I Received an Inheritance. What Should I Do First?
By Novak Financial Partners · Updated August 2026
Key takeaways
- The single best thing you can do immediately is pause. Park the money somewhere safe and give yourself time before making any major decisions
- Most inherited money is not taxable income, but inherited retirement accounts and appreciated assets come with important tax rules
- Inherited IRAs must be fully distributed within 10 years for most non-spouse beneficiaries, making withdrawal timing a real tax planning decision
- Inherited investments receive a stepped-up cost basis, which eliminates much of the built-up capital gains tax exposure
- If your inheritance is held separately from joint accounts, it may remain your separate property in most states
- Build a plan based on your own goals, not based on pressure, grief, or other people's opinions about what you should do with the money
An inheritance almost always arrives at the worst possible time. You are grieving, you may be managing family logistics, and suddenly there are financial decisions in front of you that feel urgent even when they are not.
The most common mistake we see is not reckless spending, though that happens. It is making permanent decisions too quickly, under pressure, without understanding the tax rules or thinking through what the money actually means for your own financial picture.
Inheritances take many forms. Cash, brokerage accounts, retirement accounts, real estate, a life insurance payout, or some combination. Each one comes with different rules, different tax treatment, and different decisions to make. This guide walks through all of it.
Step 1: Stop. Do not make any major decisions yet.
This applies whether you inherited $20,000 or $2,000,000.
The first thing to do with an inheritance is nothing. Not because the decisions are not important, but because they are. Grief affects judgment, and financial decisions made while grieving are often regretted later. The money is not going anywhere. The stock market will be there in three months. The house purchase you are considering can wait.
If you receive a cash inheritance or life insurance payout, put it in a high-yield savings account or a short-term Treasury while you take time to think. These accounts are paying meaningful rates right now, so your money is not sitting idle, but it is also not locked up or at risk while you get your bearings.
A general guideline: give yourself at least 30 to 90 days before making any significant financial move with inherited money. Some advisors suggest six months or more. There is no right number, but there is a wrong one, and it is "immediately."
This pause period also protects you from the well-meaning people who will have opinions about what you should do with the money. Family members, friends, financial product salespeople. They will all have ideas. You do not have to act on any of them right away.
Step 2: Understand what you actually received.
Gather the relevant estate documents: the will, any trust documents, life insurance policies, beneficiary designations, and account statements. If you are not the executor, coordinate with whoever is to understand what you are inheriting and whether there are any conditions or timelines attached.
The type of asset you inherit matters enormously for what comes next. Here is a quick overview of the most common scenarios:
| What you inherited | Key considerations |
|---|---|
| Cash or savings | Generally not taxable. Park it safely and make a plan. |
| Brokerage account or stocks | Not taxable when inherited. Stepped-up basis reduces capital gains if you sell. Tax on gains above the stepped-up value. |
| Traditional IRA or 401(k) | Taxable as ordinary income on distributions. Most non-spouse beneficiaries must fully distribute within 10 years under SECURE Act 2.0. |
| Roth IRA | Distributions are generally tax-free. Still subject to the 10-year rule for most non-spouse beneficiaries. |
| Real estate | Stepped-up basis applies. Selling near date-of-death value often results in little capital gains tax. Property taxes, insurance, and maintenance costs if you keep it. |
| Life insurance payout | Generally income-tax-free to named beneficiaries. May be subject to estate tax depending on how the policy was owned. |
The short version: cash and life insurance payouts tend to be the cleanest from a tax standpoint. Inherited retirement accounts require the most planning. Everything else falls somewhere in between.
Step 3: Get clear on the tax picture before you move anything.
Most people assume an inheritance is taxable. Usually it is not, at the federal level. But there are enough exceptions that it is worth slowing down here before taking any action.
The federal estate tax
Federal estate tax applies to the estate of the person who died, not to you as the beneficiary. In 2026, the federal estate tax exemption is $13.99 million per individual. The vast majority of estates fall well below this threshold and owe nothing. If the estate you are inheriting from is large enough to potentially trigger estate tax, the executor will handle that, and a tax attorney should be involved.
State inheritance taxes
Six states currently have their own inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Whether you owe tax and how much depends on your state, the size of the inheritance, and your relationship to the deceased. Spouses are typically exempt. Children often pay at lower rates, if anything. If you live in or the deceased lived in one of these states, check with a CPA before assuming you owe nothing.
The stepped-up basis and capital gains
This is one of the most valuable and least understood parts of inheriting appreciated assets.
When you inherit stocks, a brokerage account, or real estate, your cost basis is stepped up to the fair market value on the date of the original owner's death. The decades of appreciation that accrued while they owned it effectively disappear for tax purposes.
Example: Inherited stock with a stepped-up basis
Your parent bought 1,000 shares of a mutual fund in 1990 for $15 per share ($15,000 total). By the time they pass away, the fund is worth $85 per share ($85,000). Your stepped-up basis is $85,000. If you sell the shares immediately for $85,000, you owe zero capital gains tax. If the shares grow to $90 per share before you sell, you owe capital gains only on the $5,000 gain above your stepped-up basis.
This is an important reason not to sell inherited investments before you understand the basis. The stepped-up basis often means the tax consequence of selling is minimal or zero, but you need to confirm the actual value on the date of death to know for sure.
Inherited IRAs and the 10-year rule
If you inherit a traditional IRA or 401(k), every dollar you eventually take out is taxable as ordinary income in the year of withdrawal. That is the same tax treatment the original owner faced, now passed to you.
Under the SECURE Act 2.0, most non-spouse beneficiaries must fully distribute an inherited IRA within 10 years of the owner's death. There is no requirement to distribute evenly. You can take nothing for nine years and everything in year 10, or spread it out however makes sense given your income in each of those years.
If you inherit a $400,000 IRA and you are in a high-income year, pulling it all out at once could push a significant chunk of your income into the 37% tax bracket. Spreading withdrawals across lower-income years or years where you have deductions available can meaningfully reduce what you pay. This is a real tax planning conversation worth having with a CFP or CPA before you touch the account.
Inherited Roth IRAs are subject to the same 10-year distribution rule, but qualified withdrawals remain tax-free. If you have the flexibility, it often makes sense to let an inherited Roth continue growing tax-free for as long as the 10-year window allows.
Step 4: Address immediate financial priorities before investing anything.
Once you understand what you have and what the tax picture looks like, there is a sensible order of operations for putting the money to work. Not everyone needs to do all of these, but it is a useful framework to think through.
1. Build or fully fund an emergency reserve.
If you do not already have three to six months of living expenses in cash, an inheritance is a natural way to establish that foundation. This is not exciting, but it changes your relationship with financial risk. When you have a real emergency fund, you can invest the rest more confidently without worrying that a job loss or medical bill will force you to sell investments at the wrong time.
2. Pay off high-interest debt.
Credit card debt at 20%+ is expensive. Eliminating it is essentially a guaranteed 20% return on that money, which beats most investment strategies. Personal loans and other high-rate debt belong in this bucket as well.
Lower-rate debt, like a mortgage at 3.5% or student loans at 5%, is a different conversation. Whether paying those off makes more financial sense than investing depends on your expected investment returns, your risk tolerance, and the psychological value of being debt-free. There is no universally right answer, and it belongs in a broader planning conversation rather than a quick decision.
3. Max out tax-advantaged accounts.
If an inheritance frees up cash flow, consider using that flexibility to max out a 401(k), Roth IRA, or HSA. You cannot directly deposit inheritance funds into these accounts, since contributions must come from earned income, but if the inheritance covers everyday expenses, it frees up your paycheck to go toward retirement savings.
Step 5: Keep inherited money separate if you are married.
In most states, inherited money is considered separate property, not marital property, at least initially. If you deposit an inheritance into a joint account or use it to purchase jointly-titled assets like a home, it often becomes commingled and may be treated as marital property in a divorce.
This is not about distrust. It is about understanding how the law works. If your marriage is solid, keeping the account separate has no practical effect on your daily life. But if circumstances ever change, the distinction matters.
Commingling rules vary by state. If this consideration is relevant to your situation, it is worth a conversation with a family law attorney, particularly for larger inheritances. A financial planner can help you think through how to hold and invest the money in a way that aligns with both your financial goals and your wishes around asset protection.
Step 6: Invest for the long term, simply and deliberately.
After you have handled the emergency fund, addressed high-interest debt, and understood the tax picture, you can turn your attention to investing whatever is left.
This is also when the noise tends to get loudest. Family members will suggest investments. Advisors will pitch products. You may feel pressure to do something sophisticated with the money to honor the person who left it to you.
The research consistently shows that simple investment strategies, low-cost index funds spread across stocks and bonds in proportions that match your risk tolerance and timeline, tend to outperform complex ones over time. An inheritance does not require a more complicated investment approach than what already works. It just requires more of it.
If you are receiving a significant lump sum, you may feel anxious about investing it all at once given market uncertainty. Spreading purchases over several months through a strategy called dollar-cost averaging can help ease that discomfort, though over long time horizons, lump-sum investing often produces better outcomes statistically. Either approach is reasonable. The worst outcome is not investing at all because you waited for certainty that never came.
Step 7: Update your estate documents and financial plan.
An inheritance is a significant life event. It often changes the math on your retirement projections, your insurance needs, and your own estate plan. Take the opportunity to revisit all of it.
- Update beneficiary designations on your own retirement accounts, life insurance policies, and brokerage accounts. These do not update automatically.
- Review your will and any trust documents. If the inheritance significantly changes your net worth, your estate plan may need to be updated to reflect that.
- Reassess your insurance coverage. More assets may mean more to protect, or it may mean you no longer need as much life insurance for income replacement purposes.
- Update your retirement projections. A meaningful inheritance can change when and how comfortably you are able to retire.
What if you want to share some of it?
Many people who inherit money want to use some of it to help family members or honor the person who left it to them. This is a meaningful impulse and worth acting on thoughtfully.
In 2026, the annual gift tax exclusion is $19,000 per person per year ($38,000 if you are married and elect gift splitting). You can give up to that amount to as many individuals as you want without any gift tax filing requirement. Larger gifts may require filing IRS Form 709, though most people will never actually owe gift tax given the current lifetime exemption of $13.99 million per person.
If you want to help a child or grandchild with college costs, direct payments made to an educational institution for tuition are excluded from gift tax entirely, on top of the annual exclusion. The same applies to direct payments to a medical provider for someone's medical expenses. These are underused strategies that can allow you to be generous without touching your gift or estate tax exemptions.
We wrote a longer piece on lifetime gifting strategies if you are thinking through this more carefully. You can find it on our blog.
Frequently asked questions
Navigating an inheritance is one of the more complex financial situations a family can face.
The tax rules are specific, the emotional stakes are high, and the decisions you make in the first few months tend to matter. If you would like to talk through what you have received and what a thoughtful plan looks like, we are happy to help.
Book a Free 30-Minute CallThis article is for educational purposes only and does not constitute personalized tax, legal, or financial planning advice. Tax laws referenced reflect rules in effect as of 2026 and are subject to change. The SECURE Act 2.0 rules for inherited IRAs involve specific exceptions for eligible designated beneficiaries, including surviving spouses, minor children, individuals with disabilities, and those within 10 years of the decedent's age. Consult a qualified CPA or estate attorney for advice specific to your situation. Advisory services are offered through Core Planning LLC d/b/a Novak Financial Partners, a Registered Investment Adviser. Registration does not imply a certain level of skill or training. Full disclosures available here.
