If you just lost a loved one, you’re probably focused on dealing with your loss instead of what to do with an inheritance. But at some point, you’ll need to figure out a plan for the money and/or possessions that come your way.
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If you are receiving an inheritance, here are four important things to know.
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Don’t Expect To Receive Cash
One thing to know is that an inheritance probably won’t include cash. The more likely scenario is that you’ll be named a beneficiary of a retirement account or inherit a family home, according to Jason Albano, a managing director and wealth strategies advisor with Bank of America Private Bank who shared his expertise in a Merrill blog.
Albano explained that you may have up to 10 years to liquidate a tax-deferred account, such as an IRA or a 401(k), that you’ve inherited. However, this could be dependent upon your age and other factors.
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There Might Be Tax Consequences
An inheritance “generally isn’t considered income” for federal income tax purposes, according to Merrill. However, there are some exceptions. Depending on your location, you might also be charged a state inheritance tax.
What usually happens is that the estate will pay the estate taxes. After that, beneficiaries will receive the assets, which are free from income taxes. But if a beneficiary later sells or earns income from inherited assets, they could face income taxes, Merrill noted.
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 the usual taxes on withdrawals. That includes taxes on required minimum distributions.
And you’ll want to be aware of any assets that offer income, as that could change your tax bracket and impact your taxes, Merrill explained.
You’ll Probably Want To Hire a Financial Pro
Hiring a financial advisor and/or a tax professional is always a good idea when you receive an inheritance — but it’s especially important with large inheritances that involve a lot of money or assets.
As Charles Schwab noted, a financial advisor can review your overall financial picture and recommend the right investment vehicles. Meanwhile, a tax advisor can help explain the tax implications of your inheritance.
Don’t Be in a Hurry To Make Any Big Moves
Regardless of what kind of inheritance you receive, it’s a good idea to not rush into decisions that involve spending the money or selling off assets. Fidelity recommended not making major decisions within the first year of getting the inheritance.
Delaying these decisions ensures that you don’t get caught up in any legal entanglements should the inheritance be challenged or reassessed. It also gives you more time to strategize.
“Until you’re certain, consider keeping your money safe and secure,” Fidelity noted in a blog. “For some people, it’s better to lose some potential return in a low-interest account than to take major risks or make financial moves without considering taxes or your entire financial picture.”
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This article originally appeared on GOBankingRates.com: 4 Important Things To Know If You’re Receiving an Inheritance
