What to Do With Money When Someone Dies and Leaves You an Inheritance

An inheritance often arrives in two stages. First comes the loss. Then, sometimes weeks later, comes the money, along with decisions that will affect your financial life for years.

The single most important thing to know about inheriting money is this: you are almost certainly not required to do anything with it immediately. The instinct to act quickly, to invest it, spend it, or give it away before grief has cleared, is one of the most common and costly mistakes inheritors make. Most financial planners recommend a waiting period of at least three to six months before making any significant decisions with inherited funds.

Here is what the process actually looks like and how to handle each stage.

What You Will Actually Receive (And What Form It Takes)

Not all inheritances are the same. What you receive determines what your options are.

Cash or bank accounts: The simplest case. Funds are transferred to you directly through the estate process. No tax is owed on the inheritance itself in most situations. The federal estate tax exemption in 2025 was $13.99 million per individual, meaning the vast majority of estates owe no federal estate tax at all. Only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) have a state-level inheritance tax, and even those often exempt spouses and direct descendants.

A taxable investment account: When you inherit stocks, bonds, or ETFs held in a regular brokerage account, you receive what is called a "stepped-up basis." This means the cost basis of the inherited assets resets to the fair market value at the date of death, not the original purchase price. If the deceased bought stock at $20 per share and it was worth $120 per share at death, your cost basis is $120. Any future gain you recognize is calculated from $120, not $20. This is one of the most valuable tax benefits available to heirs and a major reason why inheriting appreciated assets is often more tax-advantaged than receiving a cash gift during someone's lifetime.

A traditional IRA or 401k: Inherited retirement accounts have their own rules, which changed significantly with the SECURE 2.0 Act. Most non-spouse beneficiaries (adult children, other heirs) are now required to withdraw all funds from an inherited IRA within 10 years of the original owner's death. If the original owner had already started taking Required Minimum Distributions (RMDs), you must also take RMDs each year during that 10-year period. Failing to take the required distributions results in a 25% penalty on the amount not withdrawn.

A Roth IRA: Inherited Roth IRAs are also subject to the 10-year rule for most non-spouse beneficiaries, but distributions are generally tax-free since the original contributions were made with after-tax dollars. The strategy here is often to let the account grow as long as possible within the 10-year window and take the full balance in year 10, avoiding income in earlier years.

A home or real property: Real estate also receives a stepped-up basis at death. If you sell the inherited home shortly after receiving it, you may owe little or no capital gains tax. If you keep it and sell it years later, your gain is calculated from the date-of-death value, not the original purchase price. Deciding whether to sell, rent, or move into an inherited home involves financial, practical, and emotional factors that rarely resolve quickly.

The Pause Rule: Why You Should Wait Before Doing Anything

Research on inheritance outcomes consistently shows that a large percentage of inherited wealth is gone within a few years of receipt. The combination of grief, sudden access to significant money, and well-meaning family pressure creates conditions for poor decisions.

Before taking any action with inherited funds beyond depositing them into a safe account, give yourself at minimum 60 to 90 days. During this period:

• Deposit everything into a high-yield savings account or money market fund
• Do not make any commitments to family members, charities, or salespeople about the money
• Do not pay off large debts or make major purchases
• Allow the emotional intensity of loss to settle before making permanent financial decisions

This is not indecisiveness. It is sound financial practice, consistently recommended by estate planners and behavioral finance researchers alike.

A Decision Framework for When You Are Ready

Once you have given yourself adequate time, work through these questions in order.

1. Do you have high-interest debt?

Credit card debt above 15% interest should be paid off before investing any inheritance. The guaranteed return of eliminating 20% interest debt outperforms nearly any investment. Student loans at 6-7% are a closer call and depend on whether you would qualify for income-driven repayment or forgiveness programs.

2. Is your emergency fund fully funded?

A genuine emergency fund of three to six months of living expenses in a liquid account is the foundation of financial stability. If yours is underfunded, an inheritance is an ideal opportunity to complete it. See How to Build an Emergency Fund for how to structure this correctly.

3. Are your retirement accounts being fully utilized?

If you have headroom in your 401k or Roth IRA, consider using some of the inheritance to free up cash flow that you can redirect into retirement contributions. You cannot contribute inherited cash directly into a retirement account beyond your annual contribution limits, but if the inheritance covers living expenses, you can redirect earned income into retirement accounts you were not previously maxing.

4. What are your medium-term goals?

A home down payment, business investment, or education funding are all reasonable uses for inheritance money. Match the time horizon of the goal to the appropriate investment vehicle: short-term goals (under 3 years) in cash or short-term bonds, medium-term goals in balanced investments, long-term goals in diversified equity funds.

5. What would the person who left it to you want?

This is not a sentimental question. Many people receive inheritances from parents or grandparents who spent decades building the wealth through disciplined saving and investing. Using it deliberately and strategically is one of the most genuine ways to honor that legacy.

Real-World Examples

Example: Diane, 44, inherits $85,000 from her mother

Situation: Diane had $14,000 in credit card debt at 22% interest, a partially funded emergency fund, and had not been contributing to her employer's 401k.

What she did: She deposited the full inheritance into a high-yield savings account and waited 90 days. Then she paid off all credit card debt ($14,000), topped off her emergency fund to six months ($18,000), and invested the remaining $53,000 into a taxable brokerage account in a three-fund portfolio. She also increased her 401k contribution to capture her employer's full match.

Result: Eliminated $3,080/year in interest costs. Emergency fund complete. Retirement contributions finally capturing the match she had been leaving on the table.

Example: Terrence, 29, inherits a traditional IRA worth $62,000

Situation: Terrence's grandfather left him a traditional IRA. Under the 10-year rule, Terrence must withdraw the full balance by year 10.

Strategy: Terrence is in the 22% federal tax bracket currently but expects to move to a higher bracket as his career progresses. He decided to take annual distributions of roughly $6,200 per year to spread the tax impact across 10 years, rather than taking a large lump sum later when his income and tax rate will be higher. Each distribution goes into his taxable brokerage account.

Common Mistakes With Inherited Money

Telling everyone about it. Unexpected money tends to attract requests, pressure, and opinions from family and friends. Keeping the details private until you have made your own decisions protects you from external pressure during a vulnerable time.

Making it "real" by spending it quickly. Large cash windfalls can feel abstract until they are spent on something tangible. Resisting this impulse is worth the effort.

Ignoring the inherited IRA rules. The SECURE 2.0 Act penalties for missing required distributions from inherited IRAs are severe. If you have inherited an IRA, consult with a CPA or financial planner to understand your specific distribution schedule.

Letting guilt drive decisions. Some heirs feel they do not "deserve" the money and give it away quickly to relieve that discomfort. Thoughtful use of an inheritance is not the same as greed. It is stewardship of something that was given to you with intention.

Conclusion

An inheritance is one of the few events in financial life where the right first move is to do nothing. Park the money safely, let time pass, then apply a deliberate framework based on your actual financial situation, not emotion or external pressure.

The hierarchy is almost always the same: eliminate high-cost debt, complete your emergency fund, then invest the remainder appropriately for your timeline. The specific choices from there depend on your age, goals, and tax situation.

For more on the investment side of putting inherited money to work, see How to Invest $500, $1,000, $5,000 and $10,000 Differently and What Is an S&P 500 Index Fund and Should You Just Put Everything In It?.

This post is for informational purposes only and does not constitute financial, tax, or legal advice. Inherited IRA rules are complex and changed under the SECURE 2.0 Act. Estate and inheritance tax rules vary by state. Consult a qualified CPA, estate attorney, or financial planner for guidance specific to your situation.