A $250,000 inheritance could offer you the chance to pay off debt, build up your savings or invest long-term. While this amount is smaller than a multimillion-dollar estate, you may assume it doesn’t require much planning. That assumption could cost you. Even a modest inheritance can create avoidable tax consequences if you make the wrong moves in the first year after inheriting it.
Know How Your Inheritance Gets Taxed
A $250,000 inheritance may be simpler than a larger estate, but it’s still important to understand exactly what you’ve received before making any decisions. At this level, an inheritance is often concentrated in one or two asset types, such as an inherited IRA and a taxable brokerage account. Each comes with different tax rules and planning considerations.
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Taking inventory first can help you avoid unnecessary taxes, prioritize the decisions that require immediate attention and build a plan for the money over time. Even if your inheritance consists of only one or two accounts, understanding how each is taxed and how it fits into your overall financial picture can help you make better decisions from the start.
A financial advisor can help you understand how each inherited account is taxed and build a plan around it.
What a Mistake on a $250,000 Inheritance Could Cost You
How you inherit assets can have a major effect on what happens next. You might receive a $150,000 taxable brokerage account that was originally purchased for $50,000 and a $100,000 traditional IRA from a parent. Even though both accounts hold investments, the IRS applies different tax rules to each.
The brokerage account gets what’s called a step-up in basis, which resets your cost basis to the fair market value as of the date of death. Practically speaking, that means the $100,000 in gains your parent’s investments built up over the years disappears for tax purposes, and you could sell right away without owing capital gains on any of it.
