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Social Security Early

Some Do’s When Inheriting

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Are you inheriting money from a relative? Or receiving funds from a lawsuit? Or planning to be a lucky lottery winner?

Here are some do’s to consider when inheriting:

  1. First, inheriting money puts a whole new spin on your outlook on money, says The Kansas City Star in its article “Coming into some money? Be wise with it.”
  2. Should you pay off your debts first if you have any? Make a list of your debt balances and their interest rates. If the interest rate is high, pay it off. If it’s low, you may be better off investing the funds.
  3. Next, check on your emergency fund. If you don’t have three to six months’ worth of living expenses on hand, use your inheritance to ramp up that fund. Yes, you can use credit cards sometimes. However, having at least two months’ worth of living expenses in cash is worthwhile.
  4. Contribute the most you can to a health savings account (HSA) if your employer does not contribute to it and if you have a qualifying health plan. That’s $3,500 if you are single, $7,000 for families, and add $1,000, if you are over 55. This gets you a nice tax deduction, and withdrawals are tax-free as long as they are used for qualified medical expenses.

If you’re still working, and depending upon the size of the inheritance, it might be time to “tax-shift” your portfolio.

Let’s say you regularly contribute $3,000 to a 401(k). If you can, increase that amount by $22,000, to the maximum, if you’re 50 and older. Since your paycheck decreases, so does your tax. If your tax rate is currently 22%, you’ll only need to add $17,160 from your inherited account to reach the same spendable dollars. The tax-deferred account in your portfolio will grow faster, while the taxable account shrinks.

When inheriting, think about whether to commingle funds with your significant other or not. Let’s say you and your spouse have a retirement portfolio. You both can spend it now, maybe on your house. The inheritance may also help you to retire earlier. If you save the inheritance, keeping it in a separate account with only your name on it will keep it your asset in case of a divorce. Most states will consider this money a non-marital asset and not subject to division between divorcing parties.

Consider using the inheritance as a way to avoid tapping into retirement accounts. Withdrawals from IRAs are taxable. If you’re not worried about commingling funds or investment gains, then use the inherited account to minimize the tax losses from retirement accounts.

Most people don’t have enough saved to keep spending during retirement as they did while working. Skip the spending spree that often follows an inheritance and enjoy the money over an extended period of time.

When inheriting, remember this is a gift and unique chance to review your estate plan and make some wise move. A new financial position may require more tax planning and more legacy planning.

Reference: The Kansas City Star (June 27, 2019) “Coming into some money? Be wise with it”