Where to Put Inherited Money: What to Do After You Receive a Lump Sum

An inheritance can rapidly change your finances, but it often arrives alongside grief. Even if the money provides greater financial security, deciding what to do with it can feel more complicated than managing another type of windfall.

You don't need to make major financial decisions right away. Giving yourself time can help you understand what you've inherited, consider your priorities and decide what you want the money to do for you.

Where you ultimately put an inheritance will depend on your existing finances, when you may need the money and the type of assets you've inherited. The first step is making sure the money is protected while you figure out what comes next.

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Start by putting the money somewhere safe

"Cash and savings" is the most popular asset that older parents say makes up their estate, a Morning Consult survey commissioned by Kiplinger found, above real estate, stocks and life insurance. You can take your time deciding what to ultimately do with the money, but it's important to keep it safe in the meantime. If your inheritance arrives as cash, consider temporarily parking it somewhere liquid while you make a long-term plan.

Options include a high-yield savings account, a money market account or a short-term CD. These accounts can provide a safe place for your money while you decide what to do next. Savings and money market accounts also keep your money easily accessible. With a short-term CD, you may pay an early withdrawal penalty if you take the money out before the term ends, so consider when you might need the funds.

If you've inherited a particularly large amount of money, pay attention to deposit insurance limits. Deposits are generally insured for up to $250,000 per depositor, per insured institution and per ownership category. If you've inherited more than $250,000, you may need to spread the money across multiple institutions or ownership categories to make sure the full amount is covered.

You may feel ready to put the money to work right away. In fact, our survey found that 70% of adult children say they feel prepared to manage an inheritance, including 40% who say they're very confident. But being prepared doesn't mean you need to act immediately.

When you first receive an inheritance, your priority can simply be protecting the money while you decide what comes next. Once it's somewhere safe, you can take a closer look at what you've inherited, your financial priorities and any potential tax consequences.

Before investing, find out what you actually inherited

Tax rules surrounding inheritances can be confusing. The federal government generally doesn't tax beneficiaries simply for receiving inherited cash, though income generated by inherited assets may be taxable.

Federal estate tax, when it applies, is generally paid by the estate rather than the beneficiary. Some states, including Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, also impose an inheritance tax, with what you owe often depending on your relationship to the person who died.

Inherited IRAs, brokerage accounts, real estate and other assets can each come with different tax rules. For example, withdrawals from an inherited traditional IRA may be subject to income tax and distribution requirements.

It's important to understand what you've inherited before making any major decisions, so don't automatically cash out investments or retirement accounts before learning about the potential tax consequences.

The confusion around inheritance taxes is reflected in Morning Consult and Kiplinger's survey, which found that 34% of adult children expect to owe taxes on their inheritance, compared with just 20% of parents who expect their children to owe taxes. If you're unsure about the tax rules surrounding inheritances, consider consulting an estate attorney or tax professional before making any moves that could have tax consequences.

Decide what the inheritance could do for your financial life

Instead of focusing on where you can earn the highest return, consider how the inheritance fits into your overall financial picture and what you want the money to help you accomplish. That can help you decide how to manage your inheritance.

Your priorities might include:

• Pay off high-interest debt
• Build or replenish an emergency fund
• Catch up on retirement savings
• Save for a near-term goal
• Invest for long-term growth
• Set aside a small portion for something meaningful or enjoyable

An inheritance can potentially help you achieve any of these goals, but your priorities will shape what you do with your inheritance.

Match where you put the money to when you'll need it

Once you've decided what you want the inheritance to help you accomplish, think about when you'll need the money. Money you'll need soon generally belongs somewhere stable and accessible, while money you won't need for many years may have more opportunity to grow through investing.

Here's how your options might change depending on your timeline:

• If you'll need the money within the next year or two: Prioritize safety and easy access over growth. A high-yield savings account or money market account can work well for money earmarked for a home purchase, major expense or other near-term goal. A short-term CD may also be an option if you're confident you won't need the money before it matures.
• If your goal is a few years away: You have more flexibility, but you may not want to expose all of the money to market swings. Depending on your timeline and comfort with risk, you could keep some of the inheritance in savings or CDs while investing a portion for potential growth.
• If you're investing for the long term: Money you don't expect to need for many years may be better positioned for long-term growth. A diversified portfolio of stocks, bonds and other investments can offer greater growth potential, although you'll need to be comfortable with market fluctuations along the way.

Whatever approach you choose, consider how the inheritance fits into your broader financial plan. A significant windfall may give you opportunities to rethink goals that once seemed years away.

If you're unsure how to balance those priorities, a financial professional can help you determine how an inheritance fits into your short- and long-term goals.

Use the tool below to connect with a vetted financial professional who can help:

Consider whether this changes your bigger financial plan

An inheritance can reshape your financial plans in ways you may not have anticipated. It could allow you to retire earlier, pay off your mortgage, help your children or grandchildren, buy a home or give more to causes you care about. Used thoughtfully, that final gift from a loved one can provide greater financial security and flexibility for years to come.

If the inheritance significantly changes your finances, consider talking with a financial planner and tax professional before making major decisions. They can help you understand how the money fits into your existing goals, identify potential tax considerations and develop a plan for using or investing it.

This may also be a good time to review your own estate plan and beneficiary designations. If your financial situation has changed, updating your plans can help ensure they still reflect your wishes and make things easier for your loved ones in the future.

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