An inheritance rarely arrives at a convenient time. It shows up in the middle of grief, paperwork, and phone calls. But somewhere in the middle of all that, a check, an account transfer, or a stack of legal documents lands in your name. Suddenly, you’re the one responsible for money you didn’t earn, didn’t plan for, and may have complicated feelings about.
The good news is no rule says you have to decide anything today. The short answer to “now what?” is this: keep the money somewhere safe, don’t do anything hasty, understand what you actually inherited and its tax treatment, and then build a plan around your own goals, not anyone else’s expectations. Let us help you break down how to do that.
Step 1: Do Nothing (On Purpose) for 90 to 180 Days
The single most common mistake people make with an inheritance is moving too fast. Whether it’s guilt, grief, excitement, or pressure from a well-meaning relative or advisor, rushing into a decision almost always costs more than it saves.
Before anything else:
- Move cash into a high-yield savings account or money market fund. It won’t earn much, but it won’t disappear either. This is a parking spot, not a destination.
- Don’t pay off debt, buy a house, quit a job, or invest in anything irreversible right away. None of those decisions get worse by waiting a few months. Many of them get better.
- Grieve before you strategize. An inheritance is often tied to the loss of someone you loved. Financial decisions made while grieving can be regretted.
This waiting period isn’t procrastination. It’s the space you need to think clearly instead of reactively.
Step 2: Understand Exactly What You Inherited
“Inherited money” isn’t one thing. What you actually receive determines what you owe, when you owe it, and how much flexibility you have. The most common categories:
Cash and Brokerage Accounts
If you inherited a taxable brokerage account or investment portfolio, you typically receive what’s called a step-up in cost basis. In plain terms, the asset’s cost basis resets to its value on the date of death, which can significantly reduce or eliminate capital gains tax if you sell. This is one of the most valuable, and most misunderstood, provisions in the tax code.
Inherited IRAs and 401(k)s
Retirement accounts operate under different rules, and those rules changed significantly under the SECURE Act. Most non-spouse beneficiaries are now required to withdraw the entire inherited account within 10 years, and depending on the original owner’s age and whether they had started Required Minimum Distributions (RMDs), you may also have to take annual withdrawals during those 10 years. If you get this wrong, it could result in IRS penalties or a much larger tax bill than necessary. This is an area where working with a fiduciary, who is legally responsible for acting in their clients’ best interests, and who understands the SECURE Act’s beneficiary rules, is essential.
House or Real Estate
Inherited real estate also generally receives a step-up in basis. Before you decide whether to sell, rent, or move in, factor in ongoing costs, capital gains exposure if the property has appreciated since inheritance, and whether the property fits your life.
A Business Interest
Inheriting part or all of a business introduces valuation questions, buy-sell agreements, and operational decisions that go well beyond typical financial planning. This almost always warrants a coordinated conversation among a financial advisor, a tax professional, and an estate attorney.
Step 3: Understand the Tax Picture Before You Spend or Invest
Most inheritances are not subject to federal income tax on the amount received. But how the assets behave after you inherit them —growth, income, withdrawals— is where taxes show up. A few things worth confirming with a professional before you act:
- Whether estate tax applies at the federal or state level (this is generally the estate’s responsibility, not yours, but it’s worth confirming).
- Whether you’re in a state with an inheritance tax, which is assessed on the beneficiary directly and works differently from an estate tax.
- The 10-year withdrawal rule for inherited retirement accounts and how it interacts with your own income and tax bracket.
- Whether selling inherited assets right away creates a capital gain you could avoid or reduce with better timing.
This is exactly where a tax-aware financial planner earns their keep. A withdrawal or sale that seems harmless can push you into a higher tax bracket or trigger a bill you didn’t see coming.
Step 4: Separate the Emotional Decision from the Financial One
It’s common to feel like spending inherited money is somehow wrong, or conversely, like you need to preserve every dollar exactly as the person who left it to you would have wanted. Neither instinct should drive the decision on its own.
The money is now yours, and it should be put to work according to your goals, family, and financial security, rather than guilt or obligation. That might mean paying down high-interest debt, funding an emergency reserve, investing for retirement, funding a child’s education, or spending some of it in a way that is meaningful to you. There’s no universally “correct” answer, only the one that fits your actual life.
H2 – Step 5: Build (or Update) a Plan Around the New Reality
Once the dust settles and you understand what you have, the real work starts: integrating this inheritance into a financial plan. That typically includes:
- Revisiting your overall financial plan, including retirement timeline, savings goals, and risk tolerance, now that your net worth has changed.
- Reassessing your investment allocation. Inherited portfolios often reflect someone else’s risk tolerance and goals, not yours. It’s common (and reasonable) to restructure the portfolio to fit your own situation.
- Updating your own estate plan, including beneficiary designations, a will or trust, and power of attorney documents, especially if this inheritance materially changed your net worth.
- Coordinating with a tax professional on the timing of withdrawals, sales, or Roth conversions that make sense given your new asset base.
When to Bring in a Fiduciary Advisor
You don’t need professional help to open a savings account. You almost certainly need it before you make permanent decisions about inherited IRAs, real estate, business interests, or a portfolio large enough to change your financial trajectory.
Look specifically for a fee-only fiduciarylike Armbruster Capital Management, an advisor who is legally required to act in your best interest and isn’t paid commissions to sell you a particular product. That distinction matters more here than almost anywhere else in financial planning, because inheritance decisions are often irreversible, and a conflicted recommendation can be costly and permanent.
Frequently Asked Questions
Do I have to pay taxes on inherited money?
Generally, no federal income tax is owed on the inheritance itself. Taxes typically apply later, on the growth, income, or withdrawals tied to the assets you inherited, such as required distributions from an inherited IRA or capital gains if you sell an appreciated asset without the benefit of a step-up in basis.
How long do I have to decide what to do with an inherited IRA?
Under current SECURE Act rules, most non-spouse beneficiaries must fully withdraw an inherited IRA within 10 years of the original owner’s death. Depending on the account type and the original owner’s age, annual withdrawals may also be required during that window. A spouse beneficiary typically has more flexible options, including the option to treat the IRA as their own.
Should I pay off debt with an inherited windfall?
It depends on the interest rate, your emergency savings, and your broader financial plan. High-interest debt is often a reasonable priority, but it shouldn’t be an automatic reflex before you’ve taken stock of your full financial picture.
What is a step-up in basis, and why does it matter?
A step-up in basis resets the cost basis of an inherited asset, such as stock or real estate, to its fair market value as of the date of the original owner’s death. This can significantly reduce or eliminate the capital gains tax you would owe if you sold the asset, compared to what the original owner would have paid.
What’s the biggest mistake people make after inheriting money?
Acting too quickly. Big purchases, rushed investment decisions, and hasty withdrawals from inherited retirement accounts are the most common and most expensive mistakes. Giving yourself time and getting fiduciary guidance before making decisions that can’t be revered can prevent many costly missteps.
Disclaimer
Views are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time. Past performance does not guarantee future results.