You Inherited Money. What Should You Do First?

Receiving an inheritance can change your financial life. It can also leave you unsure what to do next.

You may inherit cash, stocks, a brokerage account, a trust, or an inherited IRA. Sometimes several arrive at once. My first advice is usually the same: don't rush.

Before deciding how to invest the money, understand exactly what you received and what you want it to accomplish.

Understand What You Inherited

Not all inherited assets should be treated the same way.

A taxable brokerage account and an inherited IRA, for example, may look similar on a statement but operate very differently. An inherited IRA can have specific distribution requirements depending on factors such as your relationship to the original owner and when the owner died.

Inherited stocks have their own considerations. Under current federal tax rules, the cost basis of inherited property is generally its fair market value at the owner's date of death, although exceptions and special rules can apply.

Understanding those differences can help you decide how to use one account versus another rather than simply treating everything you inherited as one pool of money.

Don’t Rush, but Don’t Do Nothing Forever

There is nothing wrong with initially keeping inherited cash somewhere safe and liquid while you make a plan.

The problem is when a temporary pause turns into months or a year of doing nothing.

I have seen people inherit substantial amounts of money and leave it sitting in cash simply because they weren't sure what to do. Taking time to think is sensible. Leaving money uninvested indefinitely without a reason is still an investment decision, whether you intended to make one or not.

It’s Okay to Sell a Stock Your Parents Loved

This can be surprisingly difficult.

Someone may inherit a stock that a parent owned for 20 or 30 years. Sometimes the parent worked for the company and originally received the shares as part of their compensation.

Selling that stock can feel like selling part of the parent's history.

There is nothing wrong with recognizing that emotional connection. But the investment still needs to make sense for your financial life.

Your parents may have bought the stock at a different age, for a different reason, with different assets, income needs and goals.

You don't have to invest inherited money the way your parents did. Their financial circumstances were different from yours.

Decide What the Money Needs to Do for You

Before investing an inheritance, think about what you may need over the next few years.

Perhaps part of the money should remain available for a home purchase, education, retirement spending or another near-term need. That money may need to be invested very differently from capital you won't need for 10 or 20 years.

For someone whose retirement and lifestyle needs are already well covered, inherited money may be able to pursue longer-term growth. Someone who needs the inheritance to support current living expenses may need an entirely different approach.

Neither is inherently right or wrong.

Then Put the Money to Work

Once you understand what you inherited, any tax or distribution considerations, your near-term needs, and your longer-term goals, you can decide how the money should be invested.

An inheritance doesn't need to remain frozen in the form in which you received it.

It can become part of your own financial plan, invested according to your circumstances, your goals and what you want the money to accomplish.