Inheriting money can be life-changing—but it also comes with emotional and financial complexity. Making smart decisions during this time can secure your financial future; rushing into decisions can waste a once-in-a-lifetime opportunity.
Quick answer: No federal income tax on inheritance. Inherited IRA: 10-year withdrawal rule for non-spouses. Estate tax: only on $13.61M+. Step 1: Wait 30-60 days before acting.
Step 1: Don’t Do Anything for 30-60 Days
| Time Period | What to Do |
|---|---|
| Day 1-30 | Grieve. Park money in a high-yield savings account. Don’t make any big purchases or investments. |
| Day 30-60 | Gather all documents, understand what you’ve inherited, consult professionals if needed. |
| Day 60+ | Begin executing a deliberate plan. |
70% of families lose inherited wealth within one generation. The main reason: emotional and impulsive decisions.
Tax Rules for Different Inherited Assets
| Asset Type | Federal Income Tax? | Key Tax Rule |
|---|---|---|
| Cash | No | No income tax on inheritance |
| Stocks/investments | No (until sold) | You get a “stepped-up basis” to the date-of-death value |
| Traditional IRA/401(k) | Yes (on withdrawals) | Non-spouse must withdraw within 10 years; spouse can transfer to own IRA |
| Roth IRA | Usually no | Non-spouse must withdraw within 10 years, but withdrawals are tax-free |
| Real estate | No (until sold) | Stepped-up basis—only gains after death are taxed |
| Life insurance | No (usually) | Tax-free unless paid to the estate |
| Annuities | Yes (on gains) | Earn portion is taxed as ordinary income |
The Stepped-Up Basis (Key Tax Benefit)
| Example | Inherited Stocks |
|---|---|
| Original purchase price (cost basis) | $50,000 |
| Value at owner’s death (your new basis) | $300,000 |
| You sell immediately | $0 taxable gain |
| You sell at $350,000 | $50,000 taxable gain (not $300,000!) |
The stepped-up basis eliminates tax on all gains during the deceased’s lifetime—potentially saving tens of thousands in capital gains taxes.
Inherited IRA Rules
| Beneficiary Type | Rule |
|---|---|
| Spouse | Can roll into own IRA; RMDs based on own age |
| Non-spouse (after 2019) | Must withdraw all funds within 10 years |
| Eligible designated beneficiary* | Can use life expectancy method (stretch IRA) |
| Non-person (estate, charity) | Must withdraw within 5 years |
*Eligible designated beneficiaries: minor children, disabled/chronically ill, persons not more than 10 years younger than deceased.
What to Do With an Inheritance by Size
Under $25,000
| Priority | Action |
|---|---|
| 1 | Pay off high-interest debt (credit cards, personal loans) |
| 2 | Build emergency fund to 3 months of expenses |
| 3 | Contribute to IRA or increase 401(k) contributions |
| 4 | Invest remainder in low-cost index funds |
$25,000-$100,000
| Priority | Action |
|---|---|
| 1 | Park in high-yield savings for 60 days |
| 2 | Pay off all high-interest debt |
| 3 | Full 6-month emergency fund |
| 4 | Max out IRA ($7,000) and increase 401(k) contributions |
| 5 | Consider fee-only financial advisor consultation ($300-$500) |
| 6 | Invest in taxable brokerage account (index funds) |
$100,000-$500,000
| Priority | Action |
|---|---|
| 1 | Hire a fee-only financial advisor |
| 2 | Pay off all debt (consider keeping low-rate mortgage) |
| 3 | Max all tax-advantaged accounts |
| 4 | Review estate plan (update will, beneficiaries) |
| 5 | Invest in diversified portfolio |
| 6 | Consider funding children’s 529 plans |
$500,000+
| Priority | Action |
|---|---|
| 1 | Hire a fee-only financial advisor AND a CPA |
| 2 | Comprehensive financial and estate plan |
| 3 | Max all tax-advantaged accounts |
| 4 | Tax-efficient investment strategy |
| 5 | Estate planning (will, trust, beneficiary review) |
| 6 | Consider charitable giving strategies |
Common Inheritance Mistakes
| Mistake | Why It’s Costly |
|---|---|
| Spending it all quickly | 33% of inheritors report the money is gone within 2 years |
| Quitting your job | Inheritance may seem large but often can’t replace lifetime earnings |
| Buying a much larger house | Higher mortgage, taxes, insurance, maintenance—permanent costs |
| Lending to friends/family | Rarely repaid; damages relationships |
| Not understanding the tax rules | Could overpay taxes by thousands (missing stepped-up basis, etc.) |
| Emotional investing (risky bets) | Concentrated positions or speculative investments |
| Ignoring inherited retirement account deadlines | Missing 10-year rule triggers penalties |
| Not updating your own estate plan | Your increased net worth needs new planning |
The Bottom Line
Inherited money is a one-time opportunity. Wait 30-60 days before making decisions, understand the tax rules (especially stepped-up basis and the 10-year IRA rule), and follow a priority system: eliminate debt, build emergency savings, max tax-advantaged accounts, then invest the rest. For inheritances over $100,000, a fee-only financial advisor pays for themselves in tax savings and avoided mistakes.