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Managing an Inheritance

Baby Boomers and their parents are expected to pass down as much as $136 trillion in the coming decades—more wealth than has ever changed hands in the history of the world.1 However, “many people in line for an inheritance often fail to think through how it might affect their own financial future,” says Marilin Walker, a Schwab wealth strategist based in Indianapolis.

Marilin cites one client who inherited $1 million in retirement assets after her father passed away unexpectedly. “It was an emotional period, a sudden loss,” Marilin says. “At the same time, the client had to transfer the assets in a way that wouldn’t result in a huge tax bill.”

In the end, Marilin says, an inheritance often boils down to two types of assets—and the unique approach you take to each.

Retirement assets

Because of their tax-advantaged status, most retirement accounts are subject to specific rules concerning how and when a beneficiary must take possession of the assets. Someone who inherits an Individual Retirement Account (IRA), for example, has until the end of the following calendar year to determine what they will do with the funds. A spouse can simply roll over the account into her or his own IRA to retain the assets’ tax-advantaged status; everyone else is obliged to open an Inherited IRA and then take one of the following actions:

  • Cash out entirely.

  • Cash out during the five years following the person’s death (ending December 31 of the fifth year), so long as the decedent was younger than 70½.

  • Maintain the Inherited IRA and take the annual required minimum distributions mandated by the IRS.

How you choose to take possession of the inherited funds may depend in large part on your tax situation, since any money you withdraw will be taxed as ordinary income and could push you into a higher tax bracket. If you inherit a Roth IRA, however, your withdrawals will not be taxed in most cases.

Inherited 401(k)s are subject to similar restrictions, while pension rules are dictated by the decedent’s plan. It’s a good idea to talk with the 401(k) or pension plan administrator to learn about your options, which can be complicated and will vary by plan. And be sure to check with a qualified tax advisor before making any decisions.

Nonretirement assets

Unlike retirement assets, investments held in taxable accounts have no specific requirements. Beneficiaries should nevertheless consider whether the inherited assets complement or run counter to their preexisting investment plan. “You should research your inherited securities like you would a prospective investment,” says Robert Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research.

Depending on the outcome, you may decide to sell an inherited investment and redeploy the proceeds elsewhere—though you should first determine how such a sale might affect your tax bill. Fortunately, any appreciation on an inherited asset is classified as a long-term gain even if you’ve owned the asset for less than a year.

Getting help

Most beneficiaries will want to assemble a trustworthy support team, Marilin says—including an accountant, an attorney and a financial advisor. Strange as it may sound, your team might advise that you refuse an inheritance altogether. Such was the case with another client of Marilin’s who had substantial assets in his own right and preferred to see his father’s estate benefit other heirs.

However you decide to handle an inheritance, it provides an opportunity to contemplate your own estate plan. “Whether you’re starting from scratch or fine-tuning an existing plan,” Marilin says, “there’s no better time to ensure that the process of bequeathing your own wealth is a smooth one.”

1John J. Havens and Paul G. Schervish, “Why the $41 Trillion Wealth Transfer Estimate Is Still Valid: A Review of Challenges and Questions,” The Journal of Gift Planning, Vol. 7, No. 1, 01/2003.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness and reliability cannot be guaranteed.

This information is not intended to be a substitute for specific individualized tax, legal, estate-planning or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, attorney or investment manager.

Schwab Wealth Strategists are employees of Schwab Private Client Investment Advisory, Inc., a Registered Investment Advisor and an affiliate of Charles Schwab & Co., Inc.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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