You Just Inherited $1 Million. Now What?

No amount of money can replace the pain you'll feel after losing someone you truly loved, but you may also be thinking: “Wait a minute. Am I a millionaire now?”

You need to avoid a confused adrenaline rush that causes you to book an extravagant vacation or pursue a sports car whim. Take a deep breath and realize this money was left to you for a reason, and it’s incumbent to not treat it like you just won it on a slot machine. A windfall like this can be a tremendous opportunity to fortify your own future.

Assess Your Situation

There are basically two ways of looking at it. If you anticipate having a hard time even thinking about retirement much less paying for it, then it’s probably a good idea to secure that inherited cash in an immediate fixed annuity that pays a set amount for life. Then it becomes something more reliable than a giant lump of money.

The other option, of course, is to use the inheritance like a giant lump of money. If your retirement picture is a little rosier, then you can afford to draw from the inherited money as you need it, so it becomes more of a lifestyle fund than a basic needs fund.

Don’t Get Too Attached

Financial planners have noticed that people who inherit large sums of money treat that money differently than people who earned a windfall because of a scratch-off lottery card. The prevailing notion is that there’s more of an emotional connection to inherited money, which is good and bad. It’s good in that people are less likely to go all “purple Lamborghini” with their parents’ hard-earned money and will plan things a bit more carefully.

It’s bad because it often limits the amount of good they can do for themselves with the money in the name of “honoring the deceased.” So they invest in sentimental things — maybe a second home for the whole family to use — and they ignore the fact that they could make that money stretch further and have a more positive impact, if they only freed themselves from memories.

Create An Emergency Fund

It’s fairly standard thinking that people need to have enough money squirreled away to cover three to six months of expenses in case of an emergency. It’s also fairly standard thinking that a large majority of people sigh heavily and awkwardly stare at the floor when you tell them that fact. So use your inherited money to pay down debt, and invest what you can, perhaps in short-term CDs or even high quality municipal bonds. This is where a financial advisor really comes in handy.

What If It’s An IRA?

The biggest thing to keep in mind if your inheritance comes in the form of a Traditional Individual Retirement Account is that any money you withdraw from it counts as taxable income. So rather than take out the whole sum, which is tempting, it’s better to take smaller minimum payouts to lessen your tax hit. If the inheritance is a Roth IRA, you’re in better shape — those aren’t counted as taxable income. (For a more detailed look into inheriting an IRA, check out this Motley Fool article.)

Keep It To Yourself

Of course there will be other factors, like tax implications (again, talk to a pro!), but what about the people in your life, family included, who are curious about how much of an inheritance you received? This might be a bigger issue if they knew, or assume, the deceased was rich.

Bottom line: It’s none of their business, so never feel obligated to tell anyone. In fact, it’s best if you kept this to yourself or only someone you completely trust. Even though an inheritance might be an unexpected windfall, it still stemmed from losing a person you loved. If anyone starts getting pushy — “I’m only curious,” “You’re picking up the tab from now on ‘cause you’re loaded,” “Just tell me!” — say that you’d give it all up for one more day with your loved one. If they persist, then you might want to reconsider your relationship with that person. You’ve got some money now and don’t need that kind of drama in your life. [Related Read: How To Manage A Large Cash Windfall]