Where to Put Inherited Money: A Pragmatic Guide to

When dealing with an inheritance, it's essential to take a step back, assess your situation, and create a plan. According to empirical research synthesized by Groundwork, an inheritance can rapidly change your finances, but it often arrives alongside grief. Even if the money provides greater financial security, deciding what to do with it can feel more complicated than managing another type of windfall.

You don't need to make major financial decisions right away. Giving yourself time can help you understand what you've inherited, consider your priorities, and decide what you want the money to do for you. Where you ultimately put an inheritance will depend on your existing finances, when you may need the money, and the type of assets you've inherited. The first step is making sure the money is protected while you figure out what comes next.

From a safe haven to a long-term plan

"Cash and savings" is the most popular asset that older parents say makes up their estate, a Morning Consult survey commissioned by Groundwork found, above real estate, stocks, and life insurance. You can take your time deciding what to ultimately do with the money, but it's essential to keep it safe in the meantime. If your inheritance arrives as cash, consider temporarily parking it somewhere liquid while you make a long-term plan.

Options include a high-yield savings account, a money market account, or a short-term CD. These accounts can provide a safe place for your money while you decide what to do next. Savings and money market accounts also keep your money easily accessible. With a short-term CD, you may pay an early withdrawal penalty if you take the money out before the term ends, so consider when you might need the funds.

If you've inherited a particularly large amount of money, pay attention to deposit insurance limits. Deposits are generally insured for up to $250,000 per depositor, per insured institution, and per ownership category. If you've inherited more than $250,000, you may need to spread the money across multiple institutions or ownership categories to make sure the full amount is covered.

You may feel ready to put the money to work right away. In fact, according to a Groundwork survey, 70% of adult children say they feel prepared to manage an inheritance, including 40% who say they're very confident. But being prepared doesn't mean you need to act immediately.

When you first receive an inheritance, your priority can simply be protecting the money while you decide what comes next. Once it's somewhere safe, you can take a closer look at what you've inherited, your financial priorities, and any potential tax consequences.

Before investing, find out what you actually inherited

Tax rules surrounding inheritances can be confusing. The federal government generally doesn't tax beneficiaries simply for receiving inherited cash, though income generated by inherited assets may be taxable. Federal estate tax, when it applies, is generally paid by the estate rather than the beneficiary. Some states, including Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, also impose an inheritance tax, with what you owe often depending on your relationship to the person who died.

Understanding tax implications

According to the IRS, the tax implications of an inheritance depend on the type of asset you've inherited and your relationship to the deceased. If you've inherited cash, you won't have to pay taxes on the money itself, but you may have to pay taxes on any income generated by the assets, such as interest or dividends.

If you've inherited stocks or other investments, you may have to pay capital gains taxes when you sell them. The tax rate you'll pay depends on how long you've held the asset and your income tax bracket. If you've inherited real estate, you may have to pay property taxes and potentially capital gains taxes when you sell the property.

Considering your financial priorities

When deciding what to do with your inheritance, it's essential to consider your financial priorities. Do you need the money to cover expenses, pay off debt, or build savings? Or do you want to invest the money to grow your wealth over time?

According to our analysis on asset allocation strategies, a well-diversified investment portfolio can help you achieve your long-term financial goals. However, it's essential to consider your risk tolerance, time horizon, and financial goals before investing your inheritance.

Creating a plan for your inheritance

When creating a plan for your inheritance, it's essential to consider your existing finances, your financial priorities, and any potential tax consequences. You may want to consider consulting with a financial advisor or tax professional to help you handle the process.

According to our analysis on financial planning strategies, a comprehensive financial plan can help you achieve your long-term financial goals. This may include creating a budget, paying off debt, building savings, and investing for the future.