Inheritance Advisor Match

Inheriting Money From a Parent: What to Do (2026)

Most people have never been through this before. The tax rules are specific, several deadlines can't be undone, and the decisions you make in the first 180 days often determine whether you keep or lose hundreds of thousands of dollars.

Inheriting money from a parent is the most common inheritance scenario — and one of the most financially complex life events most people will ever face. A typical parent's estate contains a mix of assets that all have different tax rules: an IRA with decades of untaxed growth, a house with a stepped-up basis, a brokerage account full of appreciated stock, maybe a pension or life insurance policy.

Each of these works differently. The IRA is time-sensitive and fully taxable on withdrawal. The stock and house are nearly tax-free to sell now because of step-up basis. The life insurance proceeds are income-tax-free entirely. Getting these confused — or trusting a generalist who handles one parent inheritance a year — is where six-figure mistakes get made.

This guide walks through the most common scenarios with specific numbers so you know what you're actually dealing with.

The typical parent estate: what you might be inheriting

Most parents who accumulated meaningful assets hold them in some combination of these:

Common assets in a parent's estate and how each is taxed:
  • Traditional IRA or 401(k): Fully taxable as ordinary income when you withdraw. Subject to 10-year depletion deadline (SECURE Act). The biggest decisions are here.
  • Roth IRA: Tax-free distributions (if 5-year rule met). Still subject to 10-year rule — but deferring to year 10 is usually optimal.
  • Brokerage account: Step-up basis under IRC §1014 resets all embedded gains to date-of-death value. Selling soon = minimal capital gain.
  • Real estate: Same step-up basis reset. Selling a $700K house your parent bought for $120K generates almost no capital gain if you sell near date-of-death value.
  • Life insurance: Death benefit is income-tax-free under IRC §101(a). Usually arrives as cash within 30-60 days of filing a claim.
  • Pension / annuity: Depends on the type. Inherited pensions typically require lump-sum-vs-monthly-payments decision. Non-qualified annuities are taxed on gains as ordinary income.
  • Savings bonds (I Bonds / EE Bonds): No step-up. All accrued interest is taxable ordinary income when redeemed.
  • Bank accounts / CDs: No step-up on accrued interest (it's IRD — income in respect of a decedent). The principal transfers cleanly but accrued interest is taxable.

The inherited IRA: your most time-sensitive decision

If your parent had a traditional IRA or 401(k), you almost certainly inherited the most tax-complex asset in the estate. Under the SECURE Act (IRC §401(a)(9)(H)), non-spouse beneficiaries must fully deplete the inherited account within 10 years of the parent's death — not over their own lifetime as the old stretch IRA rules allowed.1

The 2024 IRS final regulations (T.D. 10001) added a critical requirement: if your parent died after their Required Beginning Date (age 73 for those born 1951–1959; age 75 for those born 1960 or later), you must also take annual RMDs during years 1–9 — you cannot simply wait and take it all in year 10.2

What this means in dollars

Say you inherited a $600,000 traditional IRA from a parent who died at age 78. You must take RMDs each year AND fully distribute the account by year 10. Each distribution is taxed as ordinary income in the year you take it — stacked on top of your salary, business income, or other income.

If you're currently in the 22% bracket and pull $60,000/year (even distribution), the tax is manageable. If you wait and take the entire $900,000 (with 6% growth) in year 10, you could owe federal tax at the 37% marginal rate on much of it.

The optimal strategy depends on your projected income over the next 10 years — particularly when you retire. Someone retiring in year 5 should delay distributions into the lower-bracket years post-retirement. Someone whose income will rise should pull more now.

Use the tools to model your situation:

One thing you absolutely cannot do: accept a check directly from the IRA (a 60-day rollover) and try to roll it into your own IRA. Under IRC §408(d)(3)(C), non-spouse beneficiaries are prohibited from 60-day rollovers. The full amount becomes taxable income immediately. This is one of the costliest inherited IRA mistakes — see 7 Costly Inheritance Mistakes to Avoid.

Inherited Roth IRA: the easy one

If your parent had a Roth IRA, congratulations — you inherited the most tax-efficient account type. The 10-year rule still applies, but there are no required annual RMDs (Roth owners never have a Required Beginning Date, so T.D. 10001 doesn't apply). Distributions are tax-free if the Roth was opened at least 5 years before the owner's death.

Optimal strategy: defer all distributions to year 10. Let the balance compound tax-free for 10 years, then take the full lump sum as tax-free income. This is the opposite of the traditional IRA strategy.

See Inheriting a Roth IRA: Rules, Tax Treatment & Smart Strategy for details.

Step-up basis: the biggest tax break on non-IRA assets

For everything outside retirement accounts — brokerage accounts, real estate, and most other property — your parent's death triggers a "step-up" in tax basis under IRC §1014. Your inherited cost basis equals the fair market value on the date of death, regardless of what your parent originally paid.3

What this means for inherited stock

If your parent bought Apple stock in 2005 for $10,000 and it was worth $180,000 when they died, your inherited basis is $180,000. If you sell the next day for $181,000, your taxable gain is $1,000 — not $170,000. The $170,000 in lifetime appreciation is permanently erased from your tax picture.

In 2026, long-term capital gains rates are:4

Under IRC §1223(11), inherited assets automatically qualify for long-term treatment regardless of how long you hold them — so there's no need to wait a year before selling to get LTCG rates.

Critical step: get a formal appraisal of the date-of-death value for any non-publicly-traded asset (real estate, private business interests, collectibles). For publicly traded stock, the FMV is the average of the high and low price on the date of death. Document everything now — you'll need it when you eventually sell.

See Step-Up Basis: What It Is and How to Use It and Step-Up Basis Tax Savings Calculator.

The inherited house: sell, rent, or move in?

The family home is often the most emotionally charged asset in a parent's estate — and fortunately, also the most tax-forgiving due to step-up basis. If the house was worth $550,000 when your parent died and you sell it for $560,000 within the year, your federal capital gain is $10,000, not the $400,000 your parent would have owed after a 35-year hold.

The three options, briefly:

See What to Do With an Inherited House: Sell, Rent, or Keep? for full analysis with detailed tax math.

Do you owe inheritance tax or estate tax?

Federal: almost certainly not

There is no federal inheritance tax. The federal estate tax is paid by the estate before you receive anything — not by you. And the estate tax exemption in 2026 is $15 million per decedent (made permanent by the One Big Beautiful Bill Act in July 2025).5 Only estates worth more than $15M owe any federal estate tax. If your parent's total estate was below that threshold, you receive your inheritance with no federal estate tax deducted.

State inheritance tax: check your parent's state

Five states impose a state inheritance tax on beneficiaries: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.6 The tax is based on where the decedent (your parent) lived, not where you live.

In all five states, direct-line descendants — children inheriting from parents — are either fully exempt or taxed at the lowest rate. In New Jersey and Nebraska, children are fully exempt. In Kentucky, Pennsylvania, and Maryland, children are exempt or pay minimal rates. But the rules vary by state and asset type.

If your parent lived in one of these five states: Read the Inheritance Tax by State: A 2026 Guide carefully, particularly the exemption for lineal descendants, and run numbers through the Inheritance Tax Calculator.

For a parent living in any other state — all 45 of them — there is no state inheritance tax owed by you on what you inherit.

Your action timeline: the first 180 days

Most of the irreversible decisions happen in the first six months. Here's what matters when:

Days 1–30: protect the assets, make no big moves

Days 30–90: understand what you have

Days 90–180: make the big decisions

When siblings are involved

The most common complication in parent inheritance is co-heirs: siblings who inherit the same estate together. The IRA beneficiary designation may name all children equally, or the will may split property. Each asset type has different mechanics for splitting:

For a full breakdown, see How to Split an Inheritance with Siblings.

The mistake that costs heirs the most

In parent inheritance, the most expensive common mistake is treating the inherited IRA like a windfall to be spent now. A $400,000 inherited IRA feels like $400,000. But if you take it all in year 1 as a lump sum, you add $400,000 to your ordinary income — potentially pushing you into the 35% or 37% federal bracket plus your state income tax rate. Federal tax alone could be $130,000+. Spread over 10 years in a thoughtful strategy, that same $400,000 (which has also grown) could be distributed at an effective federal rate half that.

The other costly mistake: selling inherited stocks before getting a date-of-death appraisal to document your stepped-up basis. Without documentation, the IRS may use your parent's original cost basis — which could make a tax-free sale look like a taxable one. Get the documentation in writing before you sell anything.

See 7 Costly Inheritance Mistakes to Avoid for the full list with dollar-cost examples.

Why a specialist matters here

A fee-only financial advisor who handles inheritance planning regularly knows how to:

The distinction that matters: fee-only. A fee-only advisor charges you directly and has no commission motive to put inherited money into products. See How to Choose a Financial Advisor for Inheritance Planning for what questions to ask before you hire.

  1. SECURE Act of 2019, IRC §401(a)(9)(H) — 10-year rule for non-spouse beneficiaries. IRS RMD Overview
  2. T.D. 10001 (July 2024) — final regulations clarifying annual RMD requirement when decedent died after Required Beginning Date. Federal Register, T.D. 10001
  3. IRC §1014 — stepped-up basis for inherited property. IRC §1223(11) — immediate long-term treatment. IRS Publication 559 — Survivors, Executors, and Administrators
  4. 2026 long-term capital gains brackets per IRS Rev. Proc. 2025-32. IRS Rev. Proc. 2025-32
  5. One Big Beautiful Bill Act (July 2025) — made $15M estate/gift/GST exemption permanent. IRS 2026 inflation adjustments
  6. State inheritance taxes: KY, MD, NE, NJ, PA. Tax Foundation — Estate and Inheritance Taxes by State

Tax values verified against 2026 rules (IRS Rev. Proc. 2025-32; T.D. 10001; OBBBA July 2025). Last reviewed May 2026.

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