Managing Inheritance

Americans are inheriting more than ever. 

Here’s the total amount received by the median inheritor, in dollars and as a share of net worth:

Source: Bloomberg analysis of Federal Reserve Survey of Consumer Finances

Millennials, born between 1981 and 1996, are expected to inherit more than $45 trillion by 2048.

But what are the rules around inheritance?

How should you manage one?

It can be pretty complicated, so let’s break down the key points.

Understanding Inheritance taxes

If you inherit anything (stocks, cash, a house, etc), there is no federal inheritance tax, which means that you don’t pay any taxes on the inheritance. The deceased person’s estate might be responsible for estate taxes though.

BUT some states might tax your inheritance. As of 2025, only KY, MD, NE, NJ, and PA have a state tax on inherited assets, but family members are generally exempt depending on the state.

Managing an inheritance

The median inherited amount is around $125K. I will use that as a baseline to come up with some specific strategies that could be helpful for best managing it.

Step 1 – Take your time

As a general rule, putting your inheritance in a high-yield savings account or Treasury Bills is the first step.

Use this time to resolve any emotional or family issues. Take some time to process it. Don’t rush it.

Step 2 – Get educated or get help

Depending on the amount, you have two options:

Get help from a competent CPA or financial planner. They can help you strategize about how to minimize taxes, recommend an investment strategy, or help you decide whether you need an estate planning attorney.

Get educated on how to manage it effectively (I can cover some of my thoughts here).

Step 3 – Come up with your goals

What are your goals?

Depending on the inherited amount and your age, it could be:

• Retiring
• Going back to school
• Changing jobs
• Building your own wealth
• Starting a business
• Buying a house

Step 4 – Create a plan

Now, you have to create a plan depending on your goals.

Let’s take a simple scenario of Jack, 30 years old, with a stable job and a mortgage. He received $125K of inheritance and wants to build wealth for the long term. Here are some general moves he could consider:

1. Out of $125K, put 3-6 months of expenses in an emergency fund if he doesn’t have one already.
2. Pay off high-interest debt (7-30%+).
3. Max out HSA (if you are qualified) for 2025.
4. Max out Roth IRA (Backdoor Roth for high-income earners) for 2025.
5. Fully max out 401(k) or 403(b) by putting more money from your paycheck (i.e. increasing contribution amounts to 90% of your paycheck) and replacing that with the inheritance.
6. Mega Backdoor Roth (if eligible).
7. Pay off medium-rate debt (4-7%) OR taxable brokerage account, depending on risk comfort.

If the inheritance amount is significant, some other important topics emerge:

• Asset protection
• Gifting
• Estate planning
• Insurance

In that case, it’s best to find a professional to assist with planning.

In addition, some special rules apply regarding inheriting IRA accounts:

Inheriting a Traditional IRA

Inheriting IRA rules depend on the beneficiary:

• Spousal Inheritance

Spouses generally have significant flexibility with the inherited IRA.

They can often assume ownership by transferring the assets to their own IRA.

This can mean a longer withdrawal period and longer tax deferral.

• Nonspousal Inheritance

Nonspouse beneficiaries, such as children, have stricter rules:

Under the SECURE Act of 2019, most nonspouse beneficiaries must withdraw all assets from an inherited IRA within 10 years.

In addition, Required Minimum Distributions (RMDs) may apply depending on the original owner’s age.

Specifically, if the person who died was required to take withdrawals, the person who inherits must take annual withdrawals in addition to closing the account within 10 years. Vanguard has an Inherited RMDs calculator to help with amounts.

Withdrawals from inherited traditional IRAs are subject to tax but avoid the 10% early withdrawal penalty.

If you are subject to withdrawal within 10 years, it’s typically best to spread it out across 10 years, rather than withdrawing it all in one year.

This is because you can fill more of your lower tax brackets each year, rather than pulling it all in year 1 and paying higher marginal rates.

Inheriting Roth IRA

Inheriting a Roth IRA follows similar rules to a Traditional IRA, with two distinct rules:

1. There are no Required Minimum Distribution (RMD) amounts that you have to take each year.
2. Generally, withdrawals from an inherited Roth IRA are tax-free. However, for earnings to be tax-free, the original account owner must have held the Roth IRA for a minimum of 5 years. So, you need to know the first year the original owner made a Roth contribution.

With the passage of the SECURE Act, Roth IRA distributions to a nonspouse must be completed within 10 years following the death of the account owner, similar to the Traditional IRA.

Since the distributions will generally be non-taxable, you may as well wait out the 10 years to allow more time for the inherited Roth to generate tax-free gains.

Overall, I hope this newsletter was helpful. If you have any questions, please reply back.