Welcome to the 20th issue of Metrix that Matter, a weekly newsletter from WEALTHMETRIX that helps you focus on what matters most for building and sustaining wealth. Every Saturday, we share an educational essay with actionable takeaways to guide you on your journey to financial independence.
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What you’ll learn in this issue:
- The importance of approaching an inheritance the right way
- Smart, intentional ways to use an inheritance
- The 10-year liquidation rule and why it requires immediate planning
- Why you may want to consider maximum rather than minimum distributions
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Inheriting money from a parent is never easy.
You’re grieving the loss of someone you love, while simultaneously navigating a maze of financial and legal decisions that demand your attention.
It’s an emotionally exhausting combination.
But amid the grief and complexity, there’s also something to be grateful for. An inheritance is a valuable gift that not everyone receives. Your parent worked hard to build this nest egg, and they chose to leave it to you.
This money represents an opportunity to completely change your financial trajectory if you handle it thoughtfully.
The right mindset
Before you do anything, you first need to have the right mindset when you inherit money. Don’t act like you just won the lottery. This isn't found money or a windfall to blow through on impulse purchases. Instead, treat it like a one-time opportunity that deserves careful thought and intentional planning.
I've seen people use inheritances to accomplish incredible things that genuinely improve their lives:
- Start or invest in a business that creates long-term income and wealth
- Fund major life events like weddings without going into debt
- Pay for children's education and give them a debt-free start to adulthood
- Supercharge retirement savings and retire years earlier than planned
- Eliminate bad debt and rebuild emergency funds to finally achieve financial stability
- Renovate a home to create a space where your family can thrive for decades
These are all strategic uses of money that create lasting value and honor the sacrifice your parent made to leave you this inheritance. Think about what matters most to you and your family's future, and let that guide your decisions.
Don’t forget about taxes
Once you have some meaningful goals for the money laid out, now you need to think about taxes. After you inherit a retirement account from your parent, you have up to 10 years to liquidate the entire account. This is a hard deadline, and how you navigate it has massive tax implications.
If you inherit a Traditional IRA or 401(k), every dollar you withdraw will be taxed as ordinary income. You may be required to take minimum distributions each year, but it also may be beneficial to take much more along the way.
Why? Because if you take only the bare minimum each year and wait until year 10 to withdraw the bulk of the money, you could face a massive tax bomb. Imagine being forced to take a six-figure distribution all at once. It could push you into the highest tax bracket and cost you tens of thousands of dollars unnecessarily.
Instead, spread your withdrawals strategically over the 10 years. Think about the maximum withdrawal you can take without jumping into higher tax brackets. Consider your current tax bracket, your income trajectory, and major life changes that might affect your taxes. The goal is to avoid any single year where a distribution pushes you into a dramatically higher bracket.
If you inherited a Roth IRA or 401(k), you're in a much better position. The money grows tax-free, and you can withdraw it tax-free at any time. In this case, you might want to let it grow as long as possible before taking distributions. Essentially, use those 10 years to maximize the tax-free growth.
Most importantly, be thoughtful about this. Think about what the next 10 years might look like for you financially, so you can make smart decisions.
Honor the gift
Your parent spent a lifetime building this nest egg. They made sacrifices, delayed gratification, and prioritized saving so they could leave something behind for you. That's not a small achievement.
Now it's your turn to honor that gift by using it wisely.
This doesn't mean you can't enjoy some of it or use it for things that bring you joy. But it does mean being intentional. It means thinking through the tax implications. It means making decisions that your parent would be proud of, choices that improve your life and set up your family for long-term success.
If you're feeling overwhelmed by the financial and legal complexity, that's completely normal. Don't hesitate to seek professional guidance from a financial planner who can help you navigate the 10-year distribution rule and create a strategy that makes sense for your situation.
This inheritance can change everything for you. Make sure it changes things for the better.
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READY TO IMPROVE YOUR FINANCES?
Thank you for reading. If you would like help figuring out how to manage an inheritance, I invite you to click the link below to gain access to our financial planning tool, Elements.
After signing up, you will be guided through a series of basic questions about your income, spending, debt, and account values. Once complete, Elements will provide a snapshot of your current financial health, as shown below.
You will then have the opportunity to schedule a complimentary meeting with me (Zoom or in-office), where I will review your current situation and discuss a few ways to make improvements.
CHECK YOUR FINANCIAL HEALTH IN 10 MINUTES
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WEALTHMETRIX
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Rockwall, TX 75087
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Addison, TX 75001
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