How to Invest Inheritances

Smart investments can increase the value of your inheritance.

Smart investments can increase the value of your inheritance.

Receiving an inheritance can be an unexpected windfall that could leave you with some spare cash to invest. However, you may be uncertain whether to invest it all at once or gradually over time. If you are new to the investment game, you may worry about choosing a strategy that will minimize any potential losses. According to George Constantinides, a finance professor, studies show that most times investors earn more money by investing a lump sum all at once, primarily because the stock market tends to rise in value over time.

Step 1

Talk to a financial planner who can help you develop a plan on how to save and invest in your future, including retirement.

Step 2

Diversify your assets. Putting your money in different kinds of investments lessens the risk. While some investments may incur losses at times, gains in other areas will offset these losses.

Step 3

Open a Roth IRA. As long as you are employed, even if only part time, you can contribute the maximum for the year and then add to the account as your finances allow. Although the eligibility requirements and contribution limits can change from year to year, in 2010 the income limits for married couples filing jointly was $177,000. You may not make a Roth IRA contribution if your modified adjusted gross income is more than this amount. Personal finance guru Suze Orman points out that there is no tax on the money while it remains invested in the IRA. If you wait until age 59½ before you make any withdrawals, you won’t have to pay tax.

Step 4

Roll over an employer-sponsored retirement plan that you’ve inherited into an inherited retirement account. There isn’t any tax on the money when you roll it over. However, you will be required to make annual withdrawals at which time you must pay tax on the amount you withdrew.

Step 5

Look for some nontraditional investments that are likely to appreciate in value. Jewels and gems, particularly gold and diamonds, tend to increase in value because they last. Rare collectibles are another investment to consider, particularly since the value depends on supply and demand. It helps to have a few liquid assets in case you need some quick cash.

Tips

  • Although it may seem prudent to plan the timing of your investments to avoid market declines, you also risk losing potential gains when the market is good.
  • If the risks associated with investing make you nervous, another strategy is to schedule investments over a period of six months. You may see it as being less risky when the stock market is bad, and therefore, lose less in returns. Spreading investments out longer than 18 months usually will reduce your return in a typical market.

About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.

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