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Suppose your $750,000 inheritance includes a $400,000 traditional IRA, $250,000 brokerage account and $100,000 in cash. Each piece can create a different tax consequence. Cash may be available immediately, while IRA withdrawals can increase taxable income. Investments may carry a new cost basis. Before using the money, it helps to know which assets can move now, and which may benefit from more planning.
Why the Type of Asset Matters More Than the Total
There’s generally no federal inheritance tax paid by an heir. However, there may be an inheritance tax at the state level. Pennsylvania, for example, taxes inheritances to direct descendants at 4.5%, 1 while New Jersey exempts children and other Class A beneficiaries from its inheritance tax. 2
An inheritance can also be taxed depending on what you do with inherited assets afterwards. If $250,000 of inherited stock originally cost $100,000, the basis generally resets to its value on the date-of-death. Selling at $250,000 could therefore avoid recognizing the $150,000 of appreciation that occurred during the owner’s lifetime, subject to applicable exceptions.
Inherited Assets and Their Tax Treatment
| Asset | General Tax Treatment | Step-Up? | When Tax Could Apply |
|---|---|---|---|
| Cash | Generally not federal taxable income when inherited | N/A | Interest earned later |
| Brokerage account | Capital gains rules | Generally yes | Post-death gains, dividends |
| Home | Capital gains rules | Generally yes | Post-death gains, rent |
| Traditional IRA | Taxable distributions | No comparable reset | When withdrawn |
| Roth IRA | Most withdrawals tax-free | No comparable reset | Earnings if 5-year rule isn’t met |
Spreading Out the Inherited IRA
Most non-spouse beneficiaries must empty an inherited IRA within 10 years. Annual RMDs may also apply if the original owner had reached their required beginning date.
Assume you’re single, with $100,000 of taxable income for five years and $30,000 after retiring for the next five. According to the current 2026 brackets, 3 and assuming no IRA growth, your options for withdrawal might look something like this:
Inherited IRA Withdrawals and Taxation
| Withdrawal Path | IRA Distribution | Estimated Taxable Income | Top Bracket |
|---|---|---|---|
| Lump sum in Year 1 | $400,000 | $500,000 | 35% |
| Equal over 10 years | $40,000/year | $140,000, then $70,000 | 24%, then 22% |
| Smaller early, larger later | $20,000/year, then $60,000/year | $120,000, then $90,000 | 24%, then 22% |
Keep in mind that these are only illustrations, not recommended schedules. They are simply used to show why the timing of withdrawals can matter, especially when your other income changes.
If $400,000 of your inheritance is in an IRA, a financial advisor working with your tax professional can model withdrawals around retirement, Social Security and other expected income, instead of choosing an amount solely in isolation.
The Mistakes That Can Raise the Tax Bill
A few decisions deserve attention before money moves.
Mistakes That Could Affect Your Tax Situation
| Mistake | What Could Happen | What to Check |
|---|---|---|
| Cashing out the IRA | More income reaches higher brackets | 10-year window |
| Using the wrong investment basis | Taxable gain may be overstated | Date-of-death value |
| Missing an RMD | Excise tax can reach 25% | Annual requirement |
| Investing all available cash | May leave little liquidity for taxes | Projected tax bill |
The RMD excise tax can fall to 10% when a shortfall is corrected within the applicable correction window.
The key is to avoid treating the $750,000 as one account with one tax strategy. Your IRA, brokerage assets and cash can each follow a different timeline. An advisor working alongside your tax professional can help coordinate those decisions with your retirement goals before withdrawals, sales or investments create tax consequences that are harder to unwind.
Photo credit: ©iStock.com/Nanci Santos, ©iStock.com/oatawa
Article Sources
All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.
- “Inheritance Tax.” Commonwealth of Pennsylvania | Home, Dec. 31, 2026, https://www.pa.gov/agencies/revenue/resources/tax-types-and-information/inheritance-tax.
- “NJ Division of Taxation – Inheritance and Estate Tax.” Official Site of The State of New Jersey, https://www.nj.gov/treasury/taxation/inheritance-estate/inheritance.shtml. Accessed May 10, 2026.
- “IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments from the One, Big, Beautiful Bill | Internal Revenue Service.” Home, https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill. Accessed Oct. 5, 2026.