I Inherited $100k. What Should I Do?

Inheriting a sum of $100,000 can be a significant financial event, offering a unique opportunity to enhance your financial well-being. This windfall is not merely a sudden influx of cash; it represents a chance to make thoughtful decisions that can lead to long-term security and growth. Approaching this inheritance with careful consideration, rather than impulsive spending, allows you to plan for a more stable financial future. The decisions you make now can profoundly impact your financial trajectory for years to come.

Addressing Immediate Financial Priorities

The first step in managing an inheritance is to address immediate financial priorities that provide a strong foundation for future growth. Prioritizing the elimination of high-interest debt is a wise decision. Paying down these debts can free up monthly cash flow and reduce borrowing costs. Lower-interest debts, such as mortgages or student loans, can be approached differently, considering their tax implications and your personal financial situation.

Establishing or bolstering an emergency fund is another important priority. It is recommended to have three to six months’ worth of living expenses readily available. This fund acts as a financial buffer, providing security against unexpected events such as job loss, medical emergencies, or unforeseen home repairs, preventing the need to incur new debt. High-yield savings accounts are suitable for emergency funds, as they offer liquidity and safety while earning a competitive interest rate.

While the focus should be on debt reduction and emergency savings, a small portion of the inheritance might be allocated for essential needs or short-term goals. This could include necessary home repairs or medical expenses not covered by insurance. Budget carefully for these items to ensure the majority of the inheritance is directed towards building long-term financial stability.

Understanding Tax Considerations

Navigating the tax implications of an inheritance is an important aspect. Generally, the recipient of an inheritance does not pay federal inheritance tax. Federal estate tax, levied on the deceased person’s estate before assets are distributed, applies only to estates valued above a very high threshold, such as $13.99 million per individual in 2025. This means a $100,000 inheritance typically falls well below the federal estate tax exemption, making it irrelevant for most individuals.

However, some states may impose their own inheritance taxes, which are paid by the recipient, or estate taxes, which are paid by the estate. The applicability of these state-level taxes often depends on the state where the deceased resided and the beneficiary’s relationship to the deceased. While some states exempt immediate family members, others may tax inheritances above certain thresholds.

An important tax concept for inherited assets like stocks or real estate is the “step-up in basis.” This rule adjusts the asset’s cost basis to its fair market value on the date of the original owner’s death. This adjustment can significantly reduce or even eliminate capital gains tax liability if the asset is sold shortly after inheritance, as the heir only pays tax on any appreciation that occurs after the date of death. While the inheritance itself may not be federally taxed upon receipt, any future income or gains generated from that inherited money, such as interest from savings accounts, dividends from stocks, or capital gains from selling appreciated assets, will be subject to income tax.

Strategic Allocation and Investment Options

After addressing immediate financial priorities and understanding tax implications, the remaining inheritance can be allocated to align with financial goals and risk tolerance. Defining clear short-term (1-3 years), medium-term (3-10 years), and long-term (10+ years) objectives is an important step for investment decisions. These goals might include saving for a down payment on a home, funding higher education, or building a retirement nest egg.

Understanding your risk tolerance is equally important, as it dictates the types of investments suitable for your portfolio. Diversification, which involves spreading investments across various asset classes, is a key principle to manage risk and potentially enhance returns over time. A well-diversified portfolio helps mitigate the impact of poor performance in any single investment.

A range of investment vehicles can be considered depending on your goals and risk appetite.

• Savings accounts and Certificates of Deposit (CDs) offer safety and predictable, generally lower, returns for short-term goals or funds requiring high liquidity.
• Bonds are suitable for capital preservation and income generation, typically carrying less risk than stocks.
• Mutual funds and Exchange-Traded Funds (ETFs) provide diversification and professional management, making them accessible options for new investors.
• Stocks offer potential for higher growth, suitable for long-term objectives despite their higher risk profile.
• Retirement accounts, such as IRAs or 401(k)s, provide tax advantages that can boost long-term savings through tax-deferred growth or tax-free withdrawals.
• Real estate can be a significant long-term investment, but it requires substantial capital and carries its own complexities and risks.

Seeking Professional Financial Guidance

Given the complexities involved in managing an inheritance, seeking professional financial guidance can be a wise step. An advisor can provide tailored advice, particularly if your financial situation is complex or if you lack experience in investment management and tax planning. They offer expertise in developing a comprehensive financial plan, managing investments, and strategizing for retirement and tax efficiency.

When considering a financial professional, understand the different types of advisors available. Fee-only fiduciaries are legally obligated to act in your best interest and are compensated directly by you, which aligns their incentives with your financial success. In contrast, commission-based advisors earn fees from the products they sell, which can create conflicts of interest.

A qualified advisor can help you integrate the inheritance into your financial picture, addressing aspects like investment management, retirement planning, and tax implications. When interviewing potential advisors, inquire about their compensation structure to ensure transparency. Ask about their credentials, such as Certified Financial Planner (CFP) designations, and their investment philosophy to ensure it aligns with your goals and values. These discussions can help you find a professional who can guide you in utilizing your inheritance to achieve your financial objectives.