I Inherited $100,000. What Should I Do?

Inheriting $100,000 can create new financial opportunities, but deciding what to do with the money may depend on what you actually inherited. Cash, taxable investments and retirement accounts can each come with different tax rules and planning considerations. Before you spend, withdraw or invest the money, it can help to understand the structure of your inheritance and what tax consequences or deadlines may apply.

A financial advisor can also help you incorporate an inheritance into your broader financial plan.

Identify What You Inherited

Cash generally doesn’t create federal income tax simply because you inherit it. Taxable stocks or funds may receive a basis tied to their fair market value at death. The IRS generally taxes traditional IRA and pretax 401(k) distributions, while most inherited Roth IRA withdrawals occur tax-free if they meet the Roth IRA five-year rule.

Many adult non-spouse beneficiaries must also empty inherited IRAs and defined-contribution accounts by the end of the 10th year after the owner’s death. Annual RMDs can apply during that window when the original owner died after the required beginning date.

The Step-Up Basis Advantage

Assume you inherit stock worth $100,000 that the decedent bought for $40,000. We’ll also assume it receives a stepped-up basis to $100,000 and you sell it for $102,000. Under those assumptions, here’s how the math works out: :

• Original cost: $40,000
• Date-of-death value/new basis: $100,000
• Sale price: $102,000
• Taxable gain: $102,000 − $100,000 = $2,000

The $60,000 of appreciation before death generally isn’t considered part of your capital gain. Still, it’s a good idea to keep documentation supporting the inherited value before selling.

The 10-Year Rule and Tax-Efficient Withdrawals

An inherited traditional IRA creates a different problem because taxable distributions can add to your ordinary income. Taking the entire $100,000 in one year could push more of the withdrawal into higher tax brackets.

If the 10-year rule applies, you may have flexibility over timing, although annual RMDs may also be required. The goal is to coordinate distributions with your other taxable income instead of waiting until year 10 and making one large withdrawal.

Example: Tax Impact and Growth by Account Type

The same $100,000 inheritance can produce very different after-tax results depending on where the money is held.

For comparison, assume each account earns 6% annually for 10 years:

$100,000 × 1.06¹⁰ = $179,085

Also assume a 22% federal tax rate on pretax retirement distributions and a 15% long-term capital-gains rate on taxable-account appreciation. These simplified rates make it easier to isolate the effect of the account type.

The taxable brokerage account gets an important advantage in this example. The $100,000 inherited value becomes the assumed cost basis, so only the $79,085 of post-death growth is subject to capital-gains tax, leaving approximately $167,222 after tax.

The traditional IRA and pretax 401(k) work differently. Assuming the entire accounts contain pretax money, both the original $100,000 and the subsequent growth are taxable when distributed. 

The Roth produces the largest after-tax amount under these assumptions because the full $179,085 can come out tax-free if the inherited Roth distribution is qualified.

Please note that actual results depend on investment returns, your income, the timing of distributions and applicable tax rates. Taking traditional IRA or 401(k) distributions gradually instead of waiting until year 10 could also change the tax bill by spreading taxable income across multiple years.

Bottom Line

A $100,000 inheritance can have different tax implications depending on whether you receive cash, investments or assets held in a retirement account. Taxable investments may benefit from a step-up in basis, while inherited traditional retirement accounts can create taxable income as you take distributions. Inherited Roth accounts, meanwhile, may offer tax-free withdrawals when certain requirements are met. Understanding the type of assets you inherited can help you decide when to take distributions, how to invest the money and how to manage the potential tax bill.

Tips for Inheriting Money

• A financial advisor can help you if you’ve come into a recent inheritance. They can help you prepare for tax consequences and advise you on the best way to achieve your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you’re inheriting a sizable amount of money, it’s important to understand what an inheritance might do to your taxes.

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