaluate your situation and make changes, if necessary.

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