Inheritance Guide: What to Do When You Inherit Money or Assets
Tax Treatment by Asset Type
| Inherited Asset | Income Tax? | Key Rule |
|---|---|---|
| Cash | No | Not taxable income |
| Stocks / Bonds | No (until sold) | Stepped-up basis eliminates prior gains |
| Real Estate | No (until sold) | Stepped-up basis to date-of-death value |
| Traditional IRA / 401(k) | Yes — on distributions | 10-year rule for most non-spouse beneficiaries |
| Roth IRA | No (if 5-year rule met) | 10-year rule applies, but distributions are tax-free |
| Life Insurance | No | Death benefit is income-tax-free |
| Annuities | Yes — on gains portion | Taxed as ordinary income when distributed |
Understanding Stepped-Up Basis
Stepped-up basis is the most valuable tax benefit in inheritance. When you inherit stocks, bonds, or real estate, your cost basis resets to the fair market value on the date of death — not what the deceased originally paid.
This eliminates all unrealized capital gains accumulated during the deceased’s lifetime. For families who used 1031 exchanges to defer taxes on real estate over decades, the stepped-up basis at death permanently eliminates those deferred gains.
Inherited Retirement Accounts: The 10-Year Rule
The SECURE Act (2019) changed the rules for inherited IRAs and 401(k)s. Most non-spouse beneficiaries must empty the account within 10 years of the original owner’s death. No more stretching distributions over your lifetime.
| Beneficiary Type | Distribution Rule |
|---|---|
| Surviving Spouse | Can roll into own IRA, treat as own, or use 10-year rule |
| Minor Child (of deceased) | Stretch until age of majority, then 10-year rule |
| Disabled/Chronically Ill | Stretch over life expectancy |
| Beneficiary ≤10 years younger than deceased | Stretch over life expectancy |
| Everyone Else (adult children, siblings, friends) | 10-year rule — must empty by end of year 10 |
What to Do When You Receive an Inheritance
Step 1: Don’t do anything for 6–12 months. Grief and financial decisions don’t mix well. Park inherited cash in a high-yield savings account while you plan.
Step 2: Understand the tax implications. Different assets have different rules. Get professional advice — the cost of a CPA or tax attorney is minimal compared to the tax mistakes you might make.
Step 3: Pay off high-interest debt. If you carry credit card debt or other high-rate loans, using part of the inheritance to eliminate them is almost always the right financial move.
Step 4: Maximize tax-advantaged accounts. Fund your 401(k), Roth IRA, and emergency fund before investing in taxable accounts.
Step 5: Invest the remainder wisely. Align inherited wealth with your overall financial plan. Consider your risk tolerance, time horizon, and existing portfolio. A diversified index fund approach works for most people.
Key Takeaways
- Most inherited assets (cash, stocks, real estate, life insurance) are not taxable income. Inherited retirement accounts (traditional IRA/401k) are taxed on distributions.
- Stepped-up basis eliminates unrealized capital gains on inherited stocks and real estate — one of the most valuable tax benefits available.
- Non-spouse beneficiaries must empty inherited retirement accounts within 10 years under the SECURE Act.
- Don’t rush decisions. Park cash in a high-yield savings account and take 6–12 months to plan.
- Get professional tax advice — the rules are complex and the stakes are high.
Frequently Asked Questions
Do I have to pay taxes on inherited money?
Inherited cash and life insurance proceeds are generally not taxable income. Inherited stocks and real estate receive a stepped-up basis and are only taxed when sold (on gains above the stepped-up value). Inherited traditional IRAs and 401(k)s are taxed as ordinary income when distributed. Six states impose inheritance taxes at varying rates.
What is the 10-year rule for inherited IRAs?
Under the SECURE Act, most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. For inherited traditional IRAs, these distributions are taxed as ordinary income. Strategic withdrawal planning — taking more in lower-income years — can minimize the total tax bill over the 10-year window.
How does stepped-up basis work?
When someone dies, the cost basis of their assets resets to fair market value on the date of death. If your parent bought a house for $150,000 and it’s worth $500,000 when they die, your basis is $500,000. If you sell for $510,000, you owe capital gains tax on only $10,000 — not $360,000.
Should I hire a financial advisor for an inheritance?
For inheritances above $100,000, a fee-only financial advisor or CPA is worth the investment. They can help with tax planning (especially for inherited retirement accounts), asset allocation, and integrating the inheritance into your overall financial plan. Avoid advisors who earn commissions — they may recommend products that benefit them more than you.
Can I disclaim (refuse) an inheritance?
Yes. A qualified disclaimer lets you refuse part or all of an inheritance, redirecting it to the next beneficiary in line. This can be a tax-planning tool — for example, a wealthy child might disclaim to pass assets to grandchildren. The disclaimer must be in writing within 9 months of death, and you can’t have accepted any benefit from the assets.