What to do with an inheritance
The tax rules that apply to inherited accounts and property, and a practical order of operations for deciding what to do with the money.
An inheritance is often the largest lump sum many people ever receive, and the tax treatment varies significantly depending on what you inherited — which makes rushing into a decision one of the most common and costly mistakes.
Inherited retirement accounts have their own rules
Most non-spouse beneficiaries who inherit an IRA or 401(k) after 2019 are subject to the SECURE Act's 10-year rule: the account must be fully distributed within 10 years of the original owner's death, and — depending on whether the original owner had already started RMDs — annual distributions may also be required during that window. Spouses generally have more flexible options, including treating the IRA as their own.
Inherited investments and property get a "step-up" in basis
Unlike retirement accounts, inherited stocks, real estate, and other taxable investments generally receive a step-up in cost basis to their fair market value on the date of death. That means if you sell shortly after inheriting, you typically owe little or no capital gains tax — a significant advantage over how the assets were taxed for the person who left them to you.
A practical order of operations
Don't make any major decisions in the first few months. Once you're ready: pay off any high-interest debt, build or top up an emergency fund, understand the specific tax treatment of what you inherited (this varies by account type), and only then decide how to invest the remainder according to your own goals and timeline — not the deceased's original investment strategy.
Where people go wrong
Common mistakes include leaving an inherited IRA in cash and missing required distributions, not realizing a step-up in basis means selling inherited investments soon after death is often tax-efficient, and making large purchases or gifts before working through the tax and planning implications.
Frequently asked questions
Do I have to pay taxes on an inheritance?+
It depends on what you inherited. Inherited retirement accounts (IRAs, 401(k)s) are generally taxed as ordinary income when withdrawn. Inherited investments and property typically receive a step-up in cost basis to fair market value at death, so selling soon after usually triggers little or no capital gains tax. There's no federal inheritance tax paid by the recipient in most cases, though a small number of states impose one.
What is the 10-year rule for inherited IRAs?+
Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA after 2019 must fully distribute the account within 10 years of the original owner's death. Depending on whether the original owner had already started required minimum distributions, annual distributions during that 10-year window may also be required, not just a lump sum at the end.
Put this into practice
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