Inherited $1 Million in the Great Wealth Transfer? Here's What to Do First
Before you splurge, learn where to park your cash, the rules for inherited IRAs and 401(k)s and how to avoid costly tax mistakes on a $1 million windfall.
You just got a $1 million inheritance in the Great Wealth Transfer and don't know what to do? You're not alone. Millions of people are poised to receive a piece of the more than $124 trillion in generational wealth expected to be transferred over the next decades.
While an inheritance of that size can be life-changing, it can also cause undue strife. With a windfall come taxes, estate administration fees and investment decisions.
"Most people, when they receive an inheritance, want to spend it," said Tim McGrath, a managing partner at Riverpoint Wealth Management. "If they don't make the right decisions, it could hurt them over the long haul rather than help them."
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Let's say you buy a big house that you can't afford or make risky investments — you could end up in debt or homeless because of the inheritance.
The good news is there are easy ways to protect your newfound wealth. From where to initially park your cash to how to grow it, here's how.
First, figure out what the inheritance means to you
Receiving $1 million can be a big deal. It could mean you're debt-free, your kids' education is paid for, or your retirement is in the bag, or it mightmean something completely different. Either way, McGrath says the first thing you should do is determine what it means for your goals and finances.
"For most people, $1 million is life-changing," says McGrath.
While you consider how to use your newfound wealth, don't keep the money under a mattress. Put it in a high-yield savings account or, if you already have one, an investment account.
"In today's environment, you can still find money markets or high-yield savings accounts paying 3% to 4%, so parking it there to make a little interest while you determine how to proceed is a simple way to get started," says Kassi Hyde, a financial adviser with Apollon Wealth Management. "If you know you don't need or want to touch the money and want it to grow for future needs, then definitely go ahead and invest. Just make sure to consider your time horizon when determining how risky you want to be."
If you don't have a financial adviser, now is the time to find one. Our How to Find a Financial Adviser guide will help you select one that matches your personality and budget.
Pay down high-interest debt
Even if you know how you want to use the inheritance, financial advisers say to pay off any high-interest debt first. That could include credit cards, personal loans and retail cards that charge you double-digit interest. The idea is to get yourself into a cash-flow positive position first, says McGrath.
Put the money to work while you wait to use it
Maybe you plan to buy a new house in a couple of years, pay for your kids' college in the future or save it for retirement. Whatever the goal, it's important to put your inheritance to work while you wait. That's where an investment plan comes into play. The type of inheritance dictates how you can invest it.
What You Inherited |
Your Options |
How to Invest It |
|---|---|---|
Traditional IRA or 401k |
1. Make withdrawals under the 10-year rule. (This rule does not apply to spouses, minor children and the chronically ill.) 2. Move funds into an Inherited IRA account. 3. Take a lump-sum cash payout. |
1. Reinvest in the markets. 2. Put cash in high-yield savings to cover daily living while maxing out your own 401(k). |
Roth IRA or Roth 401k |
1. Let the money grow tax-free for up to 10 years. 2. Take tax-free withdrawals in that window. 3. Empty the account at year 10. |
1. Keep the money inside the Roth account. 2. Move funds into taxable index funds, ETFs or other investments. |
Cash, stocks or real estate |
1. Move cash into high-interest-bearing accounts. 2. Sell the inherited stocks or property. 3. Retain the property or investments. |
1. Put the cash toward buying a home, funding a 529 plan or paying off high-interest debt. 2. Build a diversified investment portfolio. |
Develop a tax strategy
You need to be mindful of the tax portion of your inheritance, but how much is taxed depends on the asset. The lifetime federal estate tax exemption — $15 million for individuals and $30 million for couples in 2026 — pretty much guarantees most recipients won't owe federal estate taxes on their inheritance.
Depending on where the person who left you an inheritance lived, you might face state estate taxes. State tax exemptions are typically lower than the federal exemption. For example, Massachusetts exempts up to $2 million.
If the asset generates capital gains after it's passed on, you'll owe taxes. "If you inherit an investment worth $500 and the value grows to $600 and you sell it, you have $100 in gains you will have to pay taxes on," said Hyde. The caveat to that capital gains rule is the "step-up in basis," which resets an asset's original value to its market value on the date of the original owner's death.
You'll also owe taxes (as ordinary income, potentially bumping you up to a higher tax bracket) if you inherited a traditional IRA or 401(k) and you aren't a spouse.
You might wish to consult a professional tax expert if your inheritance is complex or you don't understand your options.
Stick to the plan
A $1 million inheritance offers rare financial freedom, but only if you manage it wisely. By tackling debt first, planning for taxes and putting the rest to work, you can turn a one-time inheritance into generational wealth. Once you create a plan for that money, stick to it, and don't be afraid to ask an expert for guidance along the way.
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