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If you’ve just lost a loved one, your focus is probably on coping with your loss rather than what to do with the inheritance. But at some point, you’ll need to make a plan for the money and/or assets that come your way.
If you’re receiving an inheritance, here are four important things to know.
Don’t expect to receive cash
The thing to know is that the inheritance will likely not include cash. According to Jason Albano, managing director and wealth strategy advisor at Bank of America Private Bank, the more likely scenario is that you will be named the beneficiary of a retirement account or inherit the family home. merrill Blog.
Albano points out that you may have up to 10 years to deplete an inherited tax-deferred account, such as an IRA or 401(k). However, this may depend on your age and other factors.
There may be tax consequences
According to Merrill, inheritances are “generally not considered income” for federal income tax purposes. However, there are some exceptions. Depending on your location, you may also be charged state inheritance tax.
What usually happens is that the estate will pay property taxes. After that, the beneficiaries will receive the assets, which are exempt from income tax. But if a beneficiary later sells the inherited assets or earns income from them, they may face income taxes, Merrill said.
On the other hand, if a beneficiary receives certain tax-deferred accounts, such as a traditional IRA or 401(k), they will be responsible for paying normal taxes on withdrawals. This includes taxes on required minimum distributions.
And you’ll want to be aware of any assets that provide income, as it could change your tax bracket and affect your taxes, Merrill explained.
You will probably want to hire a financial professional
It’s always a good idea to hire a financial advisor and/or tax professional when you receive an inheritance – but it’s especially important for larger inheritances that involve a lot of money or property.
As charles schwab Note, a financial advisor can review your overall financial picture and recommend the right investment vehicles. In the meantime, a tax advisor can help explain the tax implications of your inheritance.
Don’t be hasty in taking any big steps
No matter what type of inheritance you receive, it’s a good idea not to rush into decisions that involve spending money or selling assets. Loyalty It is recommended not to make major decisions within the first year of receiving the inheritance.
Delaying these decisions ensures that you will not get into any legal entanglements if the inheritance is challenged or revalued. This also gives you more time to strategize.
“Consider keeping your money safe until you’re sure,” Fidelity said in a blog. “For some people, it is better to lose some potential returns in a low-interest account than to take big risks or make financial moves without considering taxes or their entire financial picture.”