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According to the Federal Reserve’s Survey of
Consumer Finances, taken every three years, slightly more than one in five U.S.
households had received an inheritance as of 2022.
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If you
expect to receive an inheritance one day, these
tips may help you better manage your financial windfall.
Wait a while before you act.
Emotions run high after
the death of a loved one. You might regret quitting your
job, buying a sports car, or making other costly decisions
before you have thought them through. Consider how the funds might be used to strengthen
your financial position now and over the long term. You
may also want to be discreet. Telling people that
you have inherited a substantial amount of money may lead
to unwanted advice, business or investment solicitations,
and requests for financial support.
Boost (don’t blow up) your lifestyle.
If you have a large
balance on a high-interest credit card or vehicle loan,
consider paying it off and using the increased cash flow
to save more toward your retirement or other
long-term goals. Whether it would be wise to pay off your
mortgage depends on your individual circumstances and
goals. Investing represents an opportunity to grow an
inheritance and potentially make it last longer. You could
use any income generated by your portfolio to supplement
your paycheck, which might allow you to live
better now while preserving the bulk of the money for future
needs, such as a child’s education or your retirement.
Take advantage of tax deferral.
If you inherit tax-deferred
assets, such as those in a traditional 401(k) or IRA,
keep in mind that withdrawals are taxed as ordinary income.
You could choose to cash out and pay the taxes all at once,
or you might consider transferring the inherited funds to a
properly titled beneficiary IRA. Inherited retirement funds can
be withdrawn over a period of up to 10 years, although some
beneficiaries may have to take yearly required minimum
distributions (if the original owner had started taking them).
Spouses and other eligible designated beneficiaries receive
preferential treatment. The rules and deadlines for handling
inherited retirement account assets and taking distributions
are complex. Because each choice could have far-reaching
implications, be sure to seek tax guidance.
Consider meeting with a financial professional.
Discussing your situation with someone outside of your
family may help you gain perspective, clarify your goals,
and make sound decisions. Although there is no assurance
that working with a financial professional will improve
investment results, he or she can consider your objectives
and available resources and help you evaluate appropriate
financial strategies.
All investing involves risk, including the possible loss of
principal, and there is no guarantee that any investment
strategy will be successful.
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The Washington Post,
November 10, 2023