What Should You Do With an Inheritance You Don't Need?
If you've received an inheritance you don't need for your day-to-day expenses, resist the urge to make immediate decisions. Before investing, spending, or gifting the money, take time to understand what you've inherited, review any tax implications, and consider how it fits into your retirement, estate, and overall financial plan. An inheritance isn't just an investment decision—it's a decision that can affect every part of your financial life.
An Inheritance Can Change More Than Your Investment Portfolio
Receiving an inheritance is often bittersweet. While a financial gift can create new opportunities, it often arrives during a time of loss, making it easy to let emotions influence important financial decisions.
One of the first questions I hear is:
"I don't really need this money. What should I do with it?"
The answer depends on far more than where you invest it.
It's Okay to Honor Your Loved One
While I generally encourage clients not to rush into major financial decisions, that doesn't mean every dollar has to be treated as an investment.
Over the years, I've seen families set aside a small portion of an inheritance to honor the person who passed away. Sometimes that means taking a family vacation with brothers, sisters, children, and grandchildren. Other families make a charitable donation to a cause that was important to their loved one or create a lasting family tradition.
These moments aren't about spending an inheritance. They're about honoring the person who made the gift possible.
In many cases, those shared memories become just as meaningful as the financial gift itself.
An inheritance can affect your taxes, retirement income, estate plan, insurance needs, and the legacy you hope to leave. Once you've taken time to honor your loved one and process the emotions that come with a loss, it's time to think carefully about how this gift fits into your long-term financial life.
Start by Understanding What You Inherited
Not every inheritance is the same.
Before making any decisions, take inventory of what you've inherited. Whether it's cash, investment accounts, retirement assets, real estate, or another type of property, each comes with its own rules and potential tax considerations.
For example, inherited brokerage accounts often receive a step-up in cost basis, while inherited retirement accounts may have required distribution rules. Understanding those differences before making changes can help you avoid costly mistakes.
Not sure what you've inherited?
Gather account statements, beneficiary paperwork, and any estate documents before making major decisions. Having a complete picture will help you make better financial decisions and avoid unnecessary mistakes.
Make the Inheritance Part of Your Financial Plan
One of the biggest mistakes I see is treating an inheritance like it's outside the rest of your financial life.
Instead, ask questions like:
Does this change when I can retire?
Should I adjust my investment strategy?
Does it affect my estate plan?
Should I update my beneficiaries?
Are there tax opportunities I should consider?
The answers are often connected. A decision about an inheritance can influence your retirement timeline, tax strategy, estate plan, and investment portfolio all at the same time.
Maybe the inheritance allows you to retire a little earlier. Maybe it gives you the confidence to delay Social Security or reduces the amount you need to withdraw from your retirement accounts each year. Those decisions can have a much bigger impact on your long-term financial security than simply trying to earn a higher return on the money.
Avoid These Common Mistakes
Over the years, I've found that the biggest mistakes usually happen when people feel like they need to make a decision immediately. Here are a few to avoid.
Investing the entire inheritance immediately
Ignoring tax rules for inherited retirement accounts
Making large gifts before evaluating your own financial needs
Selling inherited assets without understanding the tax consequences
Forgetting to update your own estate plan
Taking a few months to develop a thoughtful strategy is rarely a mistake. Rushing almost always is.
A Simple Five-Step Framework
When clients ask how to approach an inheritance, I recommend working through these five steps:
Understand exactly what you inherited.
Review any tax implications.
Consider how the inheritance fits into your retirement plan.
Update your estate and beneficiary documents if needed.
Invest the money only after it supports your broader financial goals.
This approach helps ensure that the inheritance strengthens your overall financial picture rather than becoming an isolated decision.
Frequently Asked Questions
Should I invest an inheritance all at once?
Not necessarily. Many people benefit from taking time to understand the tax implications and how the inheritance fits into their overall financial plan before investing.
Is an inheritance taxable?
Most inheritances aren't subject to federal income tax. However, inherited retirement accounts, investment gains, and certain state laws can create tax consequences.
Should I pay off my mortgage with an inheritance?
It depends. Your interest rate, retirement income needs, and overall financial goals should all be considered before making that decision.
Should I give some of the money to my children?
Many people want to help family members, but it's generally wise to make sure your own retirement and healthcare needs are secure first.
Not sure what you've inherited?
Before making any decisions, gather account statements, beneficiary paperwork, and any estate documents. Having a complete picture will help you avoid costly mistakes and make more informed decisions.
Final Thoughts
An inheritance has the potential to improve your financial future, but only if it's handled thoughtfully.
Rather than asking, "Where should I invest this money?" consider asking a better question:
"How can this inheritance strengthen the financial life I've already built?"
One of the things I enjoy most about working with families is helping them make thoughtful decisions during life's biggest moments. An inheritance is one of those moments. When you slow down, think beyond the investments, and consider how this gift fits into the rest of your financial life, you're far more likely to honor both the person who left it to you and the future you're building for yourself and your family.