What to Do With Inherited Money: A Financial Planning Guide

An inheritance often arrives before a plan exists: probate is still open, family conversations are difficult, and a mix of taxable and tax-advantaged assets each require a different set of decisions. The planning window for inherited IRAs and other accounts can be compressed—some decisions are irreversible within months of the death.

Tax treatment varies by asset type—before anything moves, know what you have

The federal tax treatment of an inheritance is not uniform. A brokerage account, an IRA, a life insurance policy, and a piece of real estate all follow different rules. Before selling, withdrawing, or spending anything, identify which bucket each asset falls into.

Asset Type	Federal Tax Treatment	Key Planning Issue
Brokerage account / taxable investments	You inherit a stepped-up basis equal to the fair market value on the date of death (IRC §1014).¹ The decedent's lifetime capital gains disappear. Your holding period is treated as long-term from day one.	The gain that accrued during the decedent's lifetime is permanently excluded from your taxable income. Selling immediately after inheriting typically produces little or no capital gain. Delaying the sale by months or years creates new unrealized gain—measured from the stepped-up basis, not the original cost.
Real estate (home, rental, land)	Same §1014 step-up to date-of-death fair market value.¹ Rental income after inheritance is ordinary income to you; gain on future sale is capital gain measured from the stepped-up basis.	A formal appraisal at the date of death establishes the basis. Without documentation, the IRS can challenge any basis claim. If you intend to sell within a year, sell promptly—the step-up eliminates the gain that accumulated while the decedent owned it.
Traditional (pre-tax) inherited IRA or 401(k)	Withdrawals are ordinary income to you—no step-up applies to pre-tax retirement accounts. Non-spouse beneficiaries must empty the account within 10 years under SECURE 2.0.² If the decedent had passed their required beginning date, annual minimum withdrawals are required in years 1–9 as well (T.D. 10001).³	The 10-year window forces a tax decision: spread distributions evenly (smooth income), front-load (control future RMDs), or back-load (defer taxes but concentrate income in later years). A large pre-tax inherited IRA can push you into the top bracket in every withdrawal year if not planned carefully.
Roth inherited IRA or Roth 401(k)	Qualified distributions remain income-tax free to you. The 10-year rule still applies—the account must be emptied by end of year 10—but no annual distributions are required during the window because Roth IRAs have no required beginning date for the original owner.²	There is no tax cost to waiting. A large inherited Roth IRA can continue growing tax-free for up to 10 years. In most cases, delaying withdrawals until year 9 or 10 maximizes the tax-free compounding period.
Life insurance death benefit	Death benefits paid to a named beneficiary are generally excluded from the beneficiary's gross income under IRC §101(a).⁴ Interest earned on delayed payments is taxable as ordinary income.	Confirm the beneficiary designation was current. If the estate is the beneficiary instead of a named person, the proceeds may be subject to estate tax and must pass through probate. Lump sum vs. retained settlement option (RSO) is a choice that affects liquidity and investment control.
Cash, savings accounts, CDs	No income tax on receipt. Interest accrued but unpaid to the date of death (income in respect of a decedent, IRD) is ordinary income in the year you receive it. Cash received outright after probate is not taxable.	The primary planning issue is where to park large cash before a plan is in place. High-yield savings or Treasury money market funds preserve liquidity while earning a return. Do not commingle with existing accounts until the advisory team has allocated funds.

Inherited IRA rules: the 10-year window and annual RMD requirement

Inherited IRAs—particularly large pre-tax accounts from a parent or spouse—are where inheritance planning most often goes wrong. The rules changed significantly under SECURE 2.0 (effective 2020), and T.D. 10001 (finalized July 2024) added an additional layer: annual distributions are now required during the 10-year window when the original account owner had already reached their required beginning date (RBD).

Who must empty within 10 years

Most non-spouse beneficiaries—adult children, siblings, friends, trusts for adult beneficiaries—fall under the 10-year rule. The exceptions are eligible designated beneficiaries (EDBs): a surviving spouse, a minor child of the decedent (until majority), a person who is disabled or chronically ill, and a beneficiary not more than 10 years younger than the decedent. EDBs may take distributions over their own life expectancy (the traditional "stretch").

When annual RMDs are required: the "past RBD" rule

Under T.D. 10001, if the account owner died after their required beginning date, non-spouse beneficiaries must take annual minimum distributions in years 1 through 9, and empty the account by the end of year 10.³ If the owner died before their RBD, no annual distributions are required—you can take nothing for 9 years and empty the account entirely in year 10.

What is the required beginning date (RBD)? For traditional IRAs and most workplace plans: April 1 of the year following the year the owner turned 73 (for those born 1951–1959) or 75 (for those born 1960 or later), per SECURE 2.0 §107.² If your parent was 68 when they died, they had not yet passed their RBD and you likely have flexibility in timing distributions. If they were 77, they had passed their RBD and annual withdrawals are required.

Surviving spouse: additional options

A surviving spouse has three options for inherited retirement accounts: (1) roll the account into their own IRA (eliminating the 10-year rule entirely, deferring RMDs to their own RBD), (2) keep it as an inherited IRA (which allows penalty-free access before age 59½ if needed), or (3) elect to be treated as the beneficiary and take distributions under their own RMD schedule. The rollover option is almost always the most tax-efficient for a younger surviving spouse—but the inherited IRA option is better if the spouse needs early access to funds without the 10% penalty.

Tax planning across the 10-year window

If you inherit a $500,000 pre-tax IRA and take no distributions for 9 years, the year-10 distribution—plus the account's growth—arrives as a single block of ordinary income. For many beneficiaries, distributing $60,000–$80,000 per year across the 10-year period keeps the withdrawals in the 22–24% bracket rather than the 32–37% bracket. The optimal schedule depends on your other income, expected income trajectory, Roth conversion opportunities, and the decedent's RBD status.

Step-up in basis: the largest tax benefit in most inheritances

If someone inherits a $1 million brokerage account with a $200,000 cost basis, they do not owe capital gains tax on the $800,000 of appreciation that occurred during the decedent's lifetime. Under IRC §1014, the basis is "stepped up" to the $1 million fair market value on the date of death. If the beneficiary sells the shares the following week, the capital gain is zero (or near zero, depending on market movement).¹

This benefit is permanent under current law. OBBBA (2025) did not alter §1014. Any adviser who suggests selling inherited appreciated assets in a rush is likely not accounting for this correctly—the urgency argument disappears when the tax bill is near zero.

Alternate valuation date: The estate may elect to value assets at 6 months after the date of death (the alternate valuation date) if both the total estate value AND the estate tax due decreased from date-of-death to that date. This can provide a higher stepped-up basis on assets that appreciated after death—but it can only be elected by the estate representative, not by individual beneficiaries.

Jointly-held property: only half gets the step-up

Property held as joint tenants with right of survivorship (JTWROS) between a married couple gets a 50% step-up on the decedent's half. Community property states offer a more favorable outcome: both halves of community property receive a full step-up at the first spouse's death. If you are inheriting a joint account from a spouse, the community-property distinction can be worth a significant amount in taxes on a later sale.

Estate tax and state inheritance taxes

The federal estate tax applies to the estate of the person who died—not to the beneficiary receiving the inheritance. The federal exemption for 2026 is $15 million per person ($30 million per married couple, with portability), made permanent under OBBBA (2025).⁵ Fewer than 0.2% of estates owe any federal estate tax. Unless the estate is large, federal estate tax does not affect most inheritance recipients.

State inheritance taxes are different from estate taxes—and they are paid by the beneficiary, not the estate. Six states impose an inheritance tax as of 2026: Iowa (phasing out through 2025), Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates vary by state and by the relationship between the beneficiary and the decedent. Spouses are typically exempt; siblings and unrelated individuals often pay 10–15% in those states. If the decedent lived in one of these states or owned real property there, a CPA with knowledge of the applicable state law should review your inheritance before any assets transfer.

IRMAA: when a large inheritance spikes your Medicare premiums

If you are already on Medicare—or will reach age 65 within two years of the inheritance—a spike in your MAGI from a large inherited IRA distribution or a taxable estate asset sale can trigger Medicare IRMAA surcharges two years later. SSA sets premiums based on income reported two years prior.⁶

2026 Medicare Part B IRMAA tiers (based on 2024 MAGI):

MAGI (single)	MAGI (married filing jointly)	Monthly Part B premium
Up to $109,000	Up to $218,000	$202.90 (base)
$109,001 – $137,000	$218,001 – $274,000	$284.10
$137,001 – $164,000	$274,001 – $328,000	$365.30
$164,001 – $191,000	$328,001 – $382,000	$446.50
$191,001 – $500,000	$382,001 – $750,000	$527.70
Over $500,000	Over $750,000	$689.90

The 2-year lookback means 2026 income affects 2028 premiums. For an inheritance received in 2026, the IRMAA impact can arrive unexpectedly two years later when income appears to have "returned to normal." Smoothing distributions from an inherited IRA across multiple years—rather than concentrating them—reduces this exposure.

First 90 days: a cash policy for inheritance recipients

Most inheritance mistakes happen in the first 90 days. Assets are liquid, family expectations are active, and advisors and product salespeople become attentive. A written plan—even a simple one—prevents pressure from becoming a permanent decision.

Do not commingle inherited assets immediately. Keep inherited accounts separate from your own while the advisory team assesses the full picture. This also makes tax accounting cleaner.
Get the basis documentation. For any inherited brokerage or real estate, request a date-of-death valuation statement from the broker or a formal appraisal. Without this, you cannot establish the stepped-up basis for future tax purposes.
Pause irreversible decisions for 60–90 days. Home purchases, large gifts to family, rolling over accounts, or selling inherited business interests can wait. None of these need to happen in week one.
Park cash in a short-term safe instrument. A Treasury money market fund or high-yield FDIC-insured account holds cash safely while the plan is built. Do not invest a large cash inheritance in the stock market before the tax reserve for any distributions is calculated.
Establish the inherited IRA RBD status. Contact the decedent's IRA custodian immediately: was the decedent past their required beginning date? This determines whether annual RMDs are required in years 1–9 of the 10-year window. Missing a required RMD triggers a 25% penalty on the shortfall (reduced to 10% if corrected promptly).
Notify your estate attorney about your own estate plan. A significant inheritance can push your own estate over thresholds you want to manage—beneficiary designation updates, trust reviews, or annual gifting to heirs ($19,000 per recipient for 2026⁵) are worth reviewing now.

For a full first-year planning framework, see our What to Do After a Windfall guide and the Sudden Wealth Planning Checklist.

What a fee-only advisor does for inheritance recipients

An inheritance introduces planning problems across tax, investment, estate, and family dimensions simultaneously. A fee-only sudden-wealth specialist works alongside your CPA and estate attorney to coordinate all of it:

Inherited IRA distribution strategy: Model annual distributions across the 10-year window to minimize lifetime income tax—accounting for your current income, expected future income, Roth conversion windows, and IRMAA tiers. The optimal distribution schedule requires modeling your entire tax picture, not just the inherited account.
Step-up basis documentation and liquidation timing: Confirm date-of-death valuations, identify which inherited assets to sell (near-zero gain) and which to hold (low new-basis assets with meaningful new appreciation), and build a tax-efficient liquidation timeline.
Asset integration: Combine inherited assets with your existing portfolio into a unified investment policy—avoiding duplication, managing concentration, and ensuring the combined portfolio matches your risk tolerance and liquidity needs.
Estate plan update: Coordinate with your estate attorney to update beneficiary designations, wills, and trusts to reflect a changed net worth. For inheritances above ~$5M, a gifting or trust strategy may be worth establishing before the next tax year.
Family coordination: Provide the factual framework for conversations with family members about gifts, loans, or expectations—so those conversations are grounded in a written plan rather than emotional pressure.

Get matched with a fee-only inheritance advisor

An inherited IRA, a stepped-up brokerage account, a piece of real estate, and a life insurance payout each follow different tax rules—and the decisions made in the first 90 days around each one are often irreversible. A fee-only advisor who specializes in sudden wealth can build an integrated plan with your CPA and estate attorney, without selling products.

Fee-only focus · No product sales · Privacy-minded · Built for inheritance and windfall planning

Sources

IRC §1014 — Basis of property acquired from a decedent; inherited property receives a stepped-up basis equal to fair market value on date of death; holding period treated as long-term. 26 U.S.C. § 1014 — LII / Cornell Law School.
SECURE 2.0 Act of 2022, §107 — RMD age 73 for individuals born 1951–1959, RMD age 75 for individuals born 1960 or later; 10-year distribution rule for non-spouse designated beneficiaries. IRS: Required Minimum Distributions for IRA Beneficiaries.
T.D. 10001, July 2024 — Treasury and IRS final regulations under IRC §401(a)(9) clarifying that non-spouse beneficiaries of a retirement account owner who died after their required beginning date must take annual minimum distributions in years 1–9 of the 10-year period and empty the account by year 10. IRS: Final Regulations on Required Minimum Distributions (T.D. 10001).
IRC §101(a) — Exclusion from gross income of death benefits paid under a life insurance contract; interest on delayed payments is taxable; proceeds paid to a named beneficiary generally bypass probate. 26 U.S.C. § 101 — LII / Cornell Law School.
OBBBA (One Big Beautiful Bill Act, 2025) — permanently raised the federal estate and gift tax exemption to $15 million per person; 2026 annual gift exclusion $19,000 per recipient per donor (Rev. Proc. 2025-32). IRS: Estate and Gift Tax.
2026 IRMAA thresholds: SSA determines Part B and Part D surcharges using MAGI from two years prior (2024 income sets 2026 premiums). Part B base premium $202.90/month; surcharges apply in tiers above $109,000 single / $218,000 MFJ. CMS Fact Sheet: 2026 Medicare Parts A & B Premiums and Deductibles.

Content verified June 2026 against IRC §§101, 1014, SECURE 2.0 §107, T.D. 10001, OBBBA (2025 estate/gift changes), IRS Publication on RMDs, and CMS 2026 IRMAA fact sheet. Dollar thresholds are 2026 values. This page does not constitute tax, legal, or financial advice. Consult a qualified CPA and estate attorney for your specific facts.

Back to homepage · Windfall Allocation Calculator · Windfall Tax Guide · Sudden Wealth Checklist · What To Do After a Windfall