You inherited $50,000, now what?

Inheriting money can feel both emotionally heavy and financially overwhelming. If you’ve recently inherited $50,000, you may be asking: What should I do next? How you move forward depends on where that money came from. Not all inheritances are taxed or distributed the same way, and understanding the rules can help you make smart, long-term decisions.

1. Taxable Brokerage Account

A taxable brokerage account is the simplest type of inheritance because it has the fewest restrictions. Brokerage accounts receive a step up in cost basis. This means the investments are revalued to the market price on the date of death. If you choose to sell the holdings immediately, you typically owe little to no capital gains tax. Future growth is taxed at long-term or short-term capital gains.

Receiving inheritance through a brokerage account gives you the option to be flexible with how you can use it. For example, you can fund a certain goal with a lump sum distribution such as paying off debt, funding college, downpayment for home, or even retirement. A taxable brokerage is a great tool for saving for long term goals since it does not require any minimum distributions.

2. Individual Retirement Account (IRA)

The rules here changed significantly under the SECURE Act. Non-spouse beneficiaries must empty the account within 10 years with required minimum distributions (RMDs) each year. If you are a spouse receiving an inherited IRA, you have a few distribution options.

If the IRA owner passes away on or after the RMD age:
The spouse can treat the account as his/her own. If the spouse is RMD age, they can distribute over his/her life using their current age each year.
Distribute based on the IRA owners age

If the IRA owner dies before their RMD age:
The spouse can treat the account as his/her own.
The spouse can take the entire IRA balance by the end of the 10th year following the death
Distributions can be delayed until the owner would have turned 73

Withdrawals count as ordinary income, which could bump you into a higher tax bracket. This type of inheritance is best handled with tax planning. A trusted advisor can help run projections to determine the most efficient withdrawal pattern. Distributions can be used for paying down debt, building a home fund, or investing in a taxable account.

3. Roth IRA

This is often the most advantageous type of inherited account. Similar to traditional IRAs, most non-spouse beneficiaries are under the 10-year rule. Spouses can treat the inherited Roth IRA as their own. Withdrawals on the inherited Roth IRA are tax-free, as long as the original account was open for 5 or more years. Withdrawals on earnings are also tax-free within this account.

Since withdrawals have no tax consequences, you have the ability to fund lump sum goals such as a down payment, paying down debt, college funding or investing in a taxable account. You also have the option to keep the money invested while letting the money grow tax-free until year 10 will maximize the benefit.

4. Life Insurance Proceeds

Cash inheritances are the most straightforward since there is no tax on receiving the money. You can truly tailor the money to your goals with no tax consequences.

A few examples of how you could use the cash:
Fund an emergency fund
Pay off debt (car loans, student loans, mortgage)
Boost retirement savings
Save for a child’s education (529 plan)
Invest in a brokerage account

Cash can also be the most emotionally flexible. You may think about setting aside an amount to purchase something meaningful that honors or reminds you of the individual that left it to you.

An inheritance is an incredible gift and one that can shape your financial future for years to come. Understanding the type of account, setting clear goals and having a plan are key factors to making intentional and informed decisions. Schedule a complimentary consultation with Wiser today and discover how a customized plan can help fund your goals.

Grace Kennedy
Financial Planning Associate, Wiser Wealth Management