Are you ready for the greatest wealth transfer in history? Ready or not, it’s already happening!
It’s estimated that $70 trillion worth of assets will pass down from older to younger generations over the next two decades.1 That is a lot of money—and some of it might be heading your way.
But if you’re not careful, it’s easy to let an inheritance go to waste. In fact, more than one-third of all inheritors see no change or even a decline in their wealth after getting an inheritance.2
Did you catch that? Some folks are worse off after they inherit a financial windfall. But that doesn’t have to be your story. Your inheritance has the potential to change your family tree forever—so make it count!
What to Do With an Inheritance: Before You Start
Receiving an inheritance from a family member should be a blessing. But if you’re not careful, it can quickly become a burden. Here’s our advice for making the most of your inheritance.
Go Slow
Here’s the deal: When a loved one dies, you’re not thinking clearly enough to make major financial decisions. And in most cases, you don’t have to make any major decisions right away. There’s nothing wrong with letting your inheritance sit there for a while as you grieve.
If you received a lump sum of money, just park the funds in a money market account for a few months. Take a deep breath. Take some time to mourn. And then, when you’re ready, you can focus and make a plan for your inheritance.
Honor Their Legacy
As you start thinking about what you want to do with the inheritance you received, it’s important to remember where it came from. Think about all the hard work and sacrifice that went into making that inheritance possible. We’re talking about a person’s legacy here!
Ask yourself: Will this decision honor my loved one’s memory? Keeping that top of mind will bring a sense of responsibility, accountability and intentionality to the situation and help you use your inheritance wisely.
Build a Dream Team
When you receive a financial windfall like an inheritance, don’t be shocked if all kinds of people come out of the woodwork to tell you what you should do with it. That’s why you need to form your own “board of advisors”—a dream team of highly qualified professionals who can walk you through the inheritance process.
Depending on the type of inheritance you’re getting, you might need to seek counsel from some pros, like an:
- Certified Public Accountant (CPA) or tax advisor
- Insurance agent
- Investment professional
- Estate planning attorney
- Tax attorney
- Real estate agent
Remember that these people aren’t there to tell you what to do. They should be teachers who’ll sit down with you, help you understand all your options, and guide you as you make decisions that are right for you and your family.
What Do I Do With a Cash Inheritance?
When you boil it all down, there are three things you can do with your money: give, save and spend. An inheritance is no different!
Just like you give every dollar an assignment in your monthly budget, it’s important to do the same thing with your inheritance. If you don’t tell your inheritance money where to go, you’re going to end up wondering where it went!
Think of your inheritance as a pie that you’re dividing into slices. Now, how you slice up your money will depend on your unique situation and where you are in the Baby Steps.
Here are some of the slices you might include as you decide what to do with your 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! Give 10% to your church or a charity of your choice.
2. Pay off debt.
If you have any debt you’re trying to pay off, use part of your inheritance to fast-track your debt snowball. Eliminate as much debt as you can. If you can write a check and be debt-free tomorrow, do it! The peace you’ll experience that comes from having no debt (maybe for the first time) is a great way to honor your loved one’s legacy.
3. Build your emergency fund.
Having 3–6 months’ worth of expenses saved in a money market account will help you turn major emergencies into minor inconveniences!
4. Invest for the future.
Believe it or not, you are going to retire someday. Investing a portion of your inheritance could help you build a solid nest egg for when the time comes. (We’re going to talk more about how to invest your inheritance in a minute.)
5. Pay down your mortgage.
Can you imagine having no more house payments? Using part of your inheritance to pay down your mortgage can move you closer to that finish line and save you thousands of dollars in interest!
6. Save for your kids’ college fund.
There are plenty of ways to cash flow college without using your inheritance. But if you’ve fallen behind on saving for your kids’ college fund, you could put some of your inheritance into an Education Savings Account (ESA) or 529 plan to catch up on Junior’s college fund.
7. Enjoy some of it.
It’s okay to set aside some of your inheritance to have some fun, but how much will depend on where you are in the Baby Steps. If you’re still trying to pay off debt or build an emergency fund, for example, this slice should be smaller. Remember, you want to use this money wisely!
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How to Invest an Inheritance
If you’re looking for ways to invest the money you’ve inherited, here are three ways you can do just that:
1. Good Growth Stock Mutual Funds
First off, you need to make sure you’re making the most of your tax-advantaged retirement accounts—specifically a Roth IRA, which will give you tax-free growth and tax-free withdrawals in retirement. What should go inside that Roth IRA? We recommend good growth stock mutual funds.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
Growth stock mutual funds are great for long-term investing because they allow you to enjoy the growth of investing in the stock market while diversifying your portfolio (and lowering your investment risk) at the same time.
But remember, you should never invest in something you don’t understand. That’s why you should always talk things over with an investment professional you trust who can walk you through all your options.
2. Low-Turnover Mutual Funds (Index Funds)
If you’ve already maxed out the contribution limits for your tax-advantaged retirement accounts, invest in low-turnover mutual funds (like index funds) through a brokerage account, also known as a taxable investment account.
While brokerage accounts don’t have the tax advantages that regular retirement accounts offer, there are no contribution limits and you can take money out at any time (without penalty)—so that’s a plus!
3. Real Estate Bought With Cash
Depending on the size of your inheritance, you might be able to purchase a rental property outright. But hear us on this: If you don’t have enough money to pay cash for a rental property, don’t buy it. Never borrow money for a rental property.
If you have the cash to spare, contact a real estate professional who can help you find a great deal with plenty of income potential.
What to Do With an Inherited IRA or 401(k)
And speaking of investments, you might be wondering what to do with money that’s already invested inside an IRA or 401(k) your loved one left behind.
The truth is, your options might differ depending on how you’re related to the original retirement account owner. If you’re a surviving spouse receiving an IRA or 401(k) as an inheritance, you have some flexibility on how to handle those funds. If you’re not a spouse, your options are somewhat limited.
Generally, you have three options to choose from, so let’s break each one of those options down one by one!
Option 1: Take a lump sum payment.
This option is available for everyone.
This option has some advantages, especially if you’re trying to pay off debt or build an emergency fund, but it also comes with some drawbacks. The good news is you can take the lump sum payment without taking a 10% early withdrawal penalty and you’ll have access to that money right away.
The bad news is that you’ll have to pay taxes on the money if it was in a tax-deferred account—like a traditional IRA or traditional 401(k)—and lose out on any potential future growth from keeping the money invested.
Option 2: Open a brand-new inherited IRA.
This option is available for everyone.
An inherited IRA is a brand-new account that will be opened in your name, using the funds from the original owner’s IRA that was left to you. When someone close to you passes away and leaves funds from an IRA or employer workplace retirement plan to you as an inheritance, you’ll roll those funds over to an inherited IRA. Simple!
The great thing about inherited IRAs is that it allows the money that was in the original owner’s retirement account continue to grow tax-free (Roth) or tax-deferred (traditional).
However, you won’t be able to make any additional contributions to the inherited IRA and most beneficiaries—like children, parents and other loved ones—must empty the entire account within 10 years of the death of the original account holder. (There are exceptions if you’re a minor child, chronically ill or disabled, or no more than 10 years younger than the original owner.)3
Option 3: Transfer the funds into your own IRA (spouse only).
This option is only available for surviving spouses.
If you inherited an IRA from your spouse, you have an extra option that isn’t available to anyone else—it’s called the “spousal transfer.” This exception allows you (the surviving spouse) to move the funds from your spouse’s retirement account into your own existing IRA.
Once the money is in your existing IRA, those funds will be treated like the rest of the money in your IRA. That means the inherited money will now be subject to the same rules for withdrawals, contribution limits and penalties. For example, if you’re under age 59 1/2 and decide to take the money out of the account, you’ll have to pay the early withdrawal penalty.
There’s no sugarcoating it—inheriting a retirement account can get a little tricky and confusing. Whether you are a spouse or not, you should definitely get in touch with a financial advisor and a tax professional who can help you walk through the pros and cons of all your options so that you can make the choice that makes sense for you.
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What if I Inherit a House?
Okay folks, you’ve got three options if you inherit a house: sell it, rent it out, or live in it.
Option 1: Sell It
Usually when someone inherits a house, it’s worth more than it was when the original owner bought it. If that’s the case, you automatically receive something called a step-up in basis. Basically, that just means you get to inherit the house without having to worry too much about capital gains taxes if you decide to sell the house.4
Here’s how it works: Let’s say your mom’s house was worth $175,000 at the time of her death. For tax purposes, the value of the home at the time she died becomes what you “paid” for it—that’s the stepped-up tax basis.
So, if you decide to put the house on the market right away and it sells for $175,000, you wouldn’t owe any capital gains taxes on it. But if you sold it a year later for $200,000, you would only pay capital gains taxes on the $25,000 difference between the selling price and the amount the home was worth when you inherited it ($175,000).
We know that’s a lot of information to take in! If you’re confused or overwhelmed, we recommend getting in touch with our RamseyTrusted pros. Our network of tax advisors and real estate agents can help reduce the stress of figuring out what to do with an inherited house.
Option 2: Rent It Out
Renting out the house could provide an extra source of income for you and your family and be a great way to build savings, pay off debt, or invest for retirement.
But renting out a house also comes with some challenges—it’s not what some people call “passive income.” The ongoing upkeep and maintenance, along with more complicated taxes, could end up being more trouble than it’s worth. You also have to decide whether to maintain the property yourself or hire a property manager to do it for you.
Discuss your options with a real estate pro who can guide you on what makes the most sense for your situation. Either way, don’t make the decision solely on emotion.
Option 3: Live in It
If you inherit a house that’s paid for and decide to live in it, you’ll have no mortgage payment. That means you can make some serious headway on your financial goals with that extra cash!
Keep in mind, though, that moving into an inherited house means you’ll be taking on the financial responsibilities that come with homeownership. When the air conditioner breaks in the middle of summer, it’s on you to fix it! Not to mention you’ll also be responsible for paying property taxes as the new owner. If you don’t already have a solid emergency fund, use any extra cash to save up 3–6 months of expenses so you can cover anything that comes along.
Something else to think about: If you live in the house for at least two years, you can then sell it and make up to $500,000 in profit from the sale ($250,000 if you’re single) without having to pay capital gains taxes.5
What About Estate Taxes, Inheritance Taxes and Other Taxes?
Alright, things definitely get complicated when it comes to taxes associated with an inheritance, but stick with us here.
The federal estate tax is a tax on the transfer of a person’s property after their death. The federal estate tax is only assessed on estates worth more than $13.61 million in 2024.6
As an inheritor, you’re not on the hook for estate taxes—your loved one’s estate is. And even if the estate is subject to estate taxes, you don’t have to worry about them because they’re collected before the inheritance is passed to you.
Inheritance taxes are a different story. Those taxes are imposed after you inherit your loved one’s assets. There is no federal inheritance tax, but six states currently have one (Pennsylvania, Iowa, Maryland, New Jersey, Kentucky and Nebraska). But even if your loved one lived in one of those six states, many beneficiaries—including husbands, wives, children and grandchildren—are exempt from paying any inheritance taxes.7
When it comes to taxes, it’s easy to get in over your head really fast. That’s why you should include a qualified tax professional as part of your dream team. If you’re looking for advice you can trust, connect with a tax pro in your area.
Make the Most of Your Inheritance
You’ll probably only get one inheritance. Use it wisely! Like we’ve talked about, this is definitely not a time to try to figure things out on your own. You need a team in place to help you make the most of your loved one’s legacy.
A good financial advisor will help you navigate the emotions that come with receiving an inheritance as well as help you understand all your options as you decide what to do with it. Our SmartVestor program is a free and easy way to get connected with investing professionals in your area.
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