Give yourself time. Park the money in a high-yield savings account while you grieve and plan, learn the rules for anything inherited in a retirement account, then follow the usual order: emergency fund, high-interest debt, retirement accounts, then investing for income. There is no federal inheritance tax, though a few states have one.
One example split of $100,000
The $70,000 that gets invested could pay about $290 a month at a 5% yield, and it keeps paying.
An illustration, not a recommendation for you. Your split depends on your savings, debts and goals.
The order most people follow
- 1Pause before you decide
Many advisers suggest waiting several months before making big choices. Put cash in a high-yield savings account where it earns interest and stays easy to reach.
- 2Know what kind of money it is
Cash, a brokerage account, a home and a retirement account each follow different rules. Inherited stocks and funds usually get a "stepped-up" cost basis, so gains before the death are not taxed. Most people who inherit an IRA from someone other than a spouse must empty it within 10 years.
- 3Cover the basics first
Fill your emergency fund and clear high-interest debt. It is a way to honor the gift: it makes your everyday life steadier right away.
- 4Turn it into income you can see
Invested across several kinds of funds, an inheritance can pay you every month for decades. Many people find it meaningful to watch the payouts cover a real cost, like the phone bill or groceries.
Taxes worth knowing
The federal government does not tax inheritances themselves, and the federal estate tax only applies to very large estates and is paid by the estate. A handful of states charge an inheritance tax, depending on the state and your relationship to the person.
An inherited traditional IRA is taxed as you withdraw from it, so spreading withdrawals over the 10 years can keep you in a lower bracket. A tax professional can help with the details.
Questions people ask
Do I pay taxes on an inheritance?
Usually not federally on the inheritance itself. Withdrawals from an inherited traditional IRA or 401(k) are taxed as income, and a few states have an inheritance tax.
Should I pay off my mortgage with an inheritance?
It depends on your rate. Paying off a low-rate mortgage gives you peace of mind but may earn less than investing. Paying off high-interest debt almost always makes sense first.
How long should I wait before investing an inheritance?
There is no set rule. Many people wait a few months, keeping the money in a high-yield savings account, until they feel ready to make a plan.
More ways money shows up
For education only and not personalized investment, tax or legal advice. Example splits and figures are hypothetical illustrations, not a recommendation, prediction or promise of results. All investing involves risk, including the possible loss of principal. Tax rules change; check current IRS guidance or a tax professional.