A large inheritance can be both a boon and a burden—a boon because the money could come in handy someday, and a burden because it imposes a certain responsibility on the recipient to use it wisely and not squander it. Heres a step-by-step guide for anyone who has received or is anticipating to receive a large inheritance.
Inheriting a large sum of money can be a blessing, but it also comes with some important financial decisions If you’ve recently received or expect to receive a sizable inheritance, you may be wondering what to do first and how to handle depositing the funds properly Here’s a step-by-step guide on how to deposit a large inheritance.
Step 1: Choose an FDIC-Insured Account
The first thing you’ll want to do is open an FDIC-insured deposit account at a bank or credit union to initially hold the inheritance funds. This protects your money and ensures that your deposit is backed by the Federal Deposit Insurance Corporation. The 2022 standard deposit insurance limit is $250,000 per depositor, per insured financial institution. If your inheritance exceeds this amount, you may need to open accounts at multiple banks to maximize your deposit insurance coverage. High-yield online savings accounts often offer the best combination of high interest rates, deposit insurance, and easy online access.
Step 2: Understand Applicable Taxes
Before depositing inheritance funds, it’s important to determine if any taxes apply. In most cases, inheritances are not subject to federal or state income tax. However, there are some exceptions:
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Six U.S. states levy an inheritance tax – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Check if your state is one of them.
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The federal estate tax applies to inheritances over $12.06 million in 2022. Some states also have an estate tax with a lower exemption amount.
If taxes do apply to your inheritance, be sure to set aside funds to pay what you owe An accountant can help you work through the details
Step 3: Evaluate Your Options
Once your inheritance is safely deposited, take time to consider your options before spending any funds. Think through short and long-term goals, and resist the urge for any big splurges until you have a plan in place. Some smart ways to use an inheritance include:
- Paying off high-interest debt like credit cards or student loans
- Boosting retirement savings in IRAs, 401(k)s or other investment accounts
- Saving for college through 529 plans or other education accounts
- Funding a trust or estate plan to reduce future taxes
- Making upgrades or renovations to your home
A financial advisor can provide tailored guidance based on your situation.
Step 4: Transfer to Investment Accounts
Although a savings account provides security, it likely won’t offer the growth potential you need to optimize your inheritance over time. Once you decide how to allocate the funds, transfer money into appropriate investment accounts based on your goals. This may include brokerage accounts, 529 college savings plans, retirement accounts like IRAs, etc. Take advantage of any employer retirement plan matches first before fully funding other investments with inheritance money.
Step 5: Set Up Accounts for Your Heirs
If a goal is to pass some of the inheritance to your children or grandchildren one day, you can set up custodial accounts like UTMAs or UGMAs. These provide tax advantages for transferring funds to minors. Setting up trusts or naming beneficiaries on investment accounts can also ensure your heirs receive money from your estate smoothly.
Key Takeaways on Depositing a Large Inheritance
- Initially deposit funds into an FDIC-insured account for safety
- Evaluate if any inheritance taxes apply based on your state and the amount
- Resist temptation to spend hastily; align usage with financial goals
- Consider transferring funds into investment accounts for growth potential
- If desired, set up custodial accounts or trusts to provide for your heirs
With thoughtful planning and guidance from financial professionals, your large inheritance can become an integral part of a secure financial future for you and your family.
Splurge … But Be Mindful
We’ll skip the finger-wagging if you want to spend some of your inheritance on yourself or your loved ones. Its your money now. But its worth remembering that when its gone, its gone, whereas if you invest sensibly, youll likely have it for years to come. You might even be able to pass it down to your own heirs someday.
What Is Considered a Large Inheritance?
Whether an inheritance is large, small, or somewhere in between is a subjective matter that depends on the person who receives it. According to the Federal Reserve, the average inheritance is about $46,200. The Penn Wharton Budget Model study found the average inheritance to be $12,353. As you might expect, wealthy families tend to pass on greater wealth.
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FAQ
What is the best way to deposit inheritance money?
The best place to deposit the large cash inheritance is in a federally insured bank or credit union account.Mar 28, 2025
Do I need to report inheritance money to the IRS?
Do I have to report my inheritance on my tax return? In general, any inheritance you receive does not need to be reported to the IRS. You typically don’t need to report inheritance money to the IRS because inheritances aren’t considered taxable income by the federal government.
What account to put inheritance money in?
Best types of bank accounts for managing an inheritance
This could take the form of a savings account or an ISA. Easy-access accounts also offer flexibility in managing your money if you don’t want to lock it away for a set period.
What to do if you inherit a large sum of cash?
- Paying off high-cost debt, like high interest debt such as credit card debt or student loans.
- Jump-starting (or catching up on) retirement savings by investing the money in a brokerage account.
- Shoring up college funds.