I was also recently in this exact same position, though I am still 12+ years from retirement. After liquidating my mom’s estate (which consisted primarily of her small retirement fund and her home), my sister and I each received an inheritance that, while not enough to retire on or do anything overly dramatic with (you won’t see me on a house hunting show on HGTV or anything), was still a sizeable amount of money. My recommendation would be to seek the advice of both an investment professional AND a tax attorney, preferably one familiar with estate tax laws.
In terms of the home/property, in the United States you most likely won’t have to pay any tax on the money if the inherited property is sold within a year of the person’s passing AND you haven’t rented the property out or made improvements to it over that time. The way my tax attorney explained it to me was that if you inherit a house and then sell it a few months later without really changing anything about it the IRS considers the sale price to be the stepped-up basis for the property, and since you only pay tax on the amount you sell for above basis, you would essentially owe no income tax on the money from the sale.
When it comes to money inherited from a retirement account, if you choose to withdraw the money then you ARE going to be paying taxes, though thankfully not capital gains taxes or penalty taxes people pay when withdrawing money early from retirement accounts. You’re only going to pay whatever tax rate the additional income would bump you to as if it was earned income, but that rate will only apply to the amount above and beyond the tax bracket cutoff. So in the case of $200,000 ($75K in job earnings and $125K in inheritance) as a random example, when married filing jointly, you’re going to be paying 24% Federal tax on the amount over $178,000, plus the $30,000 you would have paid on the first $178,000. This is important because the fund management company is supposed to have you fill out an IRS form asking about withholding, and in the example above it would be wise to set that withholding rate at 20% to 24% depending on your own annual income. If you don’t make a choice the default withholding is only 10%, and that’s going to leave you with a sizeable tax liability when it comes time to file. Again, a tax attorney is a vital consultant when dealing with this.
As to what to do with all of that money, I agree with the folks in the thread that it is going to depend on your personal circumstances, your age and risk comfort factor, and since you’re already retired or close to it, what your retirement plans were already. A financial advisor is a necessity here, and a good one will offer sound advice without pressuring you to give them any of the money. It may well be that you’re risk averse enough now that you’re retired that you simply diversify into low-risk lower-yield investments like bond portfolios and money market funds. You may want to pay off debts to save paying interest over time, or you may still owe money on your home and wish to pay that off and or make improvements to it to gain all the advantages that brings. A good financial advisor will recommend spreading your wealth around in many ways, earning money here, saving money there, improving your financial situation while protecting your assets.
I personally decided to pay off a bit of debt we’d been carrying for a long time now to save paying the interest rate on it, which was probably more money that I could have earned each month investing the same amount, plus now those monthly payments revert to being pure income that I can invest over time or use for other things. I took a large chunk of it and opened a money market account at the bank I use for most of my banking needs, so I’ll get 4.25% APR on it while having full unfettered access to it if I decide to do something with it. A small chunk of it is going to go to paying down my oldest son’s student loans, because unlike my younger son and daughter, I didn’t have the financial resources to help pay for his school as much when he was in college, so I feel this is a good way to even things up among my kids while improving his financial situation that much more as well. My wife and I will also likely use some of the money to make long overdue improvements to our home, which in turn will add value to our greatest asset.
And maybe, just maybe, I will actually take a very small bit of my inheritance and do something for myself. I thought about upgrading my GPU and buying a pair of 4K monitors, but 4000 series cards are still $1,800+ and I’m sorry, but that is fucking ridiculous. Maybe a nice 3060ti instead…
