Are you ready for the greatest wealth transfer in history? Ready or not, it’s already happening!
It’s estimated that $70 trillion worth of assets will pass down from older to younger generations over the next two decades.1 That is a lot of money—and some of it might be heading your way.
But if you’re not careful, it’s easy to let an inheritance go to waste. In fact, more than one-third of all inheritors see no change or even a decline in their wealth after getting an inheritance.2
Did you catch that? Some folks are worse off after they inherit a financial windfall. But that doesn’t have to be your story. Your inheritance has the potential to change your family tree forever—so make it count!
Receiving a $30,000 inheritance can be a life-changing event. While exciting, it also comes with the responsibility of making smart decisions about how to use the money. Here is a step-by-step guide on what to do if you receive a $30,000 inheritance.
Don’t Count on It Until the Money is in Hand
First things first – don’t spend money you don’t have yet. While you may be expecting an inheritance, things can change. Your relative could live longer than expected and use up more of their savings on healthcare costs, for example. Or they could change their will last minute.
According to a Federal Reserve study, the average inheritance in the US is only around $46,200. And a Penn Wharton Budget Model study found the average inheritance across all income levels is just $12,353. So while possible, a $30,000 inheritance is still well above average.
The bottom line – don’t make financial plans based on money you don’t have 100% certainty you will receive It’s better to be pleasantly surprised than disappointed if things change
Understand the Tax Implications
Fortunately, inheritances are not subject to federal income tax. However, any investment earnings you make on the inherited money will be subject to taxes.
If you inherit an IRA or 401(k), you may owe income taxes if you withdraw money from the accounts. As the beneficiary, you can choose to take lump-sum withdrawals and pay the taxes immediately or transfer the funds into an inherited IRA and take minimum required distributions over your lifetime.
If you inherit investments like stocks or mutual funds, you will want to find out the cost basis – the original value of the investments when your relative first purchased them. This will determine if you owe capital gains taxes when you eventually sell the investments.
To avoid any surprises at tax time, it’s wise to consult with a tax professional or CPA when receiving an inheritance. They can help you minimize any taxes owed.
Take Your Time Deciding What to Do
When you lose a loved one, emotions can run high. It’s generally not a good idea to make big financial decisions like what to do with an inheritance when you’re grieving. The general guidance is to park the funds in a high yield savings account for at least 3-6 months. This gives you time to process your loss and then approach decisions with a clear head.
And don’t feel rushed by others who may have an opinion on what you should do. This is your money – take whatever time you need to decide what’s right for you.
Pay Off Any High Interest Debt
Once you’ve taken time to process the loss and have a clear plan, a top priority is paying off any high interest debt you may have like credit cards or personal loans.
This debt likely has an interest rate of 15% or higher. By paying it off, you eliminate these high interest payments which can save you a lot of money over time. Plus, you get the emotional benefit of becoming debt free.
Focus first on paying off the debt with the highest interest rate and make minimum payments on the others. By tackling debt strategically, you can become debt free faster.
Build up Your Emergency Fund
After eliminating any high interest debt, it’s wise to bulk up your emergency fund. This is money set aside to cover unexpected expenses like medical bills, car repairs, job loss, etc.
The standard recommendation is to have 3-6 months of living expenses saved in your emergency fund. With a $30,000 inheritance, you could easily fully fund your emergency account.
Having this money tucked away provides a tremendous sense of financial peace and stability. You know that you could handle bumps in the road without having to take on additional debt.
Invest for Long-Term Goals
If you have any inheritance funds remaining after paying off debt and building your emergency fund, investing is the next best use. Investing provides the potential for your money to grow over the long run.
Some great investing options include:
- Contributing to retirement accounts like 401(k)s and IRAs
- Investing in index funds inside a taxable brokerage account
- Working with a financial advisor to create an customized investment plan
The key is using the money to invest in your future financial growth and stability. At your age, time is on your side when it comes to compound interest.
Enjoy a Small Splurge
After you’ve addressed priorities like debt, emergency savings and investing, it’s perfectly fine to use a small portion of the inheritance money to treat yourself. This could be taking a vacation, doing a home renovation project, purchasing a big ticket item you’ve been wanting, etc.
Just don’t go overboard! It’s better to splurge on 1-2 things you really value rather than frittering away the money on impulse purchases. Keep your splurge fund to 10% or less of the total inheritance.
Give a Portion to Charity or Family
Finally, it can be very fulfilling to share your inherited money with causes and people you care about. You may choose to:
- Donate a portion of the funds to your favorite charities and nonprofits
- Help out family members in need with medical bills, college costs, etc.
- Set up a donor-advised fund that strategically grants money over many years
Giving to others is a great way to create meaning from your windfall. Overall, have a plan in place so your inheritance has impact beyond just yourself.
Get Professional Advice If Needed
Receiving a financial windfall can be complicated, especially if taxes, estates and investments are involved. Don’t be afraid to seek out professional advice and guidance around areas where you feel uncertain.
The right professionals like CPAs, financial advisors and estate attorneys can help you:
- Navigate tax implications of the inheritance
- Set up accounts correctly like inherited IRAs
- Determine the best ways to invest the money
- Make objective recommendations without personal bias
Their guidance can give you confidence you are making the very best use of your inheritance. With $30,000, the cost of professional advice will be a small price to pay.
Take Your Time and Use the Money Wisely
A $30,000 inheritance has the potential to be life-changing if used wisely. Resist the urge to spend it all right away. Investing it and using it to reach your financial goals will create lasting financial benefits.
By taking your time, keeping perspective, and getting professional advice, you can make the most of your inheritance and set yourself up for long-term success. With smart planning, a $30,000 windfall can have a major positive impact on your financial future.
Option 1: Sell It
Usually when someone inherits a house, it’s worth more than it was when the original owner bought it. If that’s the case, you automatically receive something called a step-up in basis. Basically, that just means you get to inherit the house without having to worry too much about capital gains taxes if you decide to sell the house.4
Here’s how it works: Let’s say your mom’s house was worth $175,000 at the time of her death. For tax purposes, the value of the home at the time she died becomes what you “paid” for it—that’s the stepped-up tax basis.
So, if you decide to put the house on the market right away and it sells for $175,000, you wouldn’t owe any capital gains taxes on it. But if you sold it a year later for $200,000, you would only pay capital gains taxes on the $25,000 difference between the selling price and the amount the home was worth when you inherited it ($175,000).
We know that’s a lot of information to take in! If you’re confused or overwhelmed, we recommend getting in touch with our RamseyTrusted® pros. Our network of tax advisors and real estate agents can help reduce the stress of figuring out what to do with an inherited house.
Give some of it away.
No matter where you are in the Baby Steps, giving should always be part of your financial plan! Give 10% to your church or a charity of your choice.
What to Do With $30k Inheritance?
FAQ
What to do when you inherit 30k?
- Give some of it away. No matter where you are in the Baby Steps, giving should always be part of your financial plan! …
- Pay off debt. …
- Build your emergency fund. …
- Invest for the future. …
- Pay down your mortgage. …
- Save for your kids’ college fund. …
- Enjoy some of it.
What’s the best thing to do with inheritance money?
If you inherit a large amount of money, take your time in deciding what to do with it. A high-yield savings account is a safe place to park the money while you make your decisions. Paying off high-interest debts such as credit card debt is one good use for an inheritance.
Can I deposit a large inheritance check into my bank account?
Bottom Line. You can deposit a large cash inheritance in a savings account, either through a check or direct wire to your bank. The bigger question is what you should do with it once it’s deposited.
How to avoid taxes on inheritance money?
- How can I avoid paying taxes on my inheritance?
- Consider the alternate valuation date.
- Put everything into a trust.
- Minimize retirement account distributions.
- Give away some of the money.
What should I do if I inherit a large amount of money?
If you inherit a large amount of money, take your time in deciding what to do with it. A high-yield savings account is a safe place to park the money while you make your decisions. Paying off high-interest debts such as credit card debt is one good use for an inheritance. Unless the inheritance is very large, you won’t owe tax on money you inherit.
What kind of cash inheritance should you expect?
The most common cash inheritance is usually $10,000 – $50,000. That being said, there are many elements when considering what sort of cash inheritance to expect. The first thing you should ask yourself is whether you’ll receive one. Many Americans don’t. Of those who do, the amount can range drastically.
What should I do if I inherit a house?
Consult professionals like tax advisors and estate planners before making decisions with an inheritance. Consider paying debts, saving, or donating part of a cash inheritance to maximize its value. Inherited homes can be rented or sold; consult real estate experts to optimize financial outcomes.
How do I make the most of my inheritance?
Here’s our advice for making the most of your inheritance. Here’s the deal: When a loved one dies, you’re not thinking clearly enough to make major financial decisions. And in most cases, you don’t have to make any major decisions right away. There’s nothing wrong with letting your inheritance sit there for a while as you grieve.
What can I do with my inheritance?
When you boil it all down, there are three things you can do with your money: give, save and spend. An inheritance is no different! Market chaos, inflation, your future—work with a pro to navigate this stuff. Just like you give every dollar an assignment in your monthly budget, it’s important to do the same thing with your inheritance.
What should I do with a cash inheritance?
Here are a few options to consider with a cash inheritance: Pay down your debt. Your loved one probably wanted to make your life easier by leaving you money. If you have debts, pay those down first, especially if they’re high-interest. The more monthly payments you can reduce, the more wiggle room you will have moving forward.