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What Should You Do with an Inheritance?

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Everyone dreams of receiving a windfall. Sometimes I think it would be nice if someone just dropped $10,000 on me — I don’t even dream about $1 million. However, I’m pretty sure there aren’t any long-lost uncles waiting around to leave me any sort of inheritance. Others, though, do end up with a windfall in the form of an inheritance.

The question of what to with the money is one that everyone has to answer. After the government takes its cut, you need to decide what you are going to do with the money. If you are smart about what you do with an inheritance, you can secure your financial future. Without a solid plan, though, you could quickly find yourself worse off than before you received your inheritance.

First Things First: Get That Money Working for You Safely

The most important thing to do is to avoid making any quick decisions about what to do with your inheritance. You need to grieve properly, and you need to consider your financial situation and your options. However, the fact that you should take a little time to consider your next money move doesn’t mean that you should let your money just sit there. Put the money in a safe place that is relatively liquid.

Consider putting the money in FDIC-insured high yield savings accounts, short-term CDs or money market accounts. If you are confident about U.S. Treasuries, you can consider short-term Treasuries as well. However, many people prefer the liquidity and accessibility of high yield savings accounts. Your money is safe, it is earning interest (even though the yield is low), and you have some time to get your bearings.

Ideas for Your Inheritance

Because personal finance is so, well, personal, it is vital that you consider what would be best for your situation. Consider your financial situation, and what would help you reach your goals. Here are some ideas for your inheritance:

  • Pay down debt: If you have debt, especially consumer debt, paying down your high interest obligations can be one of the best things you can do for your finances. Interest payments go straight into someone else’s pocket — without providing you with any real benefit beyond the ability to borrow. Get rid of your debt and reform your money habits, and you will be in a better position.
  • Invest: The right investments can really help you grow your inheritance. You can use the money to fund your retirement account, and to make other investments. How you invest will depend on your age, health, risk tolerance and other factors. Consider your options, and choose investments that can benefit you. It is also possible to start an income portfolio with dividend stocks and bonds to help create an income stream that can keep on giving.
  • Education: If you would like to further your education, or learn a new skill to make you more marketable, the inheritance can help. You can also use your inheritance to help your children achieve their education goals. The right education can help you improve your ability to earn more.
  • Improve your financial safety net: Establish an emergency fund with the money, and you will be prepared for setbacks. Good fortune now doesn’t mean that you experience a reversal later. If there are gaps in your insurance, you can close them up with your inheritance money. You can also use the money to fund a HSA.
  • Give: It can also be helpful to give to others. Use the money to establish a charitable foundation, take some time off to volunteer, or give in some other way. If giving is important to you, make sure it’s part of your plan.

While it can be tempting to blow all the money on fun stuff, stop and think. There’s nothing wrong with treating yourself, but you want to make sure that you are on solid financial footing first.

What would you do with an inheritance?

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17 Responses to “What Should You Do with an Inheritance?”

  1. Annie says:

    Yes, have an emergency fund, pay off debt and establish an account that will grow the money for you. Understand what you are investing in and the benefits of it. Remember inflation can be a silent thief keep your money relevant. Great options in this post.

  2. DJ Wetzel says:

    I totally agree with the cooling off period after receiving an inheritance. Getting any amount of money over $1000 ( and even that amount really) usually causes a person to lose all self control and make rash decisions. If you are able to put the money in a safe, liquid parking place, consult your trusted financial advisors, then you will have a much better idea of what to do with the money and you can avoid making any decisions you will regret.

  3. Jim says:

    A cooling off period is never a bad idea.

  4. Karen says:

    Another recommendation, which I wish I had known, is to be sure the inheritance is put into an account in the name of the recipient, not into a joint account. Great article.

  5. zapeta says:

    I’d consider these tips to apply for any kind of windfall. I also agree that a cooling off period is a good idea. I’ve also heard many times to sit aside no more than 10% of the money to spend on fun stuff…if you try to save it all you’ll go crazy, but by setting a limit you don’t waste the entire windfall.

  6. fabclimber says:

    Consider these 2 strategies. First, if you are in otherwise good financial shape and you get a decent amount of money, live off some of it it and increase your 401k contributions to the maximum. That way you’ll leverage the additional tax savings which can be a great boost to your finances!

    Or ou could pay off a mortgage at say 5% instead of getting a much smaller % in a savings account.

  7. This is a very timely article for me because I just found out that the money in my trust fund will become available in September. While it isn’t enough to retire upon, it does open up a number of options that were otherwise “once I save up the money” plans. Ideally, I’d like to invest the money so I can use the interest to make up the income gap created by maxing out my 401(k).

  8. Shirley says:

    A family friend left us a small inheiritance. We hosted a family gathering at a favorite restaurant and had a farewell party for him with a godspeed toast and lots of shared memories and laughs. It was an event that he would have definitely approved and then the rest went into our savings accounts.

  9. JoeTaxpayer says:

    May I add one warning?
    If the account inherited is an IRA – As spouse, you can retitle to your own name (but still IRA) if you wish, but if it was any other relative that left you the account, you must be careful, as the account needs to show its status as inherited IRA. No matter how small the balance, if the deceased had a pretax, traditional IRA, you can’t just withdraw the money without paying taxes. I was told of a situation where a man on Social Security Disability did just that, $160K withdrawn and a hug tax bill, when he otherwise could have taken small withdrawals each year and paid no tax at all.

    • Shirley says:

      Thanks for this tip, Joe.
      Since my daughter is the beneficiary of our IRA should something happen to both of us, I will send this information along to her. I had presumed that ownership would just automatically be retitled to her, like it would to a spouse.

  10. Brian says:

    I am one of those people who received a fairly large inheritance. Since the total estate was more than you can exempt from taxed my dad had to write a shockingly large check to the government.

    The cooling off period was pretty much built in, since the IRS had to approve what we were paying, and the lawyer had to interpret some of the trust documents. Even with plenty of planning the whole situation is annoying and since you are dealing with the government a little slow.

    Long story short, I got a house (free and clear) and some investable assets. My long term goals are to let the assets grow (taking small distributions at my more favorable personal tax rate usually via dividends) and hopefully be able to pass most of it onto my heirs.

    All that being said, I would trade the entire inheritance to have my grandparents back.

  11. Inheritance? That’s money I didn’t count on.. It is money that just ‘appeared’, so that means I can do only 2 things with it. Spend it on something luxuries, or I can see it as a bonus for my savings.. wich one i’ll choose depends on the situation. This moment I would spend it!:)

  12. Dave says:

    Blow it all in Vegas!!!!!

    Honestly, like everyone else, I think that you need to pay down debts, invest, etc, but I think that any time you get a “windfall” you should spend some of it on yourself.

    I would set aside a certain amount, 5%-10%-20%, depending on how much you received, to spend on something you’d normally not do, like a nice vacation, buying yourself a new ipad or something else fun. I’ve actually heard of people giving away part of their estate to their heirs before they die to do similar things – they want to watch those that they love to enjoy the money rather than it sit in a bank somewhere…

  13. skylog says:

    as this is something i may have to deal with soon, this is a timely article. i am already having trouble with the other side of this equation, but it is good to gain some perspective at the very least on the other side.

    i agree with what most have said, and i certainly feel the cooling off period is essential.

  14. Diane says:

    This is something I’m about to deal with, as my siblings & I will share a small inheritance from our Mother once her house is sold. My plan is to set aside something for a family trip with my 2 grown sons, and save/invest most of the balance. I am considering using a portion toward the mortgage principal when I sell my current house & purchase another. I will definitely not rush into anything!

  15. Valerie says:

    My siblings and I are inheriting several CD’s and IRA’s. What are our options? Will we have to pay taxes on them?


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