When a person receives an inheritance, there are some basic issues to be considered, according to The Rogersville Review in “What should you do with an inheritance?” The amount of the inheritance means that you might be able to retire earlier than planned, set up an investments and savings program or just end up spending a lot of money.
Here are some ways to consider using an inheritance:
Get rid of your debt load. Car loans, credit cards, and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage since now there are limits to deductions. However, you may not want to pay off a mortgage since you’ll have less flexibility if you need cash.
Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.
Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.
Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.
Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in a trust for children or grandchildren.
An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include handling an inheritance. Contact our office today to schedule your consultation.
Reference: The Rogersville Review (March 21, 2019) “What should you do with an inheritance?”