What to Do With a $1 Million Inheritance

A $1 million inheritance can immediately raise one big question: How should you invest it? But before choosing funds, stocks or other investments, there are important decisions that can shape how much of that inheritance you actually keep. Those first choices often have less to do with investing and more to do with taxes, timing and asset allocation.

First, Know What You Inherited

Before deciding how to invest a $1 million inheritance, take inventory of what you’ve received. Different assets are governed by different tax rules, and the right strategy for one may not make sense for another. The table below compares the tax treatment of four common inherited assets.

A financial advisor can help you figure out the tax consequences of an inheritance and how to invest it.

Second, Avoid This Tax Mistake

The next priority is avoiding unnecessary decisions that could increase your tax bill. Some mistakes can’t be undone.

As an example, let’s assume you inherit $1 million: $600,000 in a taxable brokerage account holding stock your parent bought decades ago for $200,000, and $400,000 in an inherited IRA.

The brokerage account receives a stepped-up cost basis. Your cost basis resets to $600,000. If you sold the investments right away, you generally would not owe capital gains tax on the $400,000 in appreciation that occurred during your parent’s lifetime.

The inherited IRA is a different story. Withdrawing the full $400,000 in one year adds that amount to your ordinary taxable income. Assuming you’re a single filer with $100,000 of taxable income before the IRA distribution, your total taxable income would rise to $500,000.

For tax year 2026, the additional IRA income would be taxed as follows: ¹

• 24% on $96,075 = $23,058
• 32% on $54,450 = $17,424
• 35% on $243,775 = $85,321

Your estimated additional federal tax? Roughly $125,800 before deductions, credits and state taxes.

The IRS, however, offers another option: The agency generally allows non-spouse beneficiaries to spread withdrawals over 10 years. And this could reduce your total tax bill by tens of thousands of dollars when compared with a lump sum withdrawal.

Third, Make That Legacy Work for You

Once you’ve identified the inherited assets and their tax treatment, you can begin building an investment plan. First, set aside enough cash to cover taxes, near-term expenses and any other immediate financial needs before investing the rest.

Then decide how to invest based on when you’ll need the money and your time horizon. If you plan to retire in five years and will rely on the inheritance for living expenses, you may want a conservative mix of investments. If you won’t need the money for 20 years or more, a stock-heavy portfolio may be appropriate for long-term growth.

A financial advisor can help you make the most of an inheritance. Connect with an advisor today!

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