What to Do With Inheritance Money: A Financial Checklist

Receiving an inheritance is a significant life event, bringing both emotional considerations and new financial opportunities. This influx of funds warrants a thoughtful and measured approach. Taking time to plan strategically can help ensure these funds serve your long-term financial well-being and align with your personal goals.

Initial Considerations Upon Receiving Funds

Upon receiving inheritance money, the first step involves securing the funds and taking a deliberate pause before making substantial financial decisions. Deposit the funds into a secure, easily accessible account, such as a savings or money market account, to ensure their safety while you formulate a plan. This initial period allows for a clear assessment of your current financial standing.

During this time, gather all relevant documentation concerning the inheritance, including the exact amount received and any associated paperwork from the estate. Resisting impulsive spending or major commitments during this initial phase can prevent future regrets and ensure the funds are utilized effectively.

Taking a few weeks or even months to consider your options can provide clarity and perspective. This allows you to evaluate your financial landscape without pressure. Professional guidance from a financial advisor or tax professional can also be beneficial during this assessment period, offering an objective viewpoint on your unique situation.

Addressing Financial Priorities

Once the initial assessment is complete, prioritizing the allocation of inheritance money towards financial health is a prudent next step. A primary focus should be on eliminating high-interest debt, which can significantly hinder financial progress due to accumulating interest charges. Examples include credit card balances, personal loans, or certain types of unsecured debt, where interest rates can be substantial.

Paying down such debts reduces your monthly financial burden and improves your overall debt-to-income ratio, which can positively impact your credit standing. This action effectively provides a guaranteed return equal to the interest rate you avoid paying, often outperforming many investment opportunities. Addressing these liabilities creates a more stable financial foundation.

Establishing an emergency fund is another important priority. This fund should ideally cover three to six months of essential living expenses, providing a financial safety net for unexpected events like job loss or medical emergencies. Keeping these funds in a liquid, accessible account, such as a high-yield savings account or money market account, ensures they are available when needed without market fluctuations.

Strategies for Long-Term Growth

After addressing immediate financial priorities, the inheritance money can be directed towards long-term growth through various investment avenues. Contributing to retirement accounts is an effective way to build wealth, often offering tax advantages. For instance, in 2024, individuals can contribute up to $7,000 to an Individual Retirement Account (IRA), or $8,000 if age 50 or older, with potential tax deductions for traditional IRAs or tax-free growth for Roth IRAs. Employee contributions to a 401(k) plan can be up to $23,000 in 2024, with an additional $7,500 catch-up contribution for those age 50 and over.

Investing in a diversified portfolio is another strategy for long-term growth, spreading risk across different asset classes. This can include a mix of stocks, bonds, mutual funds, or exchange-traded funds (ETFs). Mutual funds and ETFs, particularly index funds, offer broad market exposure and built-in diversification, making them suitable for a general audience.

For those comfortable with direct investment, real estate can also be a viable option for long-term growth. This might involve purchasing a rental property to generate passive income and potential appreciation, or investing in real estate investment trusts (REITs). Understanding the associated risks and liquidity considerations for each investment type is important. Diversifying across different investment types can help mitigate overall risk exposure.

Using Funds for Specific Goals

Inheritance funds can also be allocated toward achieving significant personal goals that extend beyond general investment. One common goal is making a down payment on a home, which can reduce the amount financed and potentially lower monthly mortgage payments. While a 20% down payment is often cited, the median down payment for all homebuyers in the U.S. was 18% in 2024, with first-time buyers typically putting down about 9%. Additionally, buyers should account for closing costs, which typically range from 2% to 6% of the loan amount and include various fees such as appraisal, title insurance, and loan origination fees.

Funding educational pursuits for oneself, children, or other family members represents another impactful use of inheritance money. This could involve paying for college tuition, vocational training, or contributing to a 529 college savings plan, which offers tax advantages for education-related expenses. Such investments in education can lead to increased earning potential and personal enrichment over time.

Starting or investing in a business can also be a use of inherited funds for those with entrepreneurial aspirations. This might involve providing startup capital, purchasing equipment, or securing working capital to support operations. Aligning these significant expenditures with well-defined personal goals can help ensure the inheritance money contributes meaningfully to your desired future.

Navigating Tax Considerations

Understanding the tax implications of receiving and utilizing inheritance money is important for effective financial management. At the federal level, recipients of an inheritance generally do not pay income tax on the inherited assets themselves.

However, tax considerations arise from what you do with the inherited funds after receiving them. If you invest the money and later sell those investments for a profit, you may owe capital gains tax. Long-term capital gains, from assets held for more than one year, are taxed at rates of 0%, 15%, or 20% in 2024, depending on your taxable income. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates.

Any interest or dividends earned on invested inheritance funds are generally subject to federal income tax, treated as ordinary income or qualified dividends depending on the source. While most states do not impose an inheritance tax on the recipient, a few states do, and these vary by relationship to the deceased. A federal estate tax may apply to very large estates, with an exemption of $13.99 million per individual in 2025, meaning only estates exceeding this amount are subject to it. Consulting with a tax professional can provide tailored advice for your specific situation.