Losing someone you love is a moment that forever changes your life. When an inheritance follows, it can feel overwhelming. A gift like this is deeply personal, and knowing where to invest inherited money becomes more than just a financial decision. It becomes a responsibility—one that deserves thoughtful planning, not guesswork.
Many people feel the pressure to “do the right thing” financially, but they don’t know where to begin. If the money is placed in the wrong account, with the wrong advisor, or exposed to unnecessary taxes and market risks, it can be squandered. This post will guide you through the options and opportunities available to help protect what you’ve received—and grow it with confidence.
Understand What You Inherited and Its Tax Status
To make a smart decision about where to invest inherited money, you first need to know what kind of asset you’ve received. The tax status of the inheritance will determine what you can and cannot do with it.
- Inherited IRAs come with strict distribution rules and potential tax implications.
- Life insurance payouts are generally tax-free but still need to be invested wisely.
- Inherited real estate or brokerage accounts may carry capital gains or stepped-up cost basis benefits.
Understanding whether the asset is taxable, tax-deferred, or tax-free is the foundation of any good plan. Missteps in this stage can lead to unnecessary taxes, penalties, or lost opportunities.
The 10-Year Rule for Inherited IRAs
If you inherit a Traditional IRA and you are not the spouse of the deceased, the SECURE Act requires you to fully distribute the account within 10 years. These distributions are taxable as ordinary income, which means they could significantly increase your tax bracket if not planned properly.
Spousal beneficiaries have different rules. A spouse may roll the IRA into their own, delay distributions, or treat the account as inherited with separate distribution rules. Each choice comes with long-term consequences that must be considered in context of age, income, and tax strategy.
You cannot afford to make these decisions in isolation. A tax-smart distribution plan is essential if you want to preserve the value of your inheritance.
Where to Invest Inherited Money from a Traditional IRA
Option 1: Convert to a Tax-Free Strategy
You can choose to pay the tax on distributions and convert your Traditional IRA into a Roth IRA. This option makes sense for those in a lower tax bracket or during years of lower income. The benefit is long-term tax-free growth and the ability to avoid required minimum distributions in the future.
An alternative option is using permanent life insurance as a tax-free asset. By strategically paying the tax over time—using a policy loan—you can preserve more of the converting amount, keep it growing, and protect it from future market risk. This method provides flexibility, access to capital, and long-term tax-free income.
This strategy is ideal for those who want to minimize out-of-pocket tax liability while maximizing protection. See our blog post on converting a taxable asset into a tax-free asset to explore how this strategy works in detail.
Option 2: Fixed and Indexed Annuities
Annuities are a strong option for non-spouse beneficiaries seeking stability, simplicity, and tax deferral. With no exposure to market loss, they provide peace of mind and consistent growth, making them ideal for anyone who wants to avoid volatility.
Option 3: Taxable Investment Accounts
This is often recommended by traditional advisors but comes with risks. Investments in mutual funds or ETFs can trigger annual capital gains taxes. There is also no protection from market downturns, which can be devastating if you’re forced to sell during a correction to meet your 10-year distribution schedule.
Where to Invest Inherited Money from Cash, Savings, or Real Estate
These types of inheritances offer more freedom. You are not constrained by forced distribution rules, which allows for more creative and customized planning. In these situations, using the “three bucket strategy” can be extremely effective.
- Taxable bucket: for immediate liquidity, emergency reserves, or near-term goals.
- Tax-deferred bucket: for retirement planning using accounts like Traditional IRAs or annuities.
- Tax-free bucket: includes Roth IRAs and permanent life insurance for long-term, tax-free income and estate planning.
Permanent life insurance offers an unmatched combination of liquidity, safety, tax-free growth, and optional lifetime income. It is often overlooked by traditional advisors who prefer fee-based mutual funds. That’s a disservice to families seeking real protection and flexibility.
Why Most Advisors Fail You When You Invest Inherited Money
Walk into most advisor offices and you’ll be sold on a model portfolio of mutual funds and diversification. The truth is, mutual funds are one of the least efficient ways to invest inherited money. They’re riddled with hidden fees, often generate mediocre returns, are taxable and expose you to market risk with little reward. Do you really want to pay taxes on the inherited money, invest it, pay more taxes, risk losing it, and pay excessive fees to the person “advising” you?
If you’re going to pay fees, make sure it’s for one of two reasons:
- Protection of capital through safe instruments
- High-performance, actively managed strategies that consistently produce results
Anything else is just paying someone to lose your money.
Traditional advisors rarely offer custom-built strategies or asset classes outside the standard playbook. Our approach focuses on flexibility, tax efficiency, and financial protection—not following some cookie-cutter strategy.
Real Examples of Smart Inheritance Planning
- A $600,000 Traditional IRA converted over five-seven years into a combination of Roth IRA and IUL with tax mapped withdrawals, resulting in tax-free retirement income
- $250,000 life insurance payout split between emergency fund, indexed annuity, and whole life cash value growth strategy
- Inherited rental property sold, proceeds used to fund all three buckets: taxable liquidity, tax-deferred annuity, and tax-free life insurance income plan
This is Your One Shot—Get It Right
You only inherit once. There are no do-overs. What you do with this money now determines the impact it will have on your life—and possibly generations to come.
Do not leave this to chance. Do not let outdated strategies or high-fee mutual fund portfolios destroy what someone worked so hard to give you. Make a tax-smart, emotionally intelligent plan that reflects your values and goals.
Ready to protect and grow what you’ve been given? Let’s talk. We specialize in implementing strategies that are safe, strategic, and tax-efficient—so you can honor the past while securing your future.