While not always easy to think about, inheritances are a part of the financial pictures for many baby boomers. Handling an inheritance sometimes requires thought and a game plan, and it is a topic that can be too easily set aside to be dealt with in the future.
Below are steps to think through after receiving an inheritance to make it a part of your financial plans and goals:
Make it a part of your plan. Before deciding to do (or not do) anything, it’s important to remember that an asset you receive was a part of another person’s financial plans. Because of the source, often times a certain stock or mutual fund has sentimental value to the recipient.
But, just because there may be some value in remembering the gift as it was, you should not let that add to your risk, or justify holding what is an asset that may not fit into your plans.
Think about it… would the person who wanted you to have this gift have you to simply hold onto it as a memory, or would they want it to be put towards your financial goals? By waiting to move forward with your own plans and sell an inherited asset you increase the likeliness of having a taxable event which often causes even more considerations to sell.
Don’t ignore retirement accounts. Many who are inheriting retirement accounts (IRA’s, 401(k)’s, 403(b)’s, etc.) are familiar with how to make contributions, but are not yet of the mindset to consider distributing money from them. Your options with managing retirement accounts depend on your relationship to the beneficiary, among other considerations, but all require having a plan to withdraw the funds in either a minimum amount on an annual basis or before the end of five years. Knowing your options and having a plan in place can save you from harsh penalties for not following mandatory distribution rules.
Have a tax plan. If you do not need the funds, consider any changes they may provide to your tax plans. Selling stock, increasing your contributions to workplace retirement accounts and living off of the inheritance, or using distributions from inherited retirement accounts to fund Roth IRAs are a few potential ideas to make an inheritance tax-efficient.
Disclaim.Many would use an inheritance to help another beneficiary who needs the money more. Often times a parent may want the funds to flow through to a child to pay for college. If this may be of interest to you, speak to an attorney regarding disclaiming all or part of an inheritance so that it flows through to the next beneficiary in line for the funds.