While you often can’t plan on receiving an inheritance, if it happens, what should you do? Above all, don’t rush to act – especially if you’re in the midst of the grieving process.
When you're ready to take action, here are a few ideas:
- Reduce your debt. Do you have any consumer loans that aren’t tax-deductible and carry high interest rates? Or perhaps you’re carrying student loans. Consider using your inheritance to pay off debts.
- Establish an emergency fund. If you have six to 12 months’ worth of living expenses in a liquid account, you can help avoid dipping into your investments to pay for unexpected costs, such as an expensive repair or a hefty medical bill.
- Review your financial strategy. If your inheritance is large enough, it may be a “game changer” in terms of your financial strategy. Your financial advisor can help you make the most appropriate moves for your personal strategy.
- Plan for taxes. Some types of inheritance, such as life insurance policy proceeds, are tax-free. On the other hand, if you inherit a 401(k) plan from someone other than your spouse, you’ll likely have to take the money as a lump sum, which means your inheritance will be subject to federal, state and local income taxes. However, you can transfer an inherited 401(k) to an IRA, which allows you to avoid immediately paying taxes on your inheritance. 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. If you receive an inherited 401(k), consult with your tax advisor on the right approach for you.
And remember to have some fun. It's likely the person who left the inheritance cared about you and your happiness.