Your inheritance was bittersweet. You lost someone you cared about, but he or she left you a nice little bundle, and you’re wondering how to spend it. As a member of Generation Y, also known as Generation Me-Me-Me, you’ve been stereotyped as materialistic and carrying a sense of entitlement. On the other hand, research also shows you’re practical when it comes to money, and you care more about being debt-free than previous generations did at your age, according to TRU Enrollment Insights.
Because you are a smart saving Millennial, you’re looking for practical advice on what to do with this windfall.
Pay Your Taxes
The good news is, the IRS does not tax inheritances. Some estates must pay income tax, but that will have been handled by the executor or administrator of the estate before you received your money. Also, if you invest your inheritance (which you should, and more on that in a minute), you’ll be taxed on earnings, just as you would for any money you earn from investments.
To see if your state charges an inheritance tax, visit Bankrate.com’s map. Most states follow the federal estate tax rule, but 16 do not. Again, you owe nothing to the IRS for your inheritance. It’s worth repeating because it’s so hard to believe!
Spend Your Inheritance Wisely
Before we get into the practical stuff, let’s talk about how much you can allow yourself to blow. Set a 10 percent limit on frivolous spending. Buy a car, take a trip, upgrade your wardrobe, get a new laptop, take your friends to dinner on you — but spend NO MORE than 10 percent of your inheritance.
Sell Your Inheritance?
Some families buy annuities to prepare for retirement, and they collect regular payments from them monthly or annually. If someone designated you as the beneficiary of his or her annuity payments after he or she died, you will continue to collect them. You could potentially sell those future payments to a company like J.G. Wentworth and receive one lump sum of cash sooner.
Before you do this, make sure the reason you cash out is worth the loss you’ll take by forfeiting future annuity payments. Paying off your mortgage and/or student loans is worthwhile, whereas buying a high-performance sports car isn’t as solid of a reason.
Some annuities have restrictions on how soon they can be sold, but your third-party agent will be able to walk you through the process.
Save and Invest The Rest
If you’ve already got a retirement account, use this inheritance as an opportunity to maximize your annual contributions. If you have children, sock some of it away in their 529 college savings plans. You can invest the rest in several ways.
Convert your cash into real estate, and as your property increases in value, so does your net worth. Tough credit restrictions have created a cash-buyers market, so now is a good time to get in, according to Forbes.
Don’t load all of your money into one stock or mutual fund. Spread it out among different types of investments. Talk to a wealth adviser at your bank.
Go back to school
If your inheritance is enough to support you through a two-year MBA, law school or other Master’s program, your earning power will increase and pay you back as long as you are in the workforce. Bloomberg Businessweek found that over a 20-year period, graduates of 20 MBA programs averaged a 90 percent increase in pay. The higher rated the MBA program, the higher the increase in pay.