I just inherited money. What do I do first?

Not much, for a few weeks. Then three things, in this order. Find out which set of rules each account you received is actually under, because two accounts that look identical on a statement can be on two completely different clocks. Settle how much cash your household needs in reach. And then decide what the money is for, as your money, which is the part almost nobody gives themselves permission to do. Investments come after all three, and they're the easy part.

The pause, and why it lasts a year

Here's what I see over and over. Somebody inherits money and they feel a kind of guilt about it. Doesn't matter whether it's a hundred thousand or a great deal more. They didn't earn it, somebody they loved died, and the whole thing feels like it belongs to that person still.

So they pause. They don't do much. Maybe they invest a little of it. And then a year goes by.

If the parent held CDs, the money stays in CDs. If the parent had a particular set of investments in an IRA, those investments stay exactly as they were. Nothing gets decided, because deciding feels like touching something you shouldn't.

I understand it. I've also watched it cost people quite a bit of time.

The money is yours, and somebody has to say it

This is the part I'd want said out loud if it were my family, and if I don't say it, there's a decent chance nobody will.

It's yours. Legally, completely. The tax code is largely set up to let you reset things when you receive money this way, with real exceptions we'll get to, and the person who named you as a beneficiary did that on purpose. They wanted it to help you. The vast majority of the time, they wanted you to act in your own interest with it.

Which means holding the investments exactly as they were is a decision too, and usually a poor one. A careful 87-year-old who has passed away does not have your time horizon, your risk capacity, or your reasons. Their portfolio was built for their life. You have a different one.

Honoring somebody and freezing their account are two different things.

Which rulebook is each account under

Before anything gets invested, this is the question. The rules for inherited retirement accounts changed in the last several years, and the changes weren't retroactive.

So it's entirely possible to be holding two inherited accounts that look the same on a statement and are governed by two different clocks. One might be stretchable across your whole lifetime. The other has to be emptied inside ten years. Treat them as one pile and you'll take too little from the one with the deadline and too much from the one without.

A taxable brokerage account is a third situation again, because the cost basis generally resets to the value on the date of death. That changes what selling costs you, and it's often the friendliest money in the whole pile to reposition.

So the first job isn't picking funds. It's writing down, account by account, which rules apply and what the deadline is. The inherited IRA ten-year rule covers that piece in detail.

There's no early withdrawal penalty here

Almost everybody's first fear is the penalty. You've heard your whole adult life that pulling from a retirement account early costs an extra 10 percent, so you assume every withdrawal gets punished.

On an inherited account, it doesn't. You owe ordinary income tax on whatever comes out of a pre-tax account, and that's the entire bill, at any age.

Where this goes sideways is the fix people reach for. Moving an inherited account into your own IRA can create exactly the problem you were trying to avoid, because now it looks like your own money coming out early. Leave it titled as an inherited account. That titling is what keeps the door open.

The cash question comes before the investment question

Money that arrives all at once triggers one reflex. Where do we invest this.

Back up one step. Cash you won't spend in the next year or two generally shouldn't sit in cash, because it could be invested or it could retire debt. But some amount does belong within reach, because a job ends, something breaks, and life runs on its own schedule.

So the honest first question is how much you have in reserve right now, and whether this money should finish that job before it does anything else. I don't get precise about the number and enough is a broad word. It's still the thing to settle first.

For the rest of it, sitting in cash because it feels respectful is expensive in a way that never shows up on a statement. Cash is secure and it barely grows. Subtract inflation and it nets to roughly nothing. Ownership, over long stretches, still nets to something real. For money nobody's touching for decades, the slow option is the risky one.

Ten years, and two accounts that want opposite things

If you inherited both a pre-tax account and a Roth, they share the same ten-year deadline and they want opposite behavior.

The Roth grows without generating a tax bill. There's very little reason to touch it early. Let it run and take it near the end of the window.

The pre-tax account is the reverse. Every dollar comes out as ordinary income. Emptying it in one year late in the window can push you into brackets you'd otherwise never see. The move is a deliberate amount each year, sized to fill the bracket you're already in, paying that rate on purpose and reinvesting what's left.

And if you're mid-career when this happens, the framing changes. For most people, tax planning arrives at retirement. For you it's arriving now. So the question isn't how to keep this year's tax bill down. It's how to keep the whole run of them down, which often means deliberately taking more out early while your income is still low, rather than waiting until your earnings peak and every dollar lands in a higher bracket. Some of that money, once it's been taxed, can go into your own retirement accounts where it isn't under anybody's clock.

The account you've quietly set apart

One more thing, and it's the reason I ask before I touch anything.

Most of a household's money is doing one job. It pays you for life, and it passes along what's left as cleanly as possible. But now and then somebody has one corner of the picture they treat differently, and it's usually something they inherited. Grandmother's account. The thing they'd never sell.

I'm not saying you should hold it apart. I've just seen it enough to ask first, because if that money carries meaning for you, I don't want to run a spreadsheet right over the top of it. So say so early if any piece of this feels different from the rest.

What first actually looks like

Give yourself a few weeks where nothing has to happen. Then get the paperwork in front of you and answer, for every account, which rules govern it and what the deadline is. Settle the cash reserve. Then ask what each dollar's job is and how long it has before somebody spends it, because a dollar you'll use in three years and a dollar nobody touches for thirty aren't the same dollar.

That's when the investment conversation gets easy. It's also when the taxes and the plan and the investments start moving together instead of separately, which is the whole idea behind the Keystone method.

The freeze feels respectful. Deciding is the respectful part.

If you want somebody to sit with you and work through it, that's what help after an inheritance is set up for, and the short version of this question lives in our Learning Center at received an inheritance, what now.

Questions people ask in the first months after an inheritance

Do I owe tax just for receiving it?

Generally no at the federal level for the person receiving it. What creates tax is what comes out of a pre-tax retirement account afterward, and that's ordinary income to you. A few states run their own inheritance tax, so that's worth checking where you live.

Should I pay off the house with it?

Maybe, and it depends on the rate, on what else the money would be doing, and on how much it would change your monthly life. It's a real option and it belongs on the list. Just don't let it be the default because it's the only option you thought of.

What if I inherited an annuity?

Those have their own rules and their own timelines, and carriers can legally take a couple of months to process a change. There's a mechanism that lets you move from one annuity into a better one without triggering tax. Miss a signature or a deadline and you can get defaulted into an option you'd never have picked, so it's worth having somebody check every box with you.

How much of this should I keep in cash?

Enough that a bad month doesn't force a decision. Beyond that, cash is a slow leak for money you won't spend for years. The specific number depends on your income stability more than on the size of what you inherited.

Keep exploring

Related reading on this site: Received an inheritance what now, Inherited ira 10 year rule, Help after an inheritance tri cities tn, Financial advisor for inherited wealth, Keystone method.

When it helps, the free planning guides walks through the pieces in plain English, and you can start with a no-pressure Explore Call any time.

Sources

• IRS: retirement topics for beneficiaries
• IRS: required minimum distributions for inherited IRAs
• IRS: exceptions to tax on early distributions
• IRS Publication 551: basis of assets, including property received from a decedent

For discussion purposes only. This is general educational information and not individualized investment, tax, or legal advice. Inherited account rules turn on when the original owner died, your relationship to them, and your own tax picture, so have the specific accounts reviewed with the right professional before you move anything.