If you receive an inheritance, experts recommend you take at least some of the money to have fun and honor your benefactor. However, most loved ones leave you an inheritance so you can build a stable and secure future. As long as you have earned income and meet certain income guidelines, you can contribute to various retirement accounts. When you receive an inheritance, you likely have the financial breathing room to afford to max out your retirement savings. You aren’t technically making contributions with inherited money because you couldn’t fund a retirement account unless you had earned income in the year. If you are in doubt, check your tax return to see whether you declared earned (taxable) income. You can only contribute up to that amount into a retirement account. According to an article by U.S. News & World Report, there are several financial moves to make when you inherit money.
Take a cooling off period
Experts recommend you don’t do anything with your money for the first three months after inheriting it. During the cooling-off period, you can still max out a Roth IRA account since you can withdrawal any contributions you make without penalty or taxes. However, you don’t want to take out any of the growth or earnings in a Roth until you are 59 and a half. The rest of the money can go into a money market account. During the 3-month break from investing and spending, evaluate your long-term financial goals and your retirement outlook. Depending how much money you received in an inheritance, you might feel tempted to quit your job. Think about the advantages you gain by keeping earned income so you are eligible to make retirement contributions.
Prioritize your goals
Some financial goals that most people have include funding retirement accounts, buying real estate and building an emergency fund. Other people want to pay down debt or pay for college. The two safest places to put your inheritance money include your primary residence and a retirement account. In most states, a homestead exemption allows you to keep your home even in a personal bankruptcy or lawsuit. Money in your retirement account is also safe from creditors, lawsuits and bankruptcy. However, if you inherit someone else’s retirement account, it’s a different matter.
By contributing to retirement accounts, you shelter money from taxes and allow it to grow so you can live on dividends in retirement. Of course, treat yourself by spending 5 percent on something fun especially if it was a loved ones desire that you travel or do something for yourself.