What to Do With an Inheritance - Experian (2024)

In this article:

  • 1. Park Your Money in a High-Yield Savings Account
  • 2. Seek Professional Advice
  • 3. Create or Beef Up Your Emergency Fund
  • 4. Invest in Your Future
  • 5. Pay Off Your Debt
  • 6. Consider Buying a Home
  • 7. Put Money Into Your Child’s College Fund
  • 8. Keep Moderation in Mind
  • The Bottom Line

When a loved one passes away, you may receive an inheritance as a final gift. An inheritance, like any large, unexpected sum of money, is a unique opportunity for financial stability.

But, as with any financial windfall, an inheritance can also be a source of stress. If mismanaged, your inheritance could leave your financial health unchanged—or even damaged, if it leads you to take on more debt than you can afford.

That's why it's crucial to act slowly and strategically when you inherit part or all of a loved one's estate, especially considering the emotional difficulties of losing someone close to you. Here are eight ways you can use your inheritance to help you improve your financial stability.

1. Park Your Money in a High-Yield Savings Account

Inheritance is something you receive at a painful time. The experience of losing a loved one and receiving assets from an estate can create a flurry of emotions from grief and confusion to stress and cloud the good judgment needed to make important financial decisions.

To avoid acting on impulse, give yourself time to reflect and set aside financial decisions until you've had time to process your loss and consult with a trusted financial advisor.

Until then, consider putting the money in a high-yield savings account, where it will accrue more interest than you'd receive in a traditional savings account. You can leave your inheritance in savings until you decide how to use it in the long term; you can also keep it there to save for short-term savings goals, such as buying a house.

2. Seek Professional Advice

A financial planner or other financial professional like a certified public accountant or estate planning lawyer can help make objective decisions about the best way to use your inheritance. They'll help you define clear goals and reach them faster, which is especially critical if you have limited experience managing a large sum of cash.

If a financial planner was already managing the estate you've inherited, consider asking them to help you manage your inheritance. They'll have an insider's knowledge of the assets you've inherited, and you'll have confidence in their proven track record of effectively managing wealth right off the bat.

3. Create or Beef Up Your Emergency Fund

Experts recommend setting aside enough funds for three to six months' worth of expenses in an emergency fund. That way, you'll be covered in times of unforeseen financial burden, such as in the event of a loss of income, medical emergency or other crisis. Consider keeping these funds in their own high-yield savings account where you can access the money quickly if needed.

4. Invest in Your Future

One of the best uses for your inheritance is to invest it in your retirement. If possible, consider funding your tax-advantaged retirement account, such as a 401(k) or traditional IRA, to the maximum contribution limit, including catch-up contributions if you're over age 50.

If you've maxed out your retirement account and want to branch out into other investments, consider these options:

  • Mutual funds: Mutual funds allow you to spread your investment across a range of securities including bonds and stocks. Professionals manage your funds for you, investing in a range of companies and industries to help mitigate risk.
  • Exchange-traded funds (ETFs): ETFs share many similarities with mutual funds, where you're investing in a pool of stocks for diversification, but ETFs are more liquid. That said, you'll typically see better returns if you hold these funds over the long term.
  • Index funds: An index fund is a type of mutual fund or exchange-traded fund that tracks a sector of the economy with an aim to provide broad returns. Popular choices for index funds are the S&P 500 Index and the Nasdaq 100.
  • Individual stocks: Stocks are volatile investments with both a high potential for growth and a high potential for loss. If you choose to buy shares in individual companies, decide on a set percentage of your portfolio for these risky investments, such as 5%, and make up the other 95% with your 401(k), IRA, mutual funds, bonds and the like.
  • Bonds: Bonds are a secure way to invest your money for a relatively small but predictable return. You can use them to hold money you'll need in the near future, or to balance out the more volatile assets in your portfolio.
  • Real estate investment trusts (REITs): REITs allow you to invest in commercial real estate companies for a share of the profits, without having to do any hands-on real estate management yourself.
  • Cryptocurrency: Cryptocurrency is a newer and highly volatile asset with an uncertain and constantly fluctuating future. If you choose to invest, experts recommend allocating only a very small, speculative portion of your portfolio to risky assets like crypto.

Keep in mind that self-managing a portfolio of individually chosen assets and securities is challenging. If you're a new investor or aren't extremely comfortable navigating investing on your own, consider working with a financial advisor or investment professional to pick the best assets for you.

5. Pay Off Your Debt

If you've created an emergency fund and contributed enough to your 401(k) to at least take advantage of your full employer match, tackling high-interest debt is one of the best uses for your inheritance.

If you have a balance on a credit card or installment loan with high interest, such as 20% APR, paying off that debt is perhaps the least risky investment you can make—and the returns are immediate and high. You'll save a substantial amount in interest over time, and you can rebudget that money towards saving and investing going forward.

Just be sure you adjust your financial habits to only charge purchases to your credit card you can pay off each billing period. Otherwise, you may end up racking up more consumer debt.

6. Consider Buying a Home

You might be able to use your inheritance to jumpstart homeownership, providing an attractive entry point into the financial benefits of owning real estate, like equity-building and the potential for increased financial security.

But practice caution using all or most of your inheritance as a down payment, especially if you may struggle to afford monthly mortgage payments, property taxes, emergency repairs, renovations and other house-related costs once the house is yours. If you're too hasty in using your inheritance to leverage large purchases, you could end up taking on more debt than you can afford to pay off once the inheritance is gone.

If you already own a home and you're considering using your inheritance to pay off your mortgage, weigh the benefits of this against other potential uses for the money. Owning your home outright can bring financial security, significantly reduce monthly expenses and put you on a path to lower expenses in retirement. But since a mortgage is usually low-interest debt, consider the trade-offs of paying off your mortgage versus investing the money for a higher return, covering other important expenses or paying off higher-interest debt.

7. Put Money Into Your Child's College Fund

Consider allocating a portion of your inheritance to a college fund for your children. Finding the money to save for college can be a source of stress for parents, and your inheritance is a unique opportunity to get on track and help your child avoid student loans down the road.

Not only can this ease your financial burden in the future, but it's also a way to invest your inheritance in future generations, as paying for college can bolster your children's lifelong earning potential. Consider opening a 529 savings plan to house your college savings, which offers tax-free growth to save more for college.

8. Keep Moderation in Mind

When unexpected cash hits your bank account, the urge to splurge is natural. But balance this desire with reason and moderation.

Hold on to all of your inheritance until you've come up with a plan for how you'll use it to improve your financial health and long-term security, such as investing in your 401(k) or paying down debt.

Then, decide on a set amount to dedicate to spending. You could use this money for a practical purpose, such as a car upgrade or a bathroom remodel, or you could choose to spoil yourself with a vacation or a hot tub. Avoid making purchases that require long-term payments or change your lifestyle to be more expensive, such as a boat that'll need upkeep and storage. Once your inheritance is gone, these purchases could leave you worse off than you were before.

The Bottom Line

An inheritance is a windfall that can be a blessing or a curse, depending on how you manage it. Rash decisions could leave you empty-handed, whereas some smart money moves can help you build greater wealth for your future.

If you aren't sure what to do next, reach out to a financial advisor to develop a game plan for your money together.

What to Do With an Inheritance - Experian (2024)


What should I do with an inheritance? ›

Ideas for what to do with your inheritance
  1. Pay off high-interest debt.
  2. Create an emergency fund of at least 3–6 months of essential expenses.
  3. Revisit your investment plan with an advisor.
  4. Invest in yourself by going to back to school or taking a sabbatical.

What should I ask my financial advisor about an inheritance? ›

Four Questions to Ask About Your Inheritance
  • Are there taxes? Knowing if the money is from a life insurance policy, sale of a property, liquidated investments or cash will help to determine if you need to pay taxes and to what degree. ...
  • Are there outstanding expenses? ...
  • Is there fine print? ...
  • Do you need help?

What to do with $800 000 inheritance? ›

What Do I Do With a Cash Inheritance?
  1. Give some of it away. No matter where you are in the Baby Steps, giving should always be part of your financial plan! ...
  2. Pay off debt. ...
  3. Build your emergency fund. ...
  4. Pay down your mortgage. ...
  5. Save for your kids' college fund. ...
  6. Enjoy some of it.
Feb 2, 2024

How do you handle an inheritance check? ›

3 Things to Do When You Receive an Inheritance
  1. Deposit the money into a safe account. Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. ...
  2. Make a list of priorities. What do you want to accomplish with your money? ...
  3. Consult a professional.

What is the first thing to do with an inheritance? ›

Keep your inheritance to yourself (for now)

The first step financial advisors typically suggest, especially if you've come into a large sum of money: Keep quiet. That might go against your instincts to squeal about your new-found wealth, or even share that wealth. But there's time for that later.

Do you have to report inheritance money to the IRS? ›

In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.

Does inheritance count as income? ›

Inheritances are not considered income for federal tax purposes, whether the individual inherits cash, investments or property.

What is the best way to receive inheritance money? ›

A living trust is the easiest and fastest way to receive inheritance money. There is no tax payable on inheritance money, as it generally does not need to be reported to the IRS and is not considered taxable income.

How much is considered a large inheritance? ›

Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.

What should you not do with an inheritance? ›

She shared five of the worst things you can do if you inherit money.
  • Sitting on the cash long-term. ...
  • Buying an asset you can't maintain. ...
  • Holding onto an inherited property you can't afford. ...
  • Putting all your money in one place. ...
  • Not speaking to a financial planner.
Nov 14, 2023

How to distribute inheritance money? ›

How Does Inheritance Work? To receive an inheritance, usually the estate must first go through probate. A court will supervise this process, which includes reviewing the will, if applicable, determining the value of assets, locating assets, paying bills and taxes and distributing the assets to the rightful inheritors.

How do I deposit a large inheritance check? ›

A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.

Can I deposit my inheritance into my checking account? ›

It may be better put to use in other investments. For instance, you could use the cash inheritance to make a down payment on a house or renovate the home you have. You can deposit a large cash inheritance in a savings account, either through a check or direct wire to your bank.

Do banks report inheritance? ›

Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.

Can the IRS touch your inheritance? ›

Can IRS seize inherited property? Yes, the IRS can seize inherited property for unpaid taxes after following their standard process of notices. Can the IRS take inheritance money? Yes, the IRS can take inheritance money for unpaid taxes.

What should I do with a $100000 inheritance? ›

If you inherit $100,000, you have a lot of options. You can pay off your highest-interest debts, save money for emergencies, or give some to charity. You might consider using it as a down payment on a house or adding it to your child's college fund.

What to do with $50,000 inheritance? ›

Before spending any of your inheritance, it's a good idea to make a plan for how you'll handle it. Some choices include creating an emergency fund, paying off high-cost debt, building up retirement savings, saving for kids' educations and buying personal luxuries.

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