I Just Inherited $250,000. Here’s the Tax Mistake That Could Cost Me $75,000.

A $250,000 inheritance can carry very different tax consequences depending on what you receive. Investments in a taxable account may qualify for a stepped-up cost basis, while distributions from an inherited traditional IRA are generally taxable as ordinary income. Taking too much from an inherited IRA in one year could leave you with a much larger federal tax bill.

These Inherited IRA Rules Can Make a Large Distribution Expensive

Many non-spouse beneficiaries have to empty an inherited IRA by the end of the 10th year after the owner’s death. For non-spouse designated beneficiaries subject to the 10-year rule, annual RMDs also apply when the original owner died on or after their required beginning date. These requirements set deadlines for taking money out, but you may still have flexibility over the amount you withdraw annually.

That timing can affect your tax bill because IRA distributions are added to your other taxable income. To show how this works, let’s assume that you are single, inherit a $250,000 traditional IRA and already have $100,000 of taxable income in 2026. Taking the entire account would raise that amount to $350,000. Based on the 2026 federal brackets for single filers, it would be taxed as follows: ¹

The full $350,000 would generate about $91,269 in federal income tax before deductions, credits and other tax considerations. Without the inheritance, federal tax on the original $100,000 of taxable income would be about $16,712. That means taking the full $250,000 inherited IRA in one year adds about $74,557 to the federal tax bill.

If the inherited IRA rules give you flexibility, spreading withdrawals across several years may keep more of the money in lower tax brackets. A financial advisor could help you compare different distribution schedules with expected income to develop a strategy that may reduce federal income taxes.

How Stepped-Up Basis May Save You Money on Inherited Assets

If you also inherit investments in a taxable account, there’s a separate tax rule worth understanding. Stocks and other investments held in a taxable account typically receive a new cost basis when the owner dies. This step-up resets the beneficiary’s basis to the investment’s fair market value on the date of death, although exceptions can apply.

To show how this works, assume the original owner paid $100,000 for investments worth $250,000 at death. If the basis steps up to $250,000 and you immediately sell the investments for the same amount, you generally have no capital gain. Using the original $100,000 basis instead would create a $150,000 gain and, at an assumed 15% long-term capital gains rate, $22,500 in federal tax.

Keep the estate valuation and related records to support the figure reported when you sell.

Plan Distributions and Sales Before Taking the Money

Before taking money from an inherited IRA, check your distribution deadline and whether annual RMDs apply. This can help you avoid concentrating too much taxable income in one year. For taxable investments, verify this basis adjustment with your brokerage ahead of any sale to take full advantage of the tax benefit. A financial advisor can help you compare withdrawal and sale timing to identify potential tax savings.

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