Whether planned or unplanned, many are unsure of how to proceed after inheriting money. Here are a few steps you can take to make the most of it.
So, you’ve inherited money. Depending on the circumstances, it may have been expected or unexpected, and it may or may not have come with a great deal of heartache. Nevertheless, too few people know what to do when they inherit large sums of money, imposing more pressure than they might have imagined. Here are a few things you should consider when you inherit money.
- Take a Brief Moment to Think
Although it’s a myth that all lottery winners end up destitute, there is some truth to the fact that it’s easy to spend too much of a good thing too fast and blow through money that could have cleared debt, funded college costs or paid for your retirement. Know that your hand isn’t forced, and you don’t have to make a decision as to what you’re going to do with it or how you will allocate it on a timeline that you aren’t comfortable with.
- Familiarize Yourself with Tax and Inheritance Laws [1,2]
Even if your inheritance comes with no tax obligations, it can come with time requirements or required minimum distributions. Non-spousal beneficiaries must drain an inherited traditional IRA, 401(k) or similar tax-deferred retirement account within 10 years, and that money is taxed as ordinary income unless it is a Roth IRA, potentially pushing you into a higher tax bracket. You may also owe federal or state estate taxes. The federal estate tax exclusion is currently $12.92 million per person, but it is set to drop back down to 2017 levels of around $6.8 million in 2026.
- Pay Outstanding Debt 
It can be extremely helpful to pay off debt, especially if it comes with higher-than-average interest rates. For instance, while personal loans, credit cards and student loans can be beneficial in the short term, they can be accompanied by unfavorable repayment terms. Paying them off can be a great way to prevent interest from piling up even further. If you are getting close to retirement, paying off your mortgage may also make sense depending on your situation.
- Establish an Emergency Fund
Committing at least a portion of your inheritance to an emergency fund can mean that you can easily tap into a flexible and liquid account to pay the deductible for a new roof after a storm, replace an appliance that goes bad or afford an unexpected auto repair. Most experts advise putting away at least three to six months’ worth of expenses, but you may want to put away more depending on your age and employment situation.
- Invest in Your Future
This can truly mean anything, whether you’re looking to grow your investment portfolio, pay for classes to grow one of your skills or provide yourself with the financing you need to start a new business venture. A larger sum of money can also give you the opportunity to employ different investing strategies, like further diversifying your portfolio. Furthermore, contributing the maximum amounts to your 401(k) and IRA accounts might be a great idea depending on your circumstances, and other retirement strategies could offer lifetime monthly income that could allow you to retire sooner.
- Finance Higher Education 
Using inherited money to fund that further education can be a great way to avoid student loans and achieve the skills you’ll use for the rest of your life. Moreover, it doesn’t necessarily have to be for your own education. There are options like 529 plans for grandparents and permanent life insurance with cash value that can help pay for your children’s or grandchildren’s educational expenses, too—without causing them to qualify for less financial aid.
- Speak to Your Financial Advisor
It’s always best to speak with your financial advisor—as well as attorneys and tax professionals—before making any major financial decisions about inherited money. Your team of advisors should work together and have a good grasp on your goals so that they can offer custom-tailored advice that can best benefit you and your family now and in the future.
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