What to Do When You Inherit Money

Receiving an inheritance is one of those life experiences that no one teaches you how to handle. It arrives during grief, often unexpectedly, and it carries emotional weight that has nothing to do with the dollar amount. Whether you’ve inherited $5,000 or $500,000, the feelings are complicated. Gratitude, guilt, sadness, confusion, maybe a little relief mixed with a lot of uncertainty.

Here is the most important piece of advice in this entire guide: you do not need to do anything with this money right now. There is no deadline. There is no optimal 48-hour window. The single best financial decision you can make with an inheritance is to pause, breathe, and give yourself time before making any major moves.

The Six-Month Rule

Financial planners widely recommend waiting at least six months before making any significant decisions with inherited money. Some recommend waiting a full year. This isn’t because the money will somehow grow better if you ignore it. It’s because grief fundamentally changes how we make decisions.

Research from the field of behavioral economics consistently shows that people in emotional states, whether positive or negative, tend to make financial decisions they later regret. You might feel an urge to “do something productive” with the money right away. You might feel pressure from family members, friends, or even financial salespeople who seem to appear out of nowhere. Resist that pressure. The money is yours. It will wait for you.

During this waiting period, your only job is to put the money somewhere safe where it won’t lose value and you won’t be tempted to spend it impulsively. We’ll cover exactly where to park it later in this guide.

Understanding the Tax Implications

One of the first questions most people have about an inheritance is: “Do I owe taxes on this?” The answer depends on what you inherited, where you live, and how the assets are structured. Here’s what you need to know.

Inheritance tax vs. estate tax

These are two different things, and the distinction matters.

Estate tax is paid by the estate itself before assets are distributed to heirs. The federal estate tax exemption for 2026 is $13.61 million per individual (the Tax Cuts and Jobs Act exemption was extended, though this number is subject to change with future legislation). This means that unless the total estate is worth more than $13.61 million, no federal estate tax is owed. According to the IRS, fewer than 0.1% of estates owe any federal estate tax. This is almost certainly not your problem.

Inheritance tax is a state-level tax paid by the person receiving the inheritance. As of 2026, only six states impose an inheritance tax: Iowa (being phased out), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you live in one of these states, the tax rate and exemptions vary based on your relationship to the deceased. Surviving spouses are exempt in all six states. Direct descendants (children, grandchildren) are exempt or pay very low rates in most of them.

The bottom line for most people: if the estate was under $13.61 million and you don’t live in one of those six states, you likely owe zero tax on your inheritance. Cash inheritances, in particular, are generally not considered taxable income.

Inherited property and the stepped-up basis

If you inherit a house, stocks, or other assets that have appreciated in value, you get what’s called a “stepped-up basis.” This is one of the most valuable tax benefits in the entire tax code, and many people don’t know about it.

Here’s how it works. Say your parent bought their home in 1990 for $120,000, and it’s worth $450,000 at the time of their death. If they had sold the home while alive, they would have owed capital gains tax on the $330,000 gain. But because you inherited the home, your cost basis “steps up” to the fair market value at the date of death: $450,000. If you sell it for $450,000, your capital gain is $0. If you sell it for $470,000, you only owe capital gains tax on the $20,000 difference.

This applies to stocks, real estate, and most other appreciated assets. It’s a significant benefit worth understanding before you make any decisions about selling inherited property.

Inherited retirement accounts (IRAs and 401(k)s)

This is where things get more complex. The rules for inherited retirement accounts changed significantly with the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, and they depend on your relationship to the deceased.

If you are the surviving spouse: You have the most flexibility. You can roll the inherited IRA into your own IRA, treat it as your own, and follow the standard withdrawal rules based on your age. This is usually the best option for most surviving spouses, but there are situations where keeping it as an inherited IRA makes more sense (for example, if you’re under 59 and a half and need access to the funds without penalty).

If you are a non-spouse beneficiary (adult child, sibling, friend): Under the current rules, most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. This is the “10-year rule” established by the SECURE Act. You do not have to take equal distributions each year; you can take it all in year 10 if you prefer. But the entire account must be emptied by the end of that 10th year.

Starting in 2025, the IRS finalized rules requiring that if the original account owner had already begun taking required minimum distributions (RMDs), the beneficiary must also take annual RMDs during the 10-year window, with the remaining balance withdrawn by the end of year 10.

Why this matters for taxes: Withdrawals from inherited traditional IRAs are taxed as ordinary income. If you withdraw a large amount in a single year, it could push you into a higher tax bracket. Spreading withdrawals across multiple years can save you thousands in taxes. For example, withdrawing $300,000 all at once could result in a federal tax bill of roughly $70,000 to $80,000 depending on your other income. Spreading that same $300,000 over 10 years ($30,000 per year) could result in a significantly lower total tax bill, potentially saving you $15,000 to $25,000 or more.

Inherited Roth IRAs follow the same 10-year rule for non-spouse beneficiaries, but the withdrawals are generally tax-free since the contributions were made with after-tax dollars.

When in doubt, consult a tax professional

The rules around inherited assets are genuinely complex, and the penalties for mistakes can be steep. If you’ve inherited a retirement account, investment portfolio, or property with significant value, spending $300 to $500 on a consultation with a CPA or tax attorney is one of the best investments you can make.

Common Inheritance Mistakes to Avoid

Financial advisors see the same patterns repeat after every inheritance. Knowing what these patterns look like can help you avoid them.

Spending it too quickly

This is the most common mistake by far. Studies on financial windfalls consistently show that people who receive lump sums tend to spend them faster than they expect. A 2018 study from the National Bureau of Economic Research found that approximately one-third of inheritance recipients had negative savings (meaning they spent more than they earned) within two years of receiving their inheritance. The money feels like “extra” money, and it flows through our fingers faster than earned income.

Making emotional purchases

Buying a new car, remodeling the house, taking a dream vacation. These impulses are understandable, and they’re not wrong in themselves. But making them in the first weeks or months after a loss, when your judgment is clouded by grief, often leads to regret. The vacation will still be available in six months. The car dealership will still be there. Give yourself time.

Lending money to family or friends

When people learn that you’ve received an inheritance, requests for loans or gifts often follow. These requests put you in an incredibly difficult position, especially during grief. Set a personal boundary early: you are not making any financial decisions, including lending, for at least six months. This buys you time and removes you from the pressure of the moment.

Quitting your job

An inheritance, especially a large one, can make early retirement or a career change feel suddenly possible. And maybe it is. But this is not a decision to make while grieving. Keep your income flowing while you figure out the long-term picture.

Ignoring the tax implications

As we covered above, some inherited assets come with real tax consequences, especially retirement accounts. Failing to plan for these taxes can result in a surprise bill of tens of thousands of dollars. Don’t let that happen to you.

Where to Park the Money While You Think

During your waiting period, the goal is simple: keep the money safe, keep it liquid (easily accessible), and earn a reasonable return without taking any risk. Here are your best options.

High-yield savings account

As of early 2026, high-yield savings accounts at FDIC-insured online banks are paying approximately 4.0% to 4.5% APY (rates fluctuate; check current offerings). This means $100,000 parked in a high-yield savings account earns roughly $4,000 to $4,500 per year while you take your time deciding what to do. The money is FDIC-insured up to $250,000 per depositor per bank, and you can access it anytime.

If your inheritance exceeds $250,000, consider spreading it across two or more FDIC-insured banks to keep the full amount protected.

Treasury bills or a Treasury money market fund

U.S. Treasury securities are backed by the full faith and credit of the federal government. Treasury bills (short-term government debt maturing in 4 to 52 weeks) offer competitive yields and are exempt from state and local income taxes. You can buy them directly at TreasuryDirect.gov or through a brokerage account.

Certificates of deposit (CDs)

If you’re confident you won’t need the money for a specific period (say, 6 or 12 months), a CD can lock in a guaranteed rate. The tradeoff is reduced flexibility; early withdrawal typically incurs a penalty.

What to avoid during the waiting period

Do not put the money into stocks, cryptocurrency, real estate, or any investment that can lose value in the short term. Do not put it into a whole life insurance policy, annuity, or any complex financial product that a salesperson recommends. These may or may not be good long-term options, but they are not appropriate for money you’re still figuring out.

Building a Plan: When You’re Ready

After your waiting period, when the acute grief has softened enough that you can think clearly about the future, it’s time to build a plan. There’s no single right way to use an inheritance, but here’s a framework that most financial planners would endorse.

Step 1: Pay off high-interest debt

If you’re carrying credit card debt, personal loans, or any debt with an interest rate above 7% to 8%, paying it off is almost always the highest-return use of inherited money. Eliminating a credit card balance at 22% APR is equivalent to earning a guaranteed, tax-free 22% return on your money. Nothing in the stock market can promise that.

Step 2: Build or replenish your emergency fund

If you don’t have 3 to 6 months of living expenses set aside in a liquid savings account, use a portion of the inheritance to build that cushion. An emergency fund isn’t exciting, but it’s the foundation of every sound financial plan.

Step 3: Fund retirement accounts

If you have room to contribute to tax-advantaged retirement accounts (401(k), IRA, Roth IRA), consider using the inheritance to maximize those contributions. You can’t put the inheritance directly into a retirement account (contributions must come from earned income), but you can use the inheritance to cover living expenses while diverting more of your paycheck into retirement savings.

Step 4: Save for specific goals

A down payment on a home. Your children’s college education. A career transition. An inheritance can accelerate goals that might otherwise take years to reach.

Step 5: Invest the remainder for long-term growth

Whatever is left after the steps above can be invested for the long term. A diversified, low-cost index fund portfolio is the approach most financial experts recommend for money you won’t need for 5 or more years. The specific allocation depends on your age, risk tolerance, and goals.

When to Hire a Financial Advisor

Not every inheritance requires professional help, but many do. Here are some guidelines.

You probably don’t need an advisor if:

• The inheritance is under $25,000
• Your financial situation is straightforward
• You have no significant debt and already have a basic investment plan

You should strongly consider an advisor if:

• The inheritance is over $100,000
• You’ve inherited complex assets (business interests, real estate, retirement accounts)
• You live in a state with an inheritance tax
• You have your own complex financial situation (high income, business ownership, existing estate plan)
• You feel overwhelmed and want someone to help you think clearly

What to look for: Seek a fee-only fiduciary financial advisor. “Fee-only” means they are paid directly by you (typically a flat fee or hourly rate), not through commissions on products they sell you. “Fiduciary” means they are legally required to act in your best interest. You can find fee-only fiduciary advisors through the National Association of Personal Financial Advisors (NAPFA) at napfa.org or the Garrett Planning Network at garrettplanningnetwork.com.

A one-time financial plan typically costs $1,000 to $3,000. For a six-figure inheritance, this is money well spent. An advisor can help you understand the tax implications, create a distribution strategy for inherited retirement accounts, and build an investment plan aligned with your goals.

Honoring the Person You Lost

We want to close with something that gets lost in guides like this. An inheritance is not just money. It represents someone’s life of work, saving, and planning. For many people, figuring out how to use an inheritance responsibly feels like a way of honoring the person who left it to them.

If that resonates with you, give yourself permission to hold that feeling. It’s okay to want to use the money well. It’s okay to feel the weight of that responsibility. And it’s okay to take your time figuring out what “well” means for your specific life and circumstances.

There is no wrong timeline for this. There is no single right answer. There is only your life, your needs, your goals, and the quiet knowledge that someone cared enough to leave you something. When you’re ready, you’ll figure out the rest.

This guide is for informational purposes only and does not constitute financial, legal, or tax advice. Tax laws and regulations change frequently. Please consult a licensed financial advisor, tax professional, and/or estate attorney for guidance specific to your circumstances.