Receiving an Inheritance in Your 20s or 30s: What to Do First

Nobody plans for this part. A parent or grandparent passes away, and a few weeks or months later there's a phone call from an attorney, or a letter from Fidelity, or a check you didn't expect. Now you're grieving and holding more money than you've ever had at once.

Figuring out what to do with an inheritance in your 20s or 30s is harder than it looks from the outside. The money tends to arrive in pieces, each piece has its own tax rules, and everyone around you suddenly has an opinion.

The short answer: park the money somewhere safe for about 90 days and don't make big decisions yet. Use that time to list what you own, what you owe, and everything you're inheriting. Move any retirement accounts into an inherited IRA, then put the money to work in order: taxes, emergency fund, high-interest debt, tax-advantaged accounts, big goals, and investing.

Below is how I'd walk through each of those steps.

Why the first 90 days matter more than any investment decision

Your first move should be no move. Seriously.

The biggest inheritance mistakes I see aren't bad investments. They're fast decisions made in the fog of grief, like paying off a car that had a 3% loan, buying a house before the estate is settled, or lending money to a relative because saying no felt impossible that week.

None of those are always wrong. But almost none of them need to happen in the first three months.

So give yourself a cooling-off period. Ninety days is a good default, and six months is fine if the loss was especially hard. During that window, the money's only job is to sit somewhere safe and earn a little interest while you get your bearings.

A high-yield savings account or a money market fund works well for this. If the cash tops $250,000, remember that FDIC insurance covers $250,000 per depositor, per bank, per ownership category. You can split it across banks or buy Treasury bills through a brokerage account.

Boring is the goal here.

Use the 90 days to get organized

Waiting doesn't mean doing nothing. You can't make a good plan for new money until you can see the full picture, and the cooling-off period is when you build it.

Start with yourself. Before you think about the inheritance at all, write down where you stand today:

• Everything you own, like checking and savings balances, your 401(k) and IRAs, any brokerage account, and the value of your home or car.
• Everything you owe, with the balance and interest rate on each one.
• Your monthly take-home pay, plus any bonus or side income you can count on.
• What you really spend each month. Pull it from the last three months of bank and credit card statements, not from memory.

What you own minus what you owe is your net worth, and that list is your personal balance sheet. Income minus spending is your cash flow. If you've never done this before, start with how to track your net worth in a way you'll actually keep up with.

Then do the same thing for the inheritance. Make a separate list of everything you're receiving, and for each item write down:

• What it is and what kind of account it's in.
• Its value on the date of death, which the executor or the financial institution can give you.
• When you'll get it. Life insurance and accounts with a named beneficiary can pay out within weeks, but anything going through probate can take months or longer.
• How it's taxed now, and how it's taxed later when you sell it or withdraw from it.
• Any deadline attached to it, like the 10-year rule on an inherited IRA.

A simple spreadsheet is plenty. I build this same two-sided view with clients before we talk about a single investment, and it changes the plan more often than you'd think.

Someone who wanted to put everything toward the mortgage realizes their emergency fund covers two weeks of expenses. Or the "big" inheritance turns out to be mostly an IRA that can't be touched without a tax bill.

Get organized first. The plan comes after.

One thing you shouldn't wait on: if you inherited an IRA or 401(k), don't cash it out or move it yourself. That's covered below, and it's the one place where a wrong click can't be undone.

How an inheritance is taxed, by type of asset

In most cases, inheriting money doesn't create income tax for you. Cash you inherit isn't income on your tax return. Taxes show up later, and how much depends on what kind of account each dollar sits in.

The federal estate tax only applies to estates above $15 million per person in 2026, and the estate pays it before anything gets distributed to you. Michigan doesn't have an estate tax or an inheritance tax.

(A few states do charge inheritance tax: Pennsylvania, New Jersey, Kentucky, Maryland, and Nebraska. It's based on where the person who died lived, not where you live, so ask the executor if that's one of them.)

The rule behind the stock and house rows is called a step-up in basis. Your cost basis, the number capital gains are measured from, resets to the value on the date of death.

Say Grandma bought Apple stock decades ago for $8,000 and it was worth $60,000 when she died. Your basis is $60,000. Sell it next month for $61,000 and you owe capital gains tax on $1,000, not $53,000.

So don't hang on to inherited stocks just because selling feels expensive. It often isn't. If the account is one concentrated position or a pile of random funds that doesn't fit your plan, cleaning it up early is cheap. (Here's the longer explanation of how capital gains tax works for young investors.)

If you inherited a house

The house is the hardest piece for most people, because it carries the most memories. Before you decide to keep it, rent it, or sell it, get a date-of-death appraisal. That's your new cost basis.

Selling within a year or so means very little capital gains tax, since the sale price lands close to your stepped-up basis. Keeping it means taking on property tax, insurance, maintenance, and maybe a mortgage.

In Michigan, ask the local assessor whether the property's taxable value will "uncap" after the transfer. A transfer of a home to a child or parent can be exempt from uncapping, but only if the house isn't rented out. That one detail can change the yearly tax bill by thousands.

The 10-year rule decides your tax bill on an inherited IRA or 401(k)

The 10-year rule says most people who inherit an IRA or 401(k) from someone other than a spouse must empty it by December 31 of the tenth year after the year the owner died. Every withdrawal from a traditional account counts as taxable income, so when you take the money out matters as much as how much.

Start with the transfer. You can't roll an inherited account into your own IRA, since that option is only for spouses. The money has to move into an inherited IRA (also called a beneficiary IRA), titled something like "John Smith, deceased, for the benefit of Sarah Smith."

Have the financial institution do it as a direct transfer. If they cut you a check instead, you can't put it back, and the whole balance becomes taxable that year.

There's a second layer. If the person who died had already started taking required minimum distributions (RMDs), you also have to take a minimum withdrawal every year in years one through nine.

Miss one and the penalty is 25% of what you should have taken, or 10% if you fix it promptly. The IRS covers the details in its required minimum distribution FAQs.

A few beneficiaries get more flexible rules: minor children of the person who died (until they turn 21), beneficiaries who are disabled or chronically ill, and anyone not more than 10 years younger than the original owner. If you're in your 20s or 30s and inheriting from a parent or grandparent, you're probably not in those groups.

One bright spot is that inherited IRA withdrawals never get hit with the 10% early withdrawal penalty, no matter your age. The only question is how much income tax you pay, and you control most of that.

Why spreading withdrawals out tends to win

Say you're 29, single, and earn $85,000. After the 2026 standard deduction of $16,100, your taxable income is $68,900, which puts you in the 22% federal bracket. You inherit a $250,000 traditional IRA from your grandfather.

Cash the whole thing out in one year and your taxable income jumps to $318,900. Part of the IRA gets taxed at 22%, part at 24%, part at 32%, and the top slice at 35%, using the IRS's 2026 brackets. Federal tax on the IRA alone comes to roughly $70,500, and Michigan's 4.25% state tax adds about $10,600 more.

Now spread it out. Pull about $25,000 a year for 10 years and your taxable income lands around $93,900 each year. Every withdrawal stays inside the 22% bracket, for roughly $55,000 of federal tax in total before growth.

That's about $15,500 saved just by being patient. And the money still in the account keeps growing tax-deferred in the meantime.

Real life won't be that tidy, which is fine. You might take bigger withdrawals in a year you're in grad school, on parental leave, or between jobs, and smaller ones in a year a big bonus lands. Ten years gives you room to pick your spots.

Watch two side effects. Inherited IRA withdrawals raise your adjusted gross income, which can push you past the Roth IRA income limit ($153,000 to $168,000 for single filers in 2026). They can also raise your payment if you're on an income-driven student loan plan.

Inherited Roth IRAs work the other way

An inherited Roth IRA is the best thing on this list to receive. It still has to be emptied within 10 years, but there are no required withdrawals along the way, because Roth owners never have RMDs.

So the move is the opposite of the traditional IRA strategy. Leave it alone, let it grow tax-free for as close to 10 years as you can, and withdraw it near the end of year 10.

What to do with an inheritance: the order I use with clients

Once the 90 days are up and you know what you have, I walk clients through the same order every time. It's the same logic as the investing order of operations for young professionals, just with a lump sum instead of monthly paychecks.

1. Set aside money for taxes you know are coming, like the tax on inherited IRA withdrawals.
2. Build or top off your emergency fund to three to six months of expenses, in a high-yield savings account.
3. Pay off high-interest debt. Credit cards charging 20% or more come first, because no investment reliably beats that.
4. Max out the tax-advantaged accounts you're eligible for, like the $24,500 401(k) limit and the $7,500 Roth IRA limit for 2026.
5. Fund the next big goal you were already saving for, like a down payment or a wedding, and keep it in cash if you'll need it within about three years.
6. Invest what's left in a diversified, low-cost portfolio based on your timeline.

Step four is where an inheritance quietly does the most good. You can't put inherited money into a 401(k) directly, because contributions come out of your paycheck. But you can raise your 401(k) contribution to the max and use the inheritance to cover the gap in your take-home pay.

A Roth IRA works the same way. You need earned income to contribute, but the dollars you deposit can come from anywhere.

That swap turns a one-time windfall into years of tax-advantaged savings. For someone who's been contributing 6% just to get the match, going to the full $24,500 for a few years can do more for retirement than almost anything else they'll do this decade.

What about student loans and a mortgage? Those sit in the gray zone. If your rate is under about 5%, investing tends to come out ahead over long periods, and if it's above 7%, paying it down is hard to argue with.

In between, it depends on how much the debt weighs on you, and that matters more than people admit. If you're stuck, here's my framework for deciding whether to pay off debt or invest.

Also, give yourself permission to spend a little. I'd set aside something like 5% to 10% for whatever feels meaningful to you, whether that's a trip, something that reminds you of the person, or a cushion that lets you breathe.

The emotional side of an inheritance matters as much as the math

Money that comes from a loss feels different from money you earned. Some people feel guilty spending any of it. Others feel pressure to "honor" the person by never touching it.

Both reactions are normal. Both can also lead to decisions you wouldn't make with a clear head.

It helps to ask what this person would have wanted the money to do for you. Most parents and grandparents didn't save so their grandkids could keep it in a checking account forever. They wanted it to give you security, opportunity, or a little more freedom.

A few other things come up often enough to plan for:

• Family members may ask for help. Decide ahead of time what you're comfortable giving, and treat any loan as money you might not see again.
• If you're married, make the plan together, since you're building one financial life and this money is part of it.
• If giving matters to you, pick that number early, before the money disappears into everyday life.
• Watch for lifestyle creep. A bigger apartment or a nicer car turns a one-time windfall into a permanent monthly bill.

While you're in this headspace, check your own beneficiary designations too. Going through someone else's estate is often the moment people realize theirs isn't set up either.

If you only remember one thing, make it this. Almost nothing about an inheritance has to be decided this month, except making sure the retirement accounts land in a properly titled inherited IRA.

Big financial transitions move fast and the decisions you make in the first year matter more than most people realize. If you're working through what to do with an inheritance, we'd be glad to help you get organized. Schedule a free intro call here.

Frequently Asked Questions

What should I do first with an inheritance?

Put the cash somewhere safe, like a high-yield savings account or money market fund, and give yourself about 90 days before making big decisions. Use that time to list what you own and owe, plus every asset you're inheriting and how it's taxed. The one thing not to wait on is an inherited retirement account, which should move into a properly titled inherited IRA through a direct transfer.

Is an inheritance considered income?

No. Inherited cash, stocks, and property aren't taxable income when you receive them, so they don't go on your tax return as income. You'll owe tax later only on what the money earns, on gains above the date-of-death value when you sell, or on withdrawals from an inherited traditional IRA or 401(k).

Do I have to pay taxes on money I inherit?

Usually not on the inheritance itself. The federal estate tax only applies to estates over $15 million per person in 2026 and is paid by the estate, and Michigan has no estate or inheritance tax. The main exception is inherited traditional IRAs and 401(k)s, where every withdrawal is taxed as ordinary income.

How long does it take to receive an inheritance?

It depends on how the asset passes. Life insurance and accounts with a named beneficiary, like IRAs and transfer-on-death accounts, can pay out within a few weeks of filing a death certificate and claim form. Assets that go through probate under a will often take several months to more than a year.

How does the 10-year rule work for an inherited IRA?

Most non-spouse beneficiaries must empty an inherited IRA by December 31 of the tenth year after the original owner's death. If the owner had already started required minimum distributions, you also have to take a minimum withdrawal each year in years one through nine. Missing one can trigger a 25% penalty, reduced to 10% if corrected promptly.

Should I use an inheritance to pay off student loans?

It depends on the interest rate. Loans above about 7% are worth paying down, while loans under about 5% often make more sense to keep while you invest instead. Build your emergency fund and clear high-interest credit card debt first, and if you're pursuing Public Service Loan Forgiveness, paying the loans off early could mean giving up forgiveness you'd otherwise get.

Can I put inherited money into a Roth IRA or 401(k)?

Not directly, because both require earned income from a job. But you can raise your 401(k) contribution and use the inheritance to cover the drop in take-home pay, and you can deposit inherited cash into a Roth IRA as long as you earned at least that much during the year. In 2026, that means up to $24,500 in a 401(k) and $7,500 in a Roth IRA.

---

Disclosure: This article is for educational purposes only and does not constitute personalized investment, tax, or legal advice. Individual situations vary. Please consult a qualified financial professional before making financial decisions. Villaire Financial, LLC is a registered investment adviser. Schedule a free intro call if you'd like to talk through your specific situation.