By Harry Prabandham · Updated September 28, 2026
Personal Finance
Receiving an Inheritance: Taxes, Inherited IRAs, and First Steps
An inheritance generally isn't federal income, but inherited IRA withdrawals and later earnings are. Most inherited assets get a stepped-up basis.
Receiving an Inheritance: Taxes, Inherited IRAs, and First Steps
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Do you pay tax on an inheritance?
- Property you inherit is generally not federal taxable income to you, though income it earns afterward is.
- Any federal estate tax is paid by the estate, and the 2026 exemption is $15 million per person.
- Five states tax inheritances: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania; California does not.
- Withdrawals from inherited pre-tax IRAs and 401(k)s are taxable income to the beneficiary.
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Full Guide
Do you pay tax on an inheritance?
- Property you inherit is generally not federal taxable income to you, though income it earns afterward is.
- Any federal estate tax is paid by the estate, and the 2026 exemption is $15 million per person.
- Five states tax inheritances: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania; California does not.
- Withdrawals from inherited pre-tax IRAs and 401(k)s are taxable income to the beneficiary.
What is the step-up in basis?
- Assets inherited outside retirement accounts generally take a basis equal to fair market value at the date of death.
- Gain built up during the decedent's life is typically never taxed, and a decline in value resets too.
- In community property states like California, both halves of community property can get a new basis when the first spouse dies.
- Documenting date-of-death values early, through statements or appraisals, supports later sales.
How do inherited IRAs work?
- Most non-spouse beneficiaries must empty an inherited IRA or 401(k) by the end of the tenth year after the owner's death.
- If the owner had already reached their required beginning date, annual RMDs generally also apply in years one through nine.
- Spouses, the owner's minor children, disabled or chronically ill heirs, and heirs not more than 10 years younger have other options.
- Inherited Roth IRAs follow the 10-year deadline without annual RMDs, and qualified withdrawals are tax-free.
Why pause before acting?
- Holding cash in FDIC-insured accounts within coverage limits, or in Treasury bills, buys time while the estate settles.
- Some deadlines don't wait, including inherited IRA RMDs and a qualified disclaimer, which is generally due within nine months of death.
- Unsolicited pitches often follow an inheritance, and decisions made under grief or pressure are hard to reverse.
- Registration and disciplinary history for any adviser can be checked on Investor.gov before hiring.
What are common first uses of inherited money?
- Paying off high-interest debt and building an emergency reserve are common starting points.
- An inherited concentrated stock or family property raises questions about diversification, taxes, and attachment.
- Investing gradually or all at once trades the risk of poor timing against time out of the market.
- In California, an inheritance is separate property, and keeping it in an account in your name alone helps it stay traceable.
How might your own estate plan change?
- A larger balance sheet may call for updated wills, trusts, and powers of attorney.
- Beneficiary designations on IRAs, insurance, and transfer-on-death accounts override a will, so they need review.
- Guardianship and trust provisions for minor children matter more with more assets.
- An estate attorney can explain whether a trust fits how you want the money to pass.
Key takeaways
- An inheritance is generally not income, but inherited IRA withdrawals and future earnings are.
- The step-up in basis resets gain on most non-retirement assets at death.
- The 10-year rule, and sometimes annual RMDs, govern most inherited retirement accounts.
- Take time, watch the deadlines, and confirm tax treatment with a CPA and estate attorney.
Related Topics
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Most non-spouse heirs must empty an inherited IRA by the end of the 10th year after death, with annual RMDs if the owner had started RMDs.
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