Receiving an inheritance can bring two very different things into your life at the same time: grief and new financial possibilities.
Whether you inherit $20,000, $200,000, an investment account, retirement assets, farmland or other property, you may suddenly face decisions you weren't expecting to make.
Should you invest the money? Pay off your mortgage? Add it to retirement? Help your children? Give some away? Take the family vacation you've postponed for years?
At Sprik Financial Group, we believe one of the smartest first moves is often the simplest:
Don't rush.
Before deciding what to do with an inheritance, understand what you've received and how it fits into your complete financial picture.
Here are seven steps to consider.
An inheritance doesn't need to be spent or invested immediately.
Give yourself time to process both the financial change and the loss behind it. Avoid making major purchases, large gifts or significant investment decisions simply because money has suddenly become available.
This can be especially important when an inheritance feels like "extra money." In reality, it may create opportunities to significantly affect goals you've been working toward for years.
The first question doesn't have to be, "Where should I put this money?"
It can be, "What could this inheritance help us accomplish?"
Not all inherited assets work the same way.
Cash, taxable investments, real estate, farmland, life insurance proceeds and retirement accounts can have very different financial and tax considerations.
Inherited retirement accounts deserve particular attention because distribution rules can depend on your relationship to the person who died, the type of account and other circumstances. Many non-spouse beneficiaries of inherited IRAs are subject to a 10-year distribution rule, although exceptions and additional annual distribution requirements may apply depending on the beneficiary's circumstances and the original account owner's situation.
Before moving or withdrawing assets, identify exactly what you own and what rules apply to it.
Receiving an inheritance doesn't automatically mean you'll owe federal income tax on its full value, but different inherited assets can create different tax consequences.
For example, taxable distributions from an inherited traditional IRA generally must be included in the beneficiary's income. Inherited property, meanwhile, generally receives a basis related to its fair market value at the owner's death, with exceptions and special rules that can apply.
Selling inherited property can create a taxable gain depending on the sale price and your basis.
Sprik Financial Group does not provide tax or legal advice. We can help incorporate these considerations into your broader financial plan while coordinating with your tax professional and attorney as appropriate.
Before deciding how to invest an inheritance, look at where you stand today.
Do you have adequate emergency savings? Are you carrying high-interest debt? Are you adequately insured? Are there significant expenses coming soon?
An inheritance might provide an opportunity to strengthen areas of your finances that previously limited your options.
This is where comprehensive financial planning can be particularly valuable. Rather than making an inheritance decision in isolation, you can see how each option affects the rest of your financial life.
Putting an inheritance toward retirement savings may be worth considering—but first determine whether that's where the money is most needed.
How are you currently tracking toward retirement?
Are you behind your goal, roughly on track or potentially ahead?
Our article about knowing whether you're on track for retirement explains why understanding your trajectory can make financial decisions much clearer.
If you're behind, an inheritance may create an opportunity to strengthen your long-term position. If you're already progressing well, however, your retirement plan may show that you have more flexibility than you expected.
That's why we prefer to run the numbers before automatically assuming every inherited dollar belongs in retirement.
Once you understand your current position, step back and consider the bigger picture.
An inheritance could potentially help you:
Invest for long-term goals
Strengthen retirement savings
Reduce debt
Help fund children's education
Make a home improvement or major purchase
Create meaningful experiences with your family
Support a charitable organization or cause
Build an estate or legacy for the next generation
The answer doesn't necessarily have to be one of these.
You might decide to invest part of the inheritance, spend part, give part away and keep some available for future opportunities.
If investing is one of your goals, our investment management services can help you evaluate the money within the context of your time horizon, objectives and risk tolerance.
If generosity is important to you, charitable planning can also become part of the conversation.
Once you've explored the possibilities, make a deliberate decision about what each portion of the inheritance should accomplish.
Then update your financial plan accordingly.
An inheritance may change your retirement trajectory, investment strategy or estate planning priorities. It could allow you to reach certain goals sooner or create entirely new possibilities.
Most importantly, don't assume the "responsible" answer is automatically to save every dollar.
Sometimes it will be. Sometimes it won't.
The better question is whether your decision supports the life you're trying to build.
These decisions will become more common as wealth moves from older generations to their children, grandchildren and charities.
According to research published by Cerulli Associates, an estimated $124 trillion could transfer through 2048, including about $105 trillion going to heirs and $18 trillion to charity.
That so-called Great Wealth Transfer represents more than a movement of assets. For millions of families, it will create decisions about what parents and grandparents worked a lifetime to build—and what the next generation wants those resources to accomplish.
At Sprik Financial Group, serving families throughout the greater Sioux Falls region and beyond, we help clients look beyond the immediate question of "Where should I put this money?"
We start with your bigger financial picture.
Where are you today? Are you on track for retirement? What matters most to your family? What opportunities could this inheritance create? What would the person who left it to you want their legacy to accomplish?
Then we can help you visualize how different choices may affect your future and develop a strategy around the goals that matter most.
If you've recently received an inheritance, begin by gathering information before making irreversible decisions.
Identify the assets you've inherited and any important deadlines. Talk with the appropriate tax and legal professionals. Then bring the inheritance into your overall financial planning conversation.
Contact Sprik Financial Group to review where you stand, explore your options and decide how your inheritance can best support the future—and the life—you want to build.