🎯 In 30 seconds: Most inheritances are not taxed as income, but what you inherit decides the tax later. Stocks and houses usually get a fresh cost basis, so selling soon costs little tax. Traditional IRAs and 401(k)s are taxed as you withdraw, and most non-spouse heirs must empty them within 10 years. Park the money safely, learn the deadlines, then decide slowly.
The first 90 days
| When | What to do |
|---|---|
| Weeks 1 to 2 | Grieve. Make no big money decisions. Keep any cash you receive in an FDIC- or NCUA-insured account. |
| By day 30 | Get several certified death certificates. Find out from the executor or account firms what you are named on, and ask each firm for its beneficiary claim forms. |
| By day 60 | For each account, learn the type (cash, brokerage, traditional IRA, Roth IRA, 401(k), annuity, life insurance) and the date-of-death value. Ask whether the original owner had started required minimum distributions. |
| By day 90 | Write a one-page plan: debts to pay, emergency fund to fill, withdrawal schedule for inherited retirement accounts, and what will be invested. Meet a tax professional before the first big withdrawal or sale. |
How each kind of inheritance is taxed
| You inherit | Income tax when you receive it | Later |
|---|---|---|
| Cash | None | Interest it earns is taxable |
| Stocks, funds, a house | None | Basis is generally the value on the date of death; gain after that is taxed when you sell, as long-term |
| Life insurance | Generally none | Interest added by the insurer is taxable |
| Traditional IRA or 401(k) | None until you withdraw | Each withdrawal is ordinary income; no 10% early penalty for beneficiaries |
| Roth IRA | None | Withdrawals are tax-free if the account is at least 5 years old; earnings may be taxed if not |
The federal estate tax is paid by the estate, not by you, and only above $15 million for deaths in 2026. A handful of states charge an inheritance tax on heirs, so check your state and the one the person lived in.
Stepped-up basis, in numbers
Your father bought shares for $40,000 decades ago. They were worth $250,000 on the day he died. Your basis is $250,000, not $40,000. If you sell for $255,000 a few months later, your taxable gain is $5,000, and it counts as long-term even though you held the shares briefly. Had he given you the shares while alive, you would have kept his $40,000 basis and faced tax on $215,000 of gain. Ask the brokerage to record the date-of-death value; keep the statement.
Inherited IRAs and 401(k)s: who must do what
- A surviving spouse has the most choices, including treating the IRA as their own or rolling it into their own IRA. A spouse under 59½ who may need the money soon sometimes keeps it as an inherited account instead, because withdrawals from your own IRA before 59½ can carry the 10% penalty.
- Eligible designated beneficiaries can stretch withdrawals over their life expectancy: a minor child of the owner (until adulthood, then the 10-year clock starts), a disabled or chronically ill person, and anyone not more than 10 years younger than the owner.
- Everyone else who is named (most adult children, nieces, friends) must empty the account by December 31 of the tenth year after the year of death.
- If the owner had already reached the age for required distributions, those heirs must also take a yearly minimum in years 1 to 9. Final IRS rules apply this from 2025, after several years of penalty relief.
- A non-spouse cannot roll the money into their own IRA. Move it by direct trustee-to-trustee transfer into an inherited IRA titled with the deceased owner’s name. A check made out to you is a taxable withdrawal that cannot be undone.
- Inherited Roth IRAs follow the 10-year rule too, but withdrawals are usually tax-free, so many heirs leave the money to grow until year 10.
Worked example: spreading the withdrawals
Nina, 45, single, earns $85,000. In 2025 she inherited a $300,000 traditional IRA from an aunt who had not reached her required beginning date, so Nina has no yearly minimum, only the 10-year deadline. Using 2026 brackets and today’s dollars (ignoring growth):
| Plan | Extra federal income tax | Top rate reached |
|---|---|---|
| Take all $300,000 in one year | about $88,000 | 35% |
| Take $30,000 a year for 10 years | about $66,000 total ($6,600 a year) | 22% |
Spreading saves Nina about $22,000. Her taxable salary income is $68,900, and the 22% bracket ends at $105,700, so she has about $36,800 of room each year before hitting 24%. Lower-income years, such as a sabbatical or early retirement, are good years to take more. If she had inherited from someone already taking RMDs, she would take at least the yearly minimum and could still take more to keep the withdrawals even.
What to do with the rest
- Pay off high-interest debt (see the debt plan).
- Fill your emergency fund.
- Use the money to max out your own retirement accounts for the year while living partly on inherited cash.
- Invest the rest by your own plan; the lump sum or spread it out page covers timing.
- Update your own will and beneficiaries, since your estate just grew.
- You inherit shares bought for $40,000, worth $250,000 at death, and sell for $255,000. What is the taxable gain? Answer: $5,000, long-term.
- Your aunt died in 2025 and you are her adult niece. When must her IRA be empty? Answer: By December 31, 2035.
- Can a non-spouse beneficiary roll an inherited IRA into their own IRA? Answer: No. Use a direct transfer to an inherited IRA.
- Do beneficiaries under 59½ owe the 10% early withdrawal penalty on inherited IRA withdrawals? Answer: No.