While often an emotional process, receiving an inheritance can also be a life-changing event, if handled properly. Without thoughtful planning, however, an influx of mismanaged funds can lead to costly financial mistakes.

In this week’s Money Wisdom Question Series, Heath Grossman, CFP® shares five steps to help you manage an inheritance responsibly and effectively.

1. Understand the Tax Implications

Depending on the account type and who you inherit it from, different tax rules may apply. While some inherited accounts may have little to no immediate tax impact, IRAs often carry tax consequences. If you inherit an IRA from your spouse, you can usually combine it with your own IRA. This typically does not trigger any taxes.

However, if you inherit an IRA from a non-spouse, you must transfer the funds into an inherited IRA. Under the latest rules for inherited IRAs, you have a 10-year window in which you must withdraw the money. If it’s a traditional IRA, those withdrawals are generally taxable. But if it’s a Roth IRA, the withdrawals are generally tax-free.

2. Decide What to Do with the Money

How you’d like to spend your inheritance will depend largely on your financial circumstances and long-term goals. For some people, this may be a good opportunity to pay down debt. For others, it may make sense to build or strengthen an emergency fund.

You may also want to explore investment opportunities if you don’t need the money right away. In some cases, you may use the inheritance to pay for a loved one’s college costs. You may also choose to donate part of it to a charitable cause or organization. While there are many possible paths to take, the right one will depend on what matters most to you.

3. Reassess Your Financial Goals and Priorities

An inheritance can change your financial picture in meaningful ways, especially in regard to your retirement. For example, if your original goal was to retire at age 65, this new influx of money may shift that timeline. You might be able to retire sooner or pursue other goals that once felt out of reach.

4. Review and Update Retirement Plans

Upon receiving an inheritance, it’s important to review and update your insurance, retirement, and estate plans. After such a major life event, you want to step back and look at your finances with a holistic lens. Doing so can help ensure your broader financial plan still reflects your current circumstances.

5. Consult Professionals Throughout the Process

As a beneficiary, you’ll likely face many critical decisions throughout this complex legal and financial process. That’s why many people turn to financial, legal, and tax professionals for guidance. They can help you avoid costly mistakes and make informed decisions based on your unique needs and goals.