A large inheritance can be both a boon and a burden—a boon because the money could come in handy someday, and a burden because it imposes a certain responsibility on the recipient to use it wisely and not squander it. Here's a step-by-step guide for anyone who has received or is anticipating to receive a large inheritance.
Key Takeaways
- If you inherit a large amount of money, take your time in deciding what to do with it.
- A high-yield savings account is a safe place to park the money while you make your decisions.
- Paying off high-interest debts such as credit card debt is one good use for an inheritance.
- Unless the inheritance is very large, you won't owe tax on money you inherit. However, other inherited assets—such as securities, retirement accounts, or real estate—can have tax implications.
1. Don't Assume You'll Get It
First of all, if you're expecting a large inheritance one day but have yet to receive the money, don't count on it. Things can change. Your relative or other benefactor might incur large medical or nursing home bills at the end of their life. They may decide to leave it all to charity. They may be swindled by a con artist.
The average inheritance today is about $46,200, according to the Federal Reserve—an amount that many families might find useful but not life-changing.1 Another study from the Penn Wharton Budget Model puts the average inheritance across all ages and income levels at $12,353, with inheritance size strongly correlated with income. In other words, if you come from a family that doesn't make much, you're not likely to receive much, if any.
2. Take It Slowly
If you do receive a substantial inheritance, don't feel that you have to rush into any decisions. Coping with grief isn't easy and adding money to the mix can only complicate matters.
What you should do first will depend on what form (or forms) your inheritance takes. For example, if you inherit cash, you might want to park it someplace safe for a while. A federally insured high-yield savings account would be a good choice. Such accounts are insured for up to $250,000 per depositor, per financial institution. You can arrange for more coverage by setting up several different types of accounts. For example, if you open both a single account and a joint account, you’ll be covered for a total of $750,000.23 If you inherit more money than one financial institution can insure, you can spread it among several.
If you receive other kinds of assets, such as securities, retirement accounts, real estate, or an interest in a business, you'll need to work with the executor of the estate to get everything properly transferred into your name.
Note, too, that even if you’re in a hurry, getting what's due you can take time. Probate—the legal process through which an estate's assets are distributed under the guidance of a court—can take anywhere from weeks to years, depending on the complexity of the estate and whether anyone challenges the will. On average, it takes about nine months.
3. Seek Advice If You Need It
Depending on the amount of money involved and your own comfort level in making financial decisions, you might want to pay for some professional guidance. A financial planner can help you decide how best to handle the money in the short term as well as devise a long-term financial plan that takes all of your assets and obligations into consideration.
A good choice here would be a fee-only financial planner, the kind who receives no commissions for steering you toward particular investments but charges you only for their services. That arrangement is intended to eliminate any conflicts of interest on the planner's part.
A planner can also help you figure out how to deal with any non-cash assets you've inherited. If you inherited securities, for example, you'll need to decide whether they're a good fit for your portfolio or whether you should sell them.
4. Pay Off Debts
One worthy use for inherited money is paying down your debts, particularly high-interest debt such as credit cards. Lower-interest debt, such as student loans or a home mortgage, is more of a judgment call. Perhaps you feel strongly that you need to have no debt at all. Or perhaps you'd rather invest the money for a higher return than your low-interest debt is costing you.
5. Invest the Rest
After you've paid off whatever amount of debt you feel comfortable with, you can decide what to do with the rest of the money. Again, don’t rush it.
With the help of a financial planner, or on your own if you'd rather, you will probably want to begin to invest the money. Inherited money is no different from money you've earned for yourself in terms of investing principles. Unless you want to keep the inheritance separate for sentimental or other reasons, consider it in the context of your entire portfolio. Aim to be properly diversified among a variety of investments with different levels of risk. And rather than invest it all at once, consider doing it over a period of time, using a strategy like dollar-cost averaging or value averaging.
Your inheritance can also provide an opportunity to boost your contributions to your retirement accounts or 529 college saving plan accounts. Strictly speaking, because inherited money isn't earned income or other taxable compensation, you can't put it in a retirement account. However, you can use it to free up some of your earned income for that purpose.4
6. Understand the Tax Implications
Unless you inherit a great deal of money, you probably won't have to worry about federal estate taxes. In 2025, for example, those kick in only on estates worth $13.99 million or more. (In 2024, it was $13.61 million.)5
Fast Fact
Some states also have inheritance taxes, but you don't really have to worry about those either because the estate has to pay them, not you.6
However, certain types of assets do have tax implications. For example, if you inherit securities, make a note of what the securities were worth on the day that the person you inherited them from died. That's because you’ll need to know your cost basis if you ever decide to sell them.7
Inherited individual retirement accounts (IRAs) can be a bit complicated. The tax rules vary depending on whether the decedent was your spouse or someone else, and also on the type of IRA: traditional or Roth. You won't owe tax on the amount you inherit, but you will be taxed when you take distributions from a traditional IRA just as the original owner would have been. In the case of Roth IRAs, your withdrawals are typically tax-free, but you're generally required to deplete the account within five years.8
The IRS explains these rules in detail in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).9
Internal Revenue Service. "Publication 590-B (2022), Distributions From Individual Retirement Arrangements (IRAs)."
7. Splurge ... But Be Mindful
We’ll skip the finger-wagging if you want to spend some of your inheritance on yourself or your loved ones. It's your money now. But it's worth remembering that when it's gone, it's gone, whereas if you invest sensibly, you'll likely have it for years to come. You might even be able to pass it down to your own heirs someday.
What Is Considered a Large Inheritance?
Whether an inheritance is large, small, or somewhere in between is a subjective matter that depends on the person who receives it. According to the Federal Reserve, the average inheritance is about $46,200.1 The Penn Wharton Budget Model study found the average inheritance to be $12,353. As you might expect, wealthy families tend to pass on greater wealth.
Where Should I Deposit a Large Cash Inheritance?
A good place to deposit a large cash inheritance, at least for the short term, would be a high-yield savings account that is federally insured. It will be safe until you decide what to do with it.
What Happens If I Inherit a House?
If you inherit a house, you have basically three options: keep it and live in it (either full- or part-time), keep it and rent it out, or sell it. Note that if you sell the home, you could owe capital gains tax on the difference between what it was worth when the person died (your cost basis) and what it's worth when it sells.7 Another consideration is whether the home is fully paid off. If it still has a mortgage, you will now be responsible for making those payments. That's also true for local property taxes and insurance.
The Bottom Line
If you receive a large inheritance and use it wisely, it can make a positive difference in your life. But don't feel rushed into making any decisions. Seek professional advice if you need it.
Comments