Inheriting money rarely feels like a windfall — it arrives alongside grief and paperwork and family pressure. The worst financial decisions happen in this window. The best thing you can do immediately is move the money somewhere safe and slow down. Once the dust settles, the tax rules are knowable and the investment path is straightforward. Here is what you need to understand in 2026.
What changed in 2026
- SECURE 2.0 rules are now fully in effect. Non-spouse beneficiaries must empty an inherited IRA within 10 years of the original owner's death — and for owners who had already started required minimum distributions (RMDs), you generally must take annual distributions during those 10 years.
- Stepped-up basis rules remain unchanged — inherited taxable brokerage accounts reset the cost basis to the fair market value on the date of death, eliminating capital gains accumulated over the original owner's lifetime.
- Estate tax threshold remains high (roughly $13–14 million per individual), so most inherited estates owe no federal estate tax.
The types of inherited assets
Understanding what you received determines your tax situation entirely:
| Asset type |
Tax at inheritance |
Ongoing tax treatment |
| Cash (savings, checking) |
None |
Interest taxed as ordinary income |
| Taxable brokerage account |
None (basis steps up) |
Gains from step-up date forward are taxable |
| Traditional IRA / 401(k) |
None at inheritance |
Distributions taxed as ordinary income |
| Roth IRA |
None |
Distributions tax-free (same as original owner) |
| Real estate |
None (basis steps up) |
Rental income and future gains taxable |
| Life insurance payout |
None |
None (lump sum proceeds are tax-free) |
Inherited IRA: the 10-year rule
This is where most people make expensive mistakes. Under current rules:
- You must open an inherited IRA in your own name (you cannot roll it into your own IRA if you are a non-spouse beneficiary).
- You must fully deplete the account by December 31 of the 10th year after the original owner's death.
- If the original owner had begun RMDs, you likely must take annual distributions — not just wait and take it all in year 10.
- Every dollar you withdraw from an inherited traditional IRA is ordinary income in that year.
The strategy implication: spread distributions across 10 years to avoid spikes into higher tax brackets. A fee-only CPA can model the optimal withdrawal schedule for your income situation.
How to invest the money
Cash inheritance
Follow the windfall stack: pay high-interest debt, max tax-advantaged accounts (your own IRA, 401(k), HSA), then invest the remainder in a taxable brokerage account with a simple index fund lineup.
Inherited brokerage account
You can sell the inherited positions without owing tax on gains that occurred before the date of death (stepped-up basis). You may want to simplify and consolidate into your preferred funds, especially if the original owner held many individual stocks.
Inherited Roth IRA
Distributions are tax-free — no rush to withdraw unless required. Consider taking distributions slowly to let the Roth continue growing.
Inherited traditional IRA
Model a 10-year drawdown plan. Keep distributions in low-income years to minimize the tax hit.
How to pick your investment approach
- Identify each asset type and confirm the tax treatment with an accountant if in doubt.
- Get the exact cost basis for any inherited brokerage account from the broker or estate executor.
- Open an inherited IRA immediately if you received a retirement account — you have limited time to establish it before you lose the option.
- Choose simple index funds for the cash/brokerage portion: total US market + international + a bond allocation appropriate for your time horizon.
- Schedule an annual withdrawal plan for inherited traditional IRA distributions before the end of the first tax year.
Common mistakes
Withdrawing the inherited IRA all at once. Taking the full balance in one year could push you into the highest tax bracket. Spread it out.
Missing the inherited IRA account opening deadline. You generally have until December 31 of the year after the death. Missing it can result in unfavorable treatment.
Selling the stepped-up brokerage account before establishing basis. Get written documentation of the stepped-up basis from the custodian before you sell anything.
Making permanent financial decisions while grieving. Giving large sums to family, buying real estate, or quitting your job in the first few months is almost always regretted.
Ignoring state taxes. A handful of states still levy inheritance or estate taxes at thresholds well below the federal exemption.
What to skip
- Annuities purchased with inherited money — high fees, complex surrender periods; rarely the right choice.
- A financial adviser who earns commissions on what they recommend — use a fee-only adviser for inherited money.
- Waiting to invest "until things settle down" — cash sitting idle loses to inflation. Park in a HYSA and set a decision deadline.
FAQ
Do I owe income tax on money I inherit?
Generally not on the principal for cash, life insurance, or stepped-up brokerage assets. But distributions from an inherited traditional IRA or 401(k) are ordinary income. State rules vary.
Can I roll an inherited IRA into my own IRA?
Only if you are the spouse of the deceased. Non-spouse beneficiaries must keep it in a separate inherited IRA and follow the 10-year rule.
What if there are multiple beneficiaries?
Each beneficiary can open their own separate inherited IRA. Splitting by September 30 of the year after the owner's death lets each beneficiary use their own life expectancy rules if applicable.
How do I find out the stepped-up basis?
The broker or custodian holding the account should be able to provide a statement showing the fair market value on the date of death. Request it in writing.
Where to go next
See How to invest a windfall in 2026, How to rebalance once a year in 2026, and How to DCA into index funds in 2026.