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As Seen in US News and World Report: Tax-Savvy Ways to Manage an Inheritance

Receiving an inheritance is helpful, but don't let the potential tax bill surprise you.


WHEN IT COMES TO inheritance, it's typically more gratifying to think about how to spend the newfound money than what the tax consequences might be. But earning a payout from a deceased relative comes with its own complicated tax repercussions. And spending the gifted money too quickly or thoughtlessly could result in an unexpectedly high tax bill.

So how can heirs ensure that they're thinking about taxes when benefiting from an inheritance? Here's what to know about tax-savvy ways to manage inherited wealth.

Inheriting IRAs or 401(k)s. If a deceased relative, spouse or friend passes along an individual retirement account or employer retirement savings account, it's important to note how it will be taxed.

Your options for the account depend on your relationship to the deceased person. A spouse may be able to roll the funds into their own account, an option other beneficiaries don't have. Alternatively, a spouse can open an Inherited or Beneficiary IRA account, which carries both partners' names and from which a young spouse can withdraw funds without triggering the 10 percent early withdrawal penalty.

Heirs who are not the spouse of the benefactor – for example, a child, nephew, niece or grandchild – don't have the option to place the money into their own retirement account but can hold it in an Inherited IRA account.

Once they decide how to house the money, the speed with which spouses and other heirs decide to withdraw the funds can have big tax implications. If they decide to take out all the money in a lump sum, they may get hit with a "double whammy" tax bill, says Tatyana Bunich, founder and president of Financial 1 Wealth Management Group in Columbia, Maryland. Here's why: For a traditional IRA, the lump sum would be treated as taxable income – beneficiaries could pay about 40 percent in taxes if they live in a state that charges income tax – plus it could push them into a higher tax bracket, causing them to pay more taxes on regular income. Read More

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