Receiving an inheritance can bring both opportunity and uncertainty, especially during an emotional time. The decisions you make early on can shape your long-term financial direction. This guide breaks down what to do with an inheritance, step-by-step, so you can move forward with confidence and clarity.
What Is an Inheritance?
An inheritance is money or assets passed from one person to another after death, often from a loved one. It can include cash, real estate, retirement accounts, or investments, each with different rules and tax implications. People typically receive inheritances through a will, beneficiary designations, or the probate process. Understanding what you’ve inherited is the first step in making informed decisions about taxes, investments, and how it fits into your goals.
What Should You Do to Get Started?
When deciding what to do with an inheritance, start by pausing, understanding your assets, and creating a plan before making any major financial moves. The steps below can help guide your next decisions:
- Take time before making decisions
- Identify exactly what you inherited
- Review your current financial priorities
- Consider tax implications and timing
- Build a plan before spending or investing
This simple framework helps you avoid rushed decisions that could lead to unnecessary tax consequences or missed opportunities.
Step 1: Take Time Before Making Decisions
Receiving an inheritance often happens during a period of grief. Emotions can affect decision-making, which is why it helps to give yourself time. Acting too quickly can lead to choices that do not align with your long-term goals.
Financial professionals often suggest waiting several months, or even up to a year, before making major changes. During this time, you can place funds in a high-yield savings account or another low-risk option. This keeps your money accessible while you evaluate your next steps.
Example
Sarah inherited $150,000 after losing her parent. At first, she planned to invest all of it in the stock market. Instead, she placed the funds in a savings account for six months. During that time, she reviewed her student loan debt, retirement savings, and future plans. By waiting, she avoided investing during a market downturn.
Risks of Rushing Decisions
- Overspending on large purchases like cars or real estate
- Investing in unfamiliar or high-risk assets
- Overlooking tax consequences tied to withdrawals or sales
Taking time does not mean doing nothing. It means creating space to think clearly. You can start by organizing documents, understanding what you inherited, and outlining your priorities.
This approach can help you make decisions that reflect your situation and the intentions of the person who left the inheritance
Step 2: Review Your Financial Priorities
Before deciding how to use your inheritance, review your current finances. This can help you align the funds with your goals instead of treating them as extra money.
Start by evaluating key areas:
- High-interest debt, such as credit cards or personal loans
- Emergency fund status
- Retirement savings progress
- Short- and long-term goals
For example, your priorities may include paying off credit cards and student loan debt, building an emergency fund or contributing more to tax-advantaged retirement accounts.
A Bankrate report found that about 47% of Americans would have difficulty covering a $1,000 emergency expense.1 This highlights the importance of building or strengthening an emergency fund.
This step is about making thoughtful choices. Aligning your inheritance with your goals can help you avoid quick decisions that may limit future options.
Step 3: Understand What You Inherited
Cash and Savings
Cash offers immediate flexibility and can be used for debt repayment, savings, or investments. Some people place inherited cash in a high-yield savings account while creating a plan.
For example, if you inherit $50,000, you might allocate:
- $20,000 to pay off high-interest debt
- $15,000 to an emergency fund
- $15,000 toward long-term investments
Retirement Accounts (IRAs, 401(k)s)
Inherited retirement accounts, such as traditional and Roth IRAs, have specific rules. For example, traditional IRA withdrawals may be taxed; Roth IRA withdrawals are generally tax-free if conditions are met. These accounts are often tax-deferred, so taxes may apply when you withdraw funds.
Many non-spouse beneficiaries must withdraw funds within 10 years under IRS rules. Careful timing may help manage taxes.
Investments (Stocks, Bonds, Funds)
Inherited investment accounts may include stocks, bonds, or mutual funds. A key concept is the step-up in basis, which resets the cost basis to the asset’s value at the time of inheritance.
This can reduce capital gains taxes. For example, if a stock was purchased for $10,000 and is worth $25,000 when inherited, your new cost basis is $25,000. Selling it right away may result in little to no capital gains tax.
Real Estate or Property
Real estate offers several options, with different responsibilities and tax implications:
- Keep it for personal use
- Rent it for income
- Sell it and reinvest the proceeds
Understanding each asset type can help guide your decisions and limit unexpected tax outcomes.
Step 4: Plan for Taxes on an Inheritance
Taxes can affect how much of your inheritance you keep. Many inheritances are not subject to federal income tax, but there are still key rules to understand.
Inheritance and Estate Taxes
Each of these types vary by location. The federal estate tax applies only to estates exceeding the federal estate tax exemption, which is over $15 million per individual.2 However, some states impose their own inheritance tax or estate taxes at lower thresholds.3
Capital Gains Taxes
When you inherit investments or real estate, the cost basis is typically adjusted to the value at the time of inheritance. This is known as a step-up in basis. Still, any increase in value after you inherit the asset may be subject to capital gains tax.
For example, John inherits a home valued at $300,000. If he sells it shortly after inheriting it, his taxable gain may be minimal. But if he holds the property and it increases to $350,000, he could owe capital gains taxes on the $50,000 increase.
Inherited Retirement Accounts
Withdrawals from tax-deferred accounts, such as traditional IRAs, are usually taxed as ordinary income. Large withdrawals in a single year may increase your tax rate.
To manage tax consequences effectively:
- Plan the timing of withdrawals
- Spread income across multiple years when possible
- Consult a tax professional for guidance
Planning ahead can help you manage taxes over time and make better use of what you receive..
Step 5: Decide How to Use Your Inheritance
Once you understand your inheritance and any tax obligations, the next step is deciding how to use it. Many people split their inheritance across several priorities rather than choosing just one.
Common Ways to Use an Inheritance
| Priority | What It Means | Why It Matters |
|---|---|---|
| Pay off debt | Eliminate high-interest balances, such as credit cards | Reduces interest costs and frees up monthly cash flow |
| Build savings | Set aside 3 to 6 months of living expenses | Helps cover unexpected costs without using credit |
| Invest for long-term goals | Put money into brokerage or retirement accounts | Supports long-term growth, though investments carry risk |
| Spend a portion | Use a set percentage for personal use | Allows enjoyment without affecting long-term goals |
| Give or support others | Donate or help family members | Supports causes or helps with major expenses |
Balancing these priorities can help you create a plan that reflects both practical needs and personal values.
Step 6: Create or Update Your Estate Plan
Receiving an inheritance is a good time to review your estate plan. Your financial situation may have changed, and your plan should reflect those updates.
Start by reviewing:
- Beneficiary designations on accounts
- Your will or trust documents
- Asset distribution preferences
If you now have additional assets, such as investment accounts or real estate, consider how you want those handled in the future. A comprehensive estate plan may involve setting up a trust, naming a guardian for dependents, and planning for estate taxes.
Working with an estate attorney can help align your plan with your current situation and long-term goals. It can also help you outline how assets may be passed on to future generations.
Step 7: Work With a Financial Professional
Managing an inheritance can involve complex decisions, especially when taxes, investments, or multiple asset types are involved. Professional guidance can help you stay organized and make informed choices.
You may want to work with:
- Financial advisor helps with investment decisions
- Tax professional handles tax-related questions
- Estate attorney supports legal and estate matters
For example, if you inherit retirement accounts, real estate, and investments, you may need coordinated advice across all areas. A financial professional can help shape an investment approach based on your goals and risk tolerance.
Choose the right professional by checking credentials, understanding fees, and ensuring their approach matches your goals.
Professional support does not replace your decisions. It provides guidance and structure so you can move forward with clarity.
Common Mistakes to Avoid With an Inheritance
Even with careful planning, mistakes can happen when managing an inheritance. Knowing these pitfalls can help you make smarter decisions and protect its long-term value.
Here are common mistakes to watch for when managing an inheritance:
- Spending Too Quickly Without a Plan: Treating it like extra income can lead to overspending and limit future savings or investing.
- Ignoring Tax Implications: Taxes on certain assets or large withdrawals can reduce what you keep.
- Taking on Unnecessary Investment Risk: Rushing to invest may lead to high-risk choices or poor diversification.
- Failing to Align Decisions with Financial Goals: Using funds without clear priorities can reduce long-term impact.
- Overcommitting Large Purchases or Obligations: Big expenses can create ongoing costs that limit flexibility.
By slowing down, understanding the full picture, and making decisions based on your financial priorities, you can use your inheritance in a way that supports long-term stability and growth.
Final Thoughts
Deciding what to do with an inheritance takes time, planning, and a clear understanding of your options. By focusing on your financial goals, considering tax implications, and making thoughtful choices, you can use your inheritance in a way that supports both your present needs and your future plans.
Sources
- Bankrate’s 2026 Annual Emergency Savings Report. https://www.bankrate.com/banking/savings/emergency-savings-report/.
- Estate tax - IRS. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
- Estate and Inheritance Taxes by State, 2025. https://taxfoundation.org/data/all/state/estate-inheritance-taxes/.
