What To Do When You Inherit Money

Receiving an inheritance is rarely a simple thing.

For most people, it arrives wrapped in grief: the loss of a parent, a grandparent, a spouse, or someone else who mattered deeply. In the middle of that grief, there are suddenly financial decisions to make. Decisions that feel significant. Decisions that can't always wait.

This post is for anyone who has recently received an inheritance in Iowa, or who knows one may be coming and wants to be better prepared. We're not going to tell you what to do with the money as that depends entirely on your situation, your goals, and your life. What we will do is help you understand the landscape, the timeline, and the questions worth asking before you make any major moves.

The most important thing first: you don't have to decide anything immediately. With very few exceptions, the financial decisions that come with an inheritance can wait, and often should.

First, Give Yourself Time

There's a reason financial advisors often suggest waiting before making major decisions after receiving an inheritance. Grief affects judgment in ways that aren't always obvious in the moment. Decisions that feel clear and urgent in the weeks after a loss can look very different six months later.

There is no rule that says inherited money must be invested, spent, or restructured on any particular timeline. Putting the funds in a conservative, accessible account while you take the time to grieve, get organized, and think clearly is not only acceptable, it's often wise.

A reasonable window for most people before making any significant financial decisions is three to six months. That's enough time to get through the most acute period of grief, get your paperwork in order, and start thinking about what you actually want your financial life to look like going forward.

Understand What You've Received

Inheritances come in many forms, and each one has different financial and tax implications. Before you can make good decisions, it helps to understand exactly what you've inherited and how each piece works.

Common forms of inheritance include:

• Cash or bank accounts: Generally the most straightforward. Cash transfers don't typically trigger income tax for the recipient, though any interest earned going forward will be taxable.
• Investment accounts (non-retirement): These often receive what's called a "step-up in cost basis", meaning the taxable gain is calculated from the value at the time of inheritance, not the original purchase price. This can significantly reduce capital gains taxes if you decide to sell.
• Inherited IRAs: These come with specific rules that have changed significantly in recent years. Most non-spouse beneficiaries are now required to withdraw the full balance within 10 years. The rules are complex and the tax implications can be substantial. This is an area where professional guidance is particularly valuable.
• Retirement accounts (401k, pension): Similar to inherited IRAs, these come with distribution requirements that depend on your relationship to the deceased and the type of account.
• Real estate: Inherited property also typically receives a step-up in cost basis. If you plan to sell, rent, or keep the property, each path has different financial implications.
• Life insurance proceeds: Generally received income-tax-free by the beneficiary, though any interest earned on delayed payouts may be taxable.

Iowa and Inheritance Tax: What You Need to Know

Iowa is one of a small number of states that has historically had an inheritance tax, meaning a tax on the recipient of an inherited asset, separate from any federal estate tax.

However, Iowa has been phasing out its inheritance tax. As of 2025, Iowa's inheritance tax has been fully eliminated. This is a meaningful change for Iowa residents, as it removes a layer of taxation that previously applied to inheritances from certain relatives.

At the federal level, there is no federal inheritance tax, though there is a federal estate tax that applies to very large estates. For the vast majority of Iowa families, the federal estate tax is not a factor.

What may still be relevant from a tax perspective: income taxes on distributions from inherited retirement accounts, capital gains taxes if inherited assets are sold, and estate administration taxes or fees depending on the complexity of the estate. These are all areas where working with a tax professional alongside a financial advisor is worthwhile.

The Mistakes That Are Easiest to Make

Receiving a meaningful sum of money is one of those moments that can bring out both the best and worst financial instincts. A few common mistakes are worth naming:

• Acting too quickly. As mentioned above, urgency is rarely your friend here. Most financial decisions that feel pressing can wait.
• Letting guilt drive the decision. Many people feel a sense of obligation to use inherited money in a particular way - to honor the person who left it, to be "responsible," or to share it broadly. Those instincts aren't wrong, but they're worth examining thoughtfully rather than acting on reflexively.
• Making large gifts to family or friends before understanding the tax implications. Gifts above the annual federal gift tax exclusion can have tax consequences. Before you share an inheritance widely, it's worth understanding the rules.
• Ignoring inherited retirement account distribution rules. The rules around inherited IRAs, in particular, have changed significantly. Missing a required distribution can result in penalties. If you've inherited a retirement account, this is worth understanding promptly.
• Treating a windfall as income rather than capital. An inheritance is typically a one-time event, not a recurring income stream. Spending it as though it's ongoing income is one of the fastest ways to see it disappear without lasting benefit.

Questions Worth Asking Before You Decide Anything

When you're ready to think about what to do with what you've received, these questions can help bring some clarity:

• What does this inheritance mean in the context of my overall financial picture? Do I have debt, an emergency fund, retirement savings on track?
• Are there any immediate needs this could address, and are those truly needs or wants?
• If this money could do one meaningful thing for my long-term financial independence, what would that be?
• Are there tax implications I need to understand before making any moves, particularly if I've inherited retirement accounts?
• Would I benefit from working with a financial advisor to think through my options with someone who understands my full picture?

There are no universally right answers. But asking these questions before acting tends to lead to better outcomes than acting first and reflecting later.

Honoring What You've Been Given

One thing we often hear from people who have received an inheritance is that they want to honor the person who left it. That's a meaningful instinct.

Honoring an inheritance doesn't mean spending it on something in their memory, though that can be a beautiful choice. It can also mean using it thoughtfully - to create independence for your family, to pay off debt that has been a burden, to fund a retirement that lets you live with dignity and ease, or to give to causes that mattered to both of you.

The best financial decisions tend to be ones that align with your values and your life. An inheritance is an opportunity to be intentional about both.

We're Here When You're Ready

If you've recently inherited money and you're not sure where to begin, we're here to help you think it through - at whatever pace makes sense for you.

At Fawkes Financial Consulting, we understand that financial decisions made during or after a loss carry emotional weight. We work with families to help them make thoughtful, informed choices about what comes next - without pressure and without rushing.

We offer a free initial consultation. No commitment, no agenda. Just a conversation.

Bailey Fawkes is an Iowa-based financial advisor registered with LPL Financial, Member FINRA/SIPC. To schedule a conversation, visit fawkesfinancialconsulting.com.