5 tax-smart ways to invest a life insurance payout

Stack of bills wrapped with red bow

You just found out that your long-lost great uncle died … and he left you as beneficiary on his life insurance policy.

The money isn’t enough to storm your boss’s office to quit, but it’s too much to blow on a new wardrobe and a tropical vacation.

So what are your options?

That's essentially what Lupe, an Interest.com reader, asked in a comment she left on a recent story.

Her question was passed on to me because I frequently deal with issues like this in my law practice.

First, you should know that, generally speaking, you won’t owe income taxes on your life insurance proceeds.

This same rule applies to most inheritances.

In other words, if you inherit money or property, you typically don’t treat what you receive as income. (The big exception to this is inheriting a 401(k) plan or Individual Retirement Account.)

Here are some tax-focused ideas for investing your windfall:

You should talk with your investment and tax advisers about your individual situation to determine if any of these strategies are advisable for you.

Clint Costa is an attorney and CPA at the law firm of Shaheen, Novoselsky, Staat & Filipowski in Chicago.

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