What to Do With a Large Inheritance

And what not to do if you want to get the most financial benefit from it

A large inheritance can be both a boon and a burden—a boon because the money could come in handy someday and a burden because it imposes a certain responsibility on the recipient to use it wisely and not simply squander it. Here's a step-by-step guide for anyone who has received or is anticipating receiving a large inheritance.

Key Takeaways

  • If you inherit a large amount of money, take your time in deciding what to do with it.
  • A federally insured bank or credit union account can be a good, safe place to park the money while you make your decisions.
  • Paying off high-interest debts such as credit card debt is one good use for an inheritance.
  • You generally won't owe tax on money you inherit, but other inherited assets—such as securities, retirement accounts, or real estate—can have tax implications.

1. Don't Assume You'll Get It

First of all, if you're expecting a large inheritance one day but have yet to receive the money, don't count on it. Things can change. Your relative or other benefactor might incur large medical or nursing home bills at the end of their life. They may decide to leave it all to charity. They may be swindled by a con artist.

A study published by the Bureau of Labor Statistics in 2011 found that a long-predicted inheritance boom as the World War II-era generation passed their wealth on to their baby boomer offspring never materialized. Between 1989 and 2007, only about 21% of households reported receiving an inheritance or gift of assets. Moreover, the average inheritance today is about $46,200, according to the Federal Reserve—an amount that many families might find useful but not life-changing.

The heirs to the baby boomers' accumulated wealth may also be disappointed when their day comes. This is a good reason for the members of younger generations to get on with their own financial lives, invest what they can for the future, try to avoid too much debt, and not rely on a windfall that may never arrive.

2. Take It Slowly

If you do receive a substantial inheritance, don't feel that you have to rush into any decisions. Coping with grief isn't easy and adding money to the mix can only complicate matters.

What you should do first will depend on what form (or forms) your inheritance takes. For example, if you inherit cash, you might want to park it someplace safe for a while. A federally insured bank or credit union account would be a good choice. Such accounts are insured for up to $250,000 per depositor, per financial institution. You can arrange for more coverage by setting up several different types of accounts. For example, if you open both a single account and a joint account, you’ll be covered for a total of $750,000. If you inherit more money than one financial institution can insure, you can spread it among several.

If you receive other kinds of assets, such as securities, retirement accounts, real estate, or an interest in a business, you'll need to work with the executor of the estate to get everything properly transferred into your name.

Note, too, that even if you’re in a hurry, getting what's due you can take time. Probate—the legal process through which an estate's assets are distributed under the guidance of a court—can take anywhere from weeks to years, depending on the complexity of the estate and whether anyone challenges the will. On average, it takes about nine months.

3. Seek Advice If You Need It

Depending on the amount of money involved and your own comfort level in making financial decisions, you might want to pay for some professional guidance. A financial planner can help you decide how best to handle the money in the short term as well as devise a long-term financial plan that takes all of your assets and obligations into consideration.

A good choice here would be a fee-only financial planner, the kind who receives no commissions for steering you toward particular investments but charges you for their services. That arrangement is intended to eliminate any conflicts of interest on the planner's part.

A planner can also help you figure out how to deal with any non-cash assets you've inherited. If you inherited securities, for example, you'll need to decide whether they're a good fit for your portfolio or whether you should sell them and buy something else.

4. Pay Off Debts

One worthy use for inherited money is paying down your debts, particularly high-interest debt such as credit cards or student loans. Lower-interest debt, such as a home mortgage if you have one, is more of a judgment call. If you would feel more secure with a paid-off mortgage, by all means, use the inheritance for that purpose. If you'd rather invest the money for a higher return than your mortgage is costing you, that's also a reasonable—if riskier—course.

5. Invest the Rest

When you've paid off debts, you can decide what to do with the money that's still sitting safely in your bank or credit union accounts. Again, don’t rush it.

With the help of a financial planner, or on your own if you'd rather, you will probably want to begin to invest the money. Inherited money is no different from money you've earned for yourself in terms of investing principles. Unless you want to keep the inheritance separate for sentimental or other reasons, consider it in the context of your entire portfolio. Aim to be properly diversified among a variety of investments with different levels of risk. And rather than invest it all at once (and risk buying when prices are unrealistically high), consider doing it over a period of time, using a strategy like dollar-cost averaging or value averaging.

Your inheritance can also provide an opportunity to boost your contributions to your retirement or 529 college saving plan accounts. Strictly speaking, because inherited money isn't earned income or other taxable compensation, you can't put it in a retirement account; however, you can use it to free up some of your earned income for that purpose.    

6. Understand the Tax Implications

Unless you inherit a great deal of money, you probably won't have to worry about federal estate taxes. In 2022, for example, those kick in only on estates worth $12.06 million or more. Some states also have inheritance taxes, but you don't really have to worry about those either because the estate has to pay them, not you.

However, certain types of assets do have tax implications. For example, if you inherit securities, make a note of what the securities were worth on the day that the person you inherited them from died. That's because you’ll need to know your cost basis if you ever decide to sell them.

Inherited IRAs are also more complicated. The tax rules vary depending on whether the decedent was your spouse or someone else and also on the type of IRA: traditional or Roth. You won't owe tax on the amount you inherit, but you will be taxed when you take distributions from a traditional IRA just as the original owner would have been. In the case of Roth IRAs, your withdrawals are typically tax-free, but you're generally required to deplete the account within five years.

The IRS explains these rules in detail in Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs).

7. Splurge If You Must, but Don’t Go Crazy

Finally, we’ll skip the finger-wagging if you want to spend some of your inheritance on yourself or your loved ones. It's your money now. But it's worth remembering that when it's gone, it's gone, whereas if you invest sensibly, you'll have it for years to come. You might even be able to pass it down to your own heirs someday.

What Is Considered a Large Inheritance?

Whether an inheritance is large, small, or somewhere in between is a subjective matter that depends on the person who receives it. As you might expect, wealthy families tend to pass on greater wealth. In 2019, for example, the wealthiest families reported average inheritances of $719,000, while the poorest families (those who received any inheritance at all) reported an average inheritance of $9,700. Another way of looking at it is impact. A $9,700 inheritance could be a godsend to someone with few other assets, while $719,000 bestowed on an already-rich individual might mean little.

Where Should I Deposit a Large Cash Inheritance?

A good place to deposit a large cash inheritance, at least for the short term, would be a federally insured bank or credit union. Your money won't earn much in the way of interest, but as long as you stay under the legal limits, it will be safe until you decide what to do with it.

What Happens If I Inherit a House?

If you inherit a house, you have basically three options: keep it and live in it (either full or part time), keep it and rent it out, or sell it. Note that if you sell the home, you could owe capital gains tax on the difference between what it was worth when the person died (your cost basis) and what it's worth when it sells. Another consideration is whether the home is fully paid off; if it still has a mortgage, you will now be responsible for making those payments. Of course, that's also true for local property taxes, insurance, and so forth.

The Bottom Line

If you receive a large inheritance and use it wisely, it can make a positive difference in your life. But don't feel rushed into making any decisions and seek professional advice if you need it.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Bureau of Labor Statistics. "Inheritances and the Distribution of Wealth, or Whatever Happened to the Great Inheritance Boom?," Page 1.

  2. Board of Governors of the Federal Reserve. "Wealth and Income Concentration in the SCF: 1989–2019."

  3. National Credit Union Administration. "How Your Accounts Are Federally Insured."

  4. Federal Deposit Insurance Corporation. "Deposit Insurance at a Glance."

  5. Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)."

  6. Internal Revenue Service. "Estate Tax."

  7. Tax Foundation. "Does Your State Have an Estate or Inheritance Tax?"

  8. Internal Revenue Service. "Frequently Asked Questions: Gifts and Inheritances."

  9. Internal Revenue Service. "Retirement Topics – Beneficiary."

  10. Internal Revenue Service. "Publication 590-B (2020), Distributions From Individual Retirement Arrangements (IRAs)."

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