Millennials, Here’s What To Do With an Inheritance in 2024

If you’re in the fortunate position to wonder what to do with an inheritance, remember to act steadily, but thoughtfully

Most Millennials remain focused on paying off student loans, saving for a down payment, or investing for the long term. With such big goals, you may wonder what to do with an inheritance that arrives unexpectedly.

How should an emotionally-charged infusion of money fit in your financial planning? The answer will vary depending on your specific situation. But for anyone, a financial windfall doesn’t free you from thoughtful financial decisions.

What You Should Know About Inheriting Money as a Millennial

You may have recently learned that you’ll soon have a Vanguard inherited IRA in your name. So what should you do next?

Many financial institutions will encourage you to invest with them. After all, they would be happy to earn fees from your money. And for some Millennials, the services that they offer will make sense!

But most of us will find that a small financial windfall only requires a few essential tasks. You may need to consult with a Certified Financial Planner or an accountant. But beyond their advice, you likely can manage the money yourself.

And initially – no matter you’re ultimate plans – you’re often best off doing very little at all.

Key Inheritance Terms: A Brief Glossary for Millennials

An inheritance can open up new opportunities for many Millennials.

But the process itself rarely feels exciting. First, an inheritance often arises due to a loved one’s death. And then receiving the inheritance typically involves unfamiliar terms and legal concepts.

So as a starting point, let’s review the 6 most important inheritance terms to know:

1. Assets: Everything that the decedent owns, including investments and real estate.
2. Beneficiary: A person who receives assets, based on a will, trust, or other legal document.
3. Custodian: The person who manages the decedent’s assets on behalf of a minor.
4. Decedent: A legal term for a person who has died.
5. Per Stirpes: A method for distributing assets in which every beneficiary receives an equal share of the total assets.
6. Inherited IRA: A new account that you open to manage the IRA you inherited from the decedent.

Investing, tax management, and estate planning each include numerous terms beyond the few that I’ve listed here. If you’re ever unsure what a word means, please consult a reliable online glossary or reach out to a professional.

What’s New in 2024: Updated Thinking on Traditional IRAs

The Secure Act of 2019 changed many rules for inherited IRAs (which I discuss in later sections). And these rule changes arrived at a time of low tax rates, by historical comparison.

A pre-tax IRA, by definition, only delays taxes. You’re not avoiding them in the future. For this reason, some financial professionals have begun to argue more strongly for Roth IRAs.

For example, author Ed Slott argues:

“The end result of all this is that people who inherit IRAs in the next decade are going to be pretty much shocked by the level of taxes they’re expected to pay — unless they inherit Roth IRAs. More people should consider putting much more of their retirement or legacy money into Roths, it’s just that simple.”

If you’re facing this decision, you can read more about Slott’s perspective here. [And now back to the original article!]

How Much Money Will Millennials Inherit?

Only a few years ago, financial articles about Millennials focused on avocado toast, lattes, and student loan debt. But headlines increasingly focus on different, slightly more flattering numbers.

As Bloomberg reported:

“As each day passes, more members of Gens X–Z are reaping the fiscal harvest sowed by the richest-ever generation who, born between 1946 and 1964, are now 58 to 76 years old. According to Morgan Stanley, this represents ‘the largest intergenerational wealth transfer in history, with $30 trillion set to change hands over the next few decades.’”

A CNBC article highlighted the same dynamic. CNBC wrote:

“Over the next decade, millennials are expected to inherit over $68 trillion from their baby boomer parents, according to an Oct. 2019 study from real estate firm Coldwell Banker. If this prediction holds true, Millennials will have five times the wealth they have today by 2030.”

As with the avocado toast headlines, this news may steer Millennials’ thinking in unproductive ways. Here are three such ways:

• First, the scale of the Millennial wealth transfer may give many young adults a stressful case of FOMO if they’re not included.
• Then, as described above, many profit-seeking financial services firms have an incentive to closely monitor who stands to receive a financial windfall.
• Finally, the frequency and, at times, seriousness of the headlines may make some Millennials feel pressure to quickly decide what to do with an inheritance.

The Four Types of Inheritance Assets

What types of assets might you inherit? Let’s review the four most common categories:

#1: Taxable Assets

The most common taxable asset that you’re likely to encounter is real estate.

But many Millennials also may inherit money from a taxable brokerage account. These are investments that aren’t held in a tax-advantaged account, such as an IRA.

When you inherit assets from a brokerage account, you get a “step up” in basis. Let’s define these terms before we proceed. The IRS defines your “basis” as “the purchase price plus any additional costs.” A “step up” in basis refers to an adjustment in that amount.

When the decedent dies, the basis changes from the original purchase price to the price of the investment on that date of death. The IRS essentially permits you to increase the basis to that higher price. And for you, this means that when you sell the asset, you’ll pay less in capital gains taxes.

So if you sell the investment immediately, you won’t pay any capital gains taxes. Under current tax laws, this rule makes taxable investments an attractive asset to inherit.

#2: Roth IRA

A Roth IRA is a retirement account for which you pay taxes upfront. So your investment – both the contributions and earnings – grow tax free. You don’t owe taxes on that money when you withdraw the funds later in life.

This means that when you inherit a Roth IRA, you also receive that money tax free. If you’re the spouse of the decedent, then you inherit that Roth IRA in your name.

If you have a different relationship to the decedent, you only need to focus on the timing of distributions. In this case, as the beneficiary, the IRS gives you 10 years to empty out your inherited Roth IRA. You can withdraw those funds in any increments that you wish, tax- and penalty-free.

#3: Tax-Deferred Assets

Certain investment accounts, such as a pre-tax 401(k) and traditional IRA, enable us to defer paying taxes. We get a tax deduction now. But in the future, we owe the IRS that tax payment that we postponed.

The IRS doesn’t want this deferral to last forever. So when we reach age 72, the IRS begins “required minimum distributions” (RMD). In effect, we’re required to withdraw a certain amount of money from our tax-deferred accounts each year.

A similar rules applies when you inherit a tax-deferred account. You’ll most commonly experience this dynamic in the form of an inherited IRA. As with a Roth IRA, the IRS requires that you withdraw all of the funds within 10 years.

The difference with a tax-deferred inherited IRA is that you must may taxes on these withdrawals. This makes your withdrawal decisions more complicated. If you wait to withdrawal the full amount in year 10, you may find yourself in a higher tax bracket.

Ultimately, you want to be strategic about the timing of these withdrawals. You’ll want to balance two aspects:

1. When you actually need the money; and
2. How to minimize your total tax bill.

For this reason, anyone with substantial tax-deferred assets later in life may want to plan ahead. During your lifetime, you may want to pay some taxes early in order to relocate these assets to Roth or taxable accounts.

#4: Health Savings Account (HSA)

HSAs offer excellent tax benefits to Millennials with access to these accounts. But the benefits of an inherited HSA depend on your relationship to the decedent.

The best-case scenario for an HSA involves a spouse. In this situation, the spouse simply takes over the account in his or her name.

But HSAs change dramatically when anyone else inherits the account. For a son or daughter, for example, the HSA funds become taxable in the year of the decedent’s death. And thereafter, the account no longer retains the characteristics of an HSA.

To avoid this worst-case scenario, a decedent may want to donate an HSA to a charity. Since non-profit organizations don’t owe the same taxes as individuals, HSA inheritance rules do not impact them in the same way.

The Tax Implications of Receiving an Inheritance

The taxes associated with your inheritance may vary based on where you live and your overall financial circumstances. But we can review a few general rules associated with income taxes, inheritance taxes, and estate taxes.

Income Taxes

At the federal level, you will not pay income taxes on any taxable assets that you inherit.

Inheritance Taxes

As of January 2024, 17 states and the District of Columbia levy an estate or inheritance tax. The Tax Policy Center offers this helpful graphic:

Estate Taxes

But on the federal level, you do need to pay attention to the estate tax. As of 2024, the estate tax only impacts estates whose value exceeds $13.61 million, minus any gifts previously given. This means that, for married couples, you won’t trigger the estate tax unless your estate exceeds $27.22 million.

Emotional Considerations After You Receive an Inheritance

The process of receiving an inheritances includes many tangible steps. You may need to deal with the logistics of settling a loved one’s estate. You may need to transfer funds and make new investment decisions. Such logistics are often unavoidable.

But you also need to set aside time for emotional considerations. When you’re sad or overwhelmed, you’re not in a good place to make long-term financial decisions.

As a result, here’s one of the best decisions you can make immediately after receiving an inheritance: wait.

The length of the pause may depend on how you’re feeling. But at least hold off on taking any action for one month. And for many people, you may be best off waiting for six months.

The 5 Steps of Inheritance Planning

As a guiding principle, you likely want to act on an inheritance steadily. But also thoughtfully and deliberately.

From a logistical standpoint then, what steps should you take when you’re trying to figure out what to do with an inheritance? Let’s review the five steps that will help you make the most of your inheritance:

Inheritance Step #1: Take a Pause

I love how financial advisor Alina Fisch phrased this step:

“Grief and other intense emotion can cloud your judgement. Now is not the time to make a huge unplanned donation, buy a sports car or vacation house, or invest a big sum in a tech start-up your cousin’s fiancé told you about at the memorial service.” 

Instead, try to embrace the idea of waiting. The idea of first taking a deep breath. The idea of thinking through – gradually – how you want to use this money. In the meantime, just let it sit in a high-yield savings account. You’ll earn some interest and hopefully keep up with inflation.

Then when you’re ready, the money is easily accessible to you.

Inheritance Step #2: Assume That Less is More

Most Millennials wonder where to open or keep their investment accounts.

I regularly hear, “Is the account that I set up after college a problem now?” Or, “Is it okay if I still use Betterment or Robinhood?” And many of these Millennials won’t inherit a financial windfall within the next decade.

So if you’re participating in “The Great Millennial Wealth Transfer,” you certainly must need a more complex account, right?

Financial technology has improved our lives in numerous ways. But that doesn’t mean more is always better. Or that new is always an upgrade. Financial technology can be overwhelming. And when it comes to managing your finances, simple and straightforward is often the best approach.

It’s understandable that you might gravitate toward every shiny, new financial tool at your disposal. But that doesn’t mean you should rush into a new service or account when you receive an inheritance.

Inheritance Step #3: Seek Professional Advice As Needed

Investing in your family’s future doesn’t need to be complicated. This idea even can apply to inheritance planning (once you’ve navigated the administrative hurdles).

So again, when you’re trying to figure out what to do with an inheritance, first pause. Take a breath. Then decide what type of professional help, if any, you need. You may indeed benefit from expertise, such as from an accountant or financial advisor. (And I’ll review those possibilities below.)

But otherwise, remember that fewer hasty actions under these new circumstances may serve you better over the long term.

Inheritance Step #4: Update Your Estate Planning Documents

In a Yahoo article, David DuFault, an attorney in North Carolina, advises, “If the inheritance you’re receiving is significant, the likelihood that your own children or family will inherit a larger amount could require additional documents, such as a trust, to control or protect them.”

But let’s assume that these specific circumstances don’t apply to you. An inheritance still creates an excuse for you to plan an estate.

Almost no one, especially busy Millennial parents, wants to set aside time or energy for estate planning. But the occasion of a one-time financial windfall may help you feel the motivation to make sure all of the necessary documents are in place. 

Inheritance Step #5: Spend on Yourself

You just received an inheritance. Financially, at least, that should be a positive thing!

So set aside a small amount of money for you to spend on yourself in the initial months. Maybe 2-5%, depending on the size of the inheritance? In any case, purchase something that you value. Purchase something that will make your life better.

The person who made the inheritance possible likely would want that for you.

What Type of Help Do You Need to Manage a Financial Windfall?

You’ve learned that you’ll receive an inheritance. And you’ve decided that you need help. In this situation, you may want to consider working with one or more of the following professionals:

• Financial advisor
• Estate attorney
• Accountant

Patrick Hicks, the head of legal at Trust & Will, believes that “it’s a good idea to consider a financial checkup to help you plan for any changes to your overall financial status, including receiving an inheritance.”

In the case of a lawyer, Real Simple‘s Lamberg writes, “Your attorney can best explain how both federal estate taxes and any applicable state inheritance taxes may impact your inheritance. The taxes that are levied also depend on factors including your personal wealth, the state you live in, and the amount of your inheritance.”

And an accountant can make sure you make the most tax-optimal decisions possible.

How Long Does It Take to Get Inheritance Money?

You receive word that you’ll be inheriting some money from a loved one. This information, coupled with that person’s passing, can feel overwhelming.

But then you wait. Perhaps much longer than you expect. Lamberg explained:

“When you are notified that you’ll be receiving an inheritance, you must understand that you’re probably not going to receive a check that week. ‘The process to receive an inheritance can be slow and tortuous,’ says Patrick Hicks, an estate planning attorney in California and head of legal at Trust & Will. ‘It may take months or years, and you may not receive exactly what you expect.’”

As we discussed above, Lamberg encouraged her readers to “take some time to think about what you want to do with the gift.”

In fact, assuming you’re not under current financial pressure, a slow inheritance process may prove helpful. Would you truly be ready to act if you received an inheritance tomorrow? For most people, the answer would be “no.” Most people are better off with longer decision timelines.

After all, this may be a one-time financial event that you’ve never experienced before. And that you may never experience again. If that’s the case, you’ll want to make sure you’re thoughtful about the opportunity. And moving money – either into or out of an investment account – can have significant consequences, including from a tax perspective.

So you may not even want, “How long does it take to get inheritance money?” to be your first question.

Instead, consider a version of the following thought process: “Let’s say I receive an unexpected financial windfall. How could I best use that money to live the life that I want to live, either now and/or in the future?”

An Inheritance Example: How Millennials Should Handle a Vanguard Inherited IRA

An inheritance can take many forms. You may need to work with different asset types, different accounts, and different financial institutions. How should you handle these transfers?

I’ve worked with several Millennials whose family members left them funds in a traditional IRA at Vanguard. So let’s walk through one of the most common inheritance examples: a Vanguard inherited IRA.

Vanguard’s main inheritance page notes that, “Being named a beneficiary means that someone has passed away and they’ve named you as the person to receive all or a portion of their assets.”

In the case of a Vanguard inherited IRA, though, you don’t just receive a check in the mail. You first need to transfer account ownership into your own name. Here’s what you should know:

• At Vanguard, you may be able to transfer account ownership entirely online.
• You’ll need the full Social Security number for the person who passed away.
• You’ll also need a digital copy of their death certificate.

After Vanguard processes your request, you’ll have the opportunity to make decisions about the investment allocation, withdrawals, and taxes.

Once you do control your Vanguard inherited IRA, pay close attention to IRS distribution rules. Here’s what you’ll want to remember:

• As Investopedia writes, “Starting with those [traditional IRAs] inherited after Jan. 1, 2020, the SECURE Act requires the entire balance of the participant’s inherited IRA account to be distributed or withdrawn within 10 years of the death of the original owner.”
• You must pay income taxes on the distributions.
• And you must empty the account within the specific timeframe if you don’t qualify for an exception.

A Financial Windfall Still Requires Smart Financial Planning

CNBC’s Anna Hecht perfectly captures what an inheritance can mean for Millennials:

“For some, gaining sudden wealth could mean finally being able to buy a home, pay back student loans, save for retirement or start a business. For others, it could mean achieving financial freedom for the first time in their lives.”

I’m so happy for you if this applies to you, too.

Keep in mind, though, that a financial windfall doesn’t free you from thoughtful financial decisions. I’m sure you want to make the most of the money you received. I’m sure you want to honor the person who gave you the inheritance.

To make these things happen, you can’t stop managing your money prudently.

For most Millennials, your current savings and investment goals shouldn’t change. Someone who cares about you has given you a small financial boost. Your long-term financial stability may be better off.

But perhaps the best answer to what to do with an inheritance is “more of the same.”

Resources for Millennials About Inheritances

• Want to hear from the IRS on inherited IRAs? Start here.
• Interested in understanding more inheritance and estate planning terms? Try this.
• Concerned about inheritance taxes? Here’s more on federal and state taxes.
• And here’s a list of some of the best financial advisors for Millennials.

Your Questions About What To Do With an Inheritance

What questions about the “Great Millennial Wealth Transfer” do you have at this point? I encourage you to send me an e-mail at kevin@illumintfc.com. I’d love to hear about the other inheritance information you’d like to know. And subscribe to my finance podcast for Millennials to learn more about how you can invest for your future.

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Recommended Money Reads for Millennials

If you liked this article, you may also want to check out:

• What’s the Right Savings Rate for Millennials?
• Should Millennials Make Extra Mortgage Payments?

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About Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!