What to Do With a $2 Million Inheritance

Your first instinct after inheriting $2 million may be to invest. But one of the biggest financial decisions comes before you buy your first stock or fund. Get your tax strategy wrong, and you could lose a significant portion of your inheritance before investing a single dollar.

First, Know How Your Inheritance Gets Taxed

Before deciding what to do with your inheritance, identify exactly what you received. Different assets are taxed differently, and treating everything as one $2 million inheritance can lead to unnecessary taxes. The table below compares the tax treatment of four common inherited assets.

A financial advisor can help you understand how each inherited asset fits into your overall tax strategy before you invest.

This Tax Mistake That Can Cost You Most

Once you know what you inherited, the next decision is how and when to access those assets. The timing of a withdrawal can have just as much impact as the investment itself.

For example, suppose your inheritance includes a $1.2 million taxable brokerage account holding investments your parents purchased for $400,000, along with an $800,000 inherited traditional IRA. Although both accounts hold investments, they follow very different tax rules.

The brokerage account generally receives a stepped-up cost basis, meaning your basis is adjusted to the fair market value of the investment at the date of death. If you sold the investments shortly after inheriting them, you generally would not owe capital gains tax on the $800,000 of appreciation that occurred during your parent’s lifetime.

The inherited IRA is different. Suppose you already have $100,000 of taxable income before taking any distributions. Withdrawing the entire $800,000 IRA balance in one year would increase your taxable income to $900,000.

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

• 22% on $5,700 = $1,254
• 24% on $96,075 = $23,058
• 32% on $54,450 = $17,424
• 35% on $384,375 = $134,531
• 37% on $259,400 = $95,978

In this example, your estimated additional federal tax would add up to $272,245 before deductions, credits and state taxes.

Most non-spouse beneficiaries, however, generally have up to 10 years to distribute inherited IRA assets. Spreading withdrawals over that period instead of taking the entire balance in one year could substantially reduce your overall tax bill.

Now, Create a Plan to Invest Your Inheritance

Once you’ve accounted for taxes, you can begin deciding how to invest the inheritance. The right strategy depends on when you’ll need the money and the role you want it to play in your overall financial plan.

Start by setting aside enough cash to cover taxes, unexpected expenses and other short-term needs. Having that cushion can help you avoid selling long-term investments earlier than planned.

Next, think about how you’ll use the inheritance. If you’ll rely on it for income within the next several years, a more conservative allocation may be appropriate. If your goal is long-term growth and you won’t need the money for decades, a larger allocation to stocks may make more sense.

Your investment strategy should reflect more than the size of the inheritance. It should account for the tax treatment of each inherited asset, the investments you already own and the financial goals you’re trying to achieve.

A financial advisor can coordinate both taxes and investment planning, helping protect your inheritance before positioning it to grow. 

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