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A Guide to Your Inheritance

Retirement planning, family financial

Before you begin to invest or spend an inheritance, it’s essential to know what type you will be receiving. Knowing what you will inherit and how it can be taxed gives you a much better picture of what to expect. This guide provides simple explanations for the most common forms of inheritance and their potential for taxation:


Straight Up Cash: Cash is one of the most common forms of inheritance. The good news is that when you inherit cash, you most likely won’t be taxed on it. You will benefit tax-free, unless it’s an enormous windfall, thanks to a rule from 2018 which allows someone to leave up to $11.18 million or $22.36 million (for a married couple) in cash before any taxes are due.

IRA- Individual Retirement Account: (IRAs) are portfolios of assets that many Americans use to save for retirement. Hold on, since this is technically a retirement account, does that mean if I inherit an IRA then I’ll have to wait until my retirement to use it? No! While the intended purpose of the IRA was retirement savings for the now deceased, the beneficiary (you) does not have to wait until retirement to use the assets in the portfolio.

When you inherit an IRA, you have a few options. First, you could take a lump-sum payout of the entire retirement account balance. However, doing so may result in a large tax. You must take the full distribution within 10 years of the account owner’s death (the IRS wants their take!). If you are a spouse who receives an IRA, you can roll the assets from the account into your own IRA, in which case you won’t have to begin taking those taxable distributions until age 72.


401(k) Inheritance: 401(k) plans are relied on by many Americans for their retirement savings. Retirees often pass before depleting their savings, leaving many 401(k) accounts to be inherited.

Just like an IRA, beneficiaries can withdraw the entire balance of a 401(k) in one lump sum. While it is easy to do and tempting to receive all that money at once, there are some drawbacks. The main problem with taking a lump sum payout of an inherited 401(k) is the huge tax bill.

Roth IRA and Roth 401(k): So, you’ve just inherited a Roth IRA or Roth 401(k) and you’re wondering how they differ from a regular IRA or 401(k)? Inheriting a Roth IRA or Roth 401(k) account is different since Roth accounts are funded with money that has already been taxed. Lucky for you, that means that when you withdraw money from a Roth IRA or 401(k), it won’t be subject to taxation!


Houses or Property: There are three main options once you’ve inherited a house. You can choose to live in the house, sell the house, or rent the house to tenants.

Choosing to live in the inherited home can be beneficial as you won’t have to pay rent or make mortgage payments. However, you will be responsible for other costs such as property taxes, insurance and maintenance. Therefore, when you inherit a house, you should make sure that you can afford these new expenses, if you plan to keep it. If those costs exceed your budget, then consider selling or renting the property.

If you decide to sell the home, the net proceeds are treated similar to a cash inheritance.

If you want to keep the house as an investment, make sure the rent will cover your costs. If renting out the home will provide additional income each month, you could benefit from potential appreciation over time along with a tax break from depreciation. However, being a landlord can add many responsibilities to your workweek. Unlike the passive nature of stocks, bonds and cash, make sure you have the time to devote to manage the property. Consider a reputable rental agency to manage the home as another viable option.

While this list is a good start, developing a more comprehensive inheritance plan with a Demand Wealth advisor will lead to greater peace of mind during this important and often emotional time. Ask us about the transitional stages of the ‘Demand Legacy’ portfolio and how they can help you move forward with peace of mind.

Schedule a video conference with us today.


This report is a publication of Demand Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.


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