How to Invest Inheritances

Smart investments can increase the value of your inheritance.
i Jupiterimages/Comstock/Getty Images

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.

the nest