What To Do With An Inheritance

This is a highly personal question, and thus, the answer is not black or white. So let’s first consider the motive rather than the method. Your motive should be to improve your financial condition. With this in mind, we ask, “what is the best way to improve my financial condition?”

Here are several ideas or methods that may help answer this for you. (Note that the following ideas follow the assumption that you are receiving a cash lump sum vs. an inherited IRA* or other assets that might need a different strategy.

  1. - Establish a stable emergency fund. Typically we as Americans are lacking in this area of finance. Many people may not have even a few months of planned spending covered if they had an emergency. Six to nine months of expenditure coverage is a good place to start.
  2. - Pay off/down debt. Any high interest credit cards, personal loans or medical debt still hanging over your head? Get rid of it. One could even argue that paying off a car loan is also a good idea in getting rid of the monthly debt load.
  3. - Have a high-deductible medical insurance plan? Consider max funding your HSA for the year and maybe the next. Why? Getting a tax deduction today for those contributions to the HSA and then being able to use the funds for qualifying medical expenses during your lifetime makes a lot of sense for many. Chances are you’ll use the funds in your account during your lifetime.
  4. - If still employed, consider max funding tax-favorable retirement accounts like ROTH IRAs and ROTH 401ks. You might defer more income into such plans and use funds from the inheritance to buffer the lost income, since you’ve most likely increased your retirement plan contributions.
  5. - Joint tax-managed investment account. This is basically an account that either feeds future retirement accounts or supports your future goals for financial independence.
  6. - Fund education for children. Funnel the money into college savings accounts for your kids or grandkids. Ideally this strategy would follow if you are already on track to fund your own future financial goals.
  7. - Other options exist like putting a down payment on some property, such as a home or business. Making some needed repairs to said home or business. Doing some home improvements or even just spending some of it on leisure or other “toys.”

The bottom line is that we want to have good motives and clear goals before simply committing funds to anything that excites us and in doing so, causes us to lose focus and have buyer’s remorse down the road. Anyone can spend money or save money, but having a good plan takes time and thought.

headshot of Bradley

Bradley Ruh Owner, Financial Adviser

* When considering rolling over the proceeds from your retirement plan to another tax-qualified vehicle, note that you have options, including leav- ing the funds in your existing plan, or rolling it over to a new employer’s plan. Depending on the option you select, there may be fees, expenses, and taxes upon withdrawal. Please consult a tax advisor before withdrawing funds.

This material is for general informational purposes only and was produced by Action Financial Strategies, LLC.

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