The Millennial’s Guide to Inheriting Money

Inheriting money is often a complex process, emotionally and financially, typically involving the loss of a loved one. It’s not the most light-hearted topic, but it’s critical to equip ourselves with the necessary knowledge to make well-informed decisions. As the saying goes, “Knowledge is power.”

So, let’s delve into the realm of inheritance, focusing on the tax implications, rules for withdrawal, key considerations, and other aspects that you should be mindful of.


Tax Implications


Firstly, the silver lining: As of 2023, the vast majority of individuals who inherit money in the United States do not need to pay federal estate tax. This is because the federal estate tax exemption is $12.92 million per individual or $25.84 million for a married couple. Unless the estate you’re inheriting exceeds these amounts, federal estate taxes should not be a concern.

However, there’s something called “income in respect of a decedent” (IRD), which could apply if you inherit certain kinds of assets that have not yet been taxed, such as an IRA or 401(k). If this is your situation, you may owe income tax when you withdraw the money.

Also, remember to check state taxes. Some states levy their own estate or inheritance taxes, with exemption amounts often considerably lower than the federal exemption.


Rules for Withdrawal


Inherited retirement accounts like 401(k)s or IRAs come with their own set of rules. The Secure Act, passed in 2019, reshaped how beneficiaries should withdraw from these accounts.

For non-spouse beneficiaries, there’s a general requirement to drain the account within 10 years of the original owner’s death, known as the “10-year rule”. There are no specific required minimum distributions within those ten years, but the entire balance must be distributed by the end of the 10th year. Strategically planning these withdrawals can help manage potential tax liabilities.


Other Characteristics of Inheritance


Inheritance can come in many forms—cash, real estate, personal items, and more. Each type has different financial implications.

  1. Real Estate: If you inherit a property and decide to sell it, be aware of potential capital gains tax. The property’s cost basis is “stepped up” to the current market value at the time of the owner’s death. You may owe capital gains tax on the difference if you sell it for more than this “stepped-up” basis.

  2. Stocks: Similarly, inherited stocks follow the “step-up in basis” rule, potentially reducing capital gains tax if the shares have appreciated significantly.

  3. Personal Belongings: Items like jewelry, art, and cars are part of your inheritance too. Their value can add up and may have tax implications if sold.


Key Considerations When Inheriting Money


Inheritance is more than just a financial windfall; it’s a legacy that has been entrusted to you. Here are some crucial points to consider:

  1. Assess Your Financial Situation: Use this as an opportunity to review your financial situation holistically. Think about how this inheritance can help you reach your financial goals, pay off debts, or invest for the future.

  2. Take Your Time: You don’t need to make immediate decisions about what to do with the inheritance. It’s often best to park the funds in a safe, accessible account until you have a clear plan.

  3. Consider Professional Help: A financial planner or tax professional can provide invaluable assistance in navigating the complex world of inheritance.


Inheritance can be a complex world to navigate. It intertwines our emotional responses with the need for pragmatic decision-making. Remember, while an inheritance can provide financial security, it’s also a testament to the legacy of the person who left it behind. By handling it wisely, you can honor their memory while also ensuring their legacy benefits your life and potentially, the lives of future generations.


Please note: This blog post is intended for informational purposes only and does not constitute financial or tax advice. Tax laws are intricate and subject to change. Always consult with a certified financial planner or tax professional about your specific circumstances.

Millennial Wealth Management

Millennial Wealth Management is a fee-only registered investment advisor in Colorado. We educate and advise millennials and their families in the Denver and Boulder area, as well as other states virtually. As millennials, we understand the financial choices our generation is faced with, from navigating your first home purchase or tackling student loans. Our mission is to help our generation stop worrying about money.

Copyright Millennial Wealth Management, 2020.