Investor's Corner - July 2, 2008

What to do with an inheritance

Keith SandvossJuly 2, 2008 

Keith Sandvoss is a financial advisor and accredited asset management specialist for Edward Jones Investments in Fort Mill. He can be reached at 802-4310.

Will you ever receive a sizable inheritance? You can't plan on it. But if you do receive one, you can plan on it helping you achieve key financial goals.

Once you get word of an inheritance, what steps should you take? Above all, don't rush to act. If you are in the midst of the grieving process, it's hard to make good decisions about money. Consider "parking" your inheritance temporarily in a liquid vehicle, such as a cash or cash alternative investment.

Don't fret if your inheritance isn't really growing much for a few months -- you'll have time to put it to work later. After some time has passed, you can decide what to do with the money. Here are a few ideas:

• Get rid of debts. Use your inheritance to pay off as many debts as you can, especially those consumer loans that are not tax-deductible and that carry high interest rates.

• Establish an emergency fund. It should contain six to 12 months' worth of living expenses. Without it, you may be forced to dip into your investments to pay for unexpected costs, such as an expensive car repair or medical bill.

• Review and adjust your financial strategies. If your inheritance is large enough, it may be a "game changer." For example, you may now be able to speed up your timetable toward retirement. Or you may be able to pay more of your children's college education, thus freeing up retirement savings.

Something else you should do is plan for taxes. Unless you are "inheriting" your spouse's assets, you may be subject to taxes when you receive an inheritance. Some types of inheritance, such as proceeds from a life insurance policy, are tax-free. On the other hand, if you inherit a non-spousal 401(k) plan and are forced to take the money as a lump sum, your inheritance will be subject to federal, state and local income taxes.

However, thanks to recent tax law changes, as a non-spouse beneficiary you can now transfer an inherited 401(k) to an IRA, which allows you to avoid immediately paying taxes. You'll still be required to take annual withdrawals, which are taxable, but the amount will be based on your life expectancy, so you can spread out your tax burden. Be sure to consult with your tax advisor.

You may get only one inheritance -- so do whatever you can to make the most of it.

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