What to Do With Investments You Inherit
When you hear you're receiving an inheritance, it's natural to make plans for the money. But what do you do when you inherit investment accounts from a loved one?
Before you make a plan to liquidate those assets to cash, it helps to understand how inheriting investments works and the different steps you'll need to take to move those assets into your name.
The steps below will help you navigate this process -- and understand your options for the investments once they're legally in your name.
Transfer account ownership
Inheriting an investment account is different from other common types of inheritances, such as being the beneficiary of a bank account. Where you'll likely just get a check from your loved one's estate for your share of what's in the bank, inheriting an investment account means you'll first have to take steps to move that investment into your name before you can do anything with the assets.
After you find out that you're inheriting an investment account, your first step is to contact the account custodian. The custodian is the entity that holds the account1 and ensures its safekeeping and that all necessary IRS regulations are met. You'll likely inherit either a taxable investment account or a tax-advantaged retirement account such as an IRA, SEPIRA, or 401(k).
If you're the beneficiary of a taxable account, the estate's trustee or executor may contact the account custodian on your behalf to begin the transfer process.
However, the process is different if you're the beneficiary of a retirement account — such as a SEP-IRA, IRA, or 401(k). These retirement investment accounts transfer outside of probate, so you will need to contact the account custodian directly.
In all cases, the custodian will need proof of a person's authority to act on behalf of the estate (no matter if you're a beneficiary, trustee, or executor) and a copy of the death certificate to begin the transfer process.
Decide what to do with the investments
In general, you have three options once the inherited investment account is in your name. You can:
Keep the investments and let them grow
You might choose to keep the inherited investments intact and let them grow if:
- You like the investments and want to see how they continue to perform.
- You plan on using the funds to supplement your retirement savings in the future.
- You want to avoid potential tax implications from liquidating the investments and taking the cash.
Liquidate the investments and invest in different investments
If you want to use your inheritance to stay in the market, you might choose to sell your inherited investments and choose new ones if:
- You're a savvy investor who wants to make their own investment options.
- You have a moral or ethical concern about the investments you inherited.
- You prefer to move the money to a custodian that doesn't offer the same type of investments, such as a custodian that doesn't offer exchange traded funds (ETFs) or individual stocks.
If you've inherited an IRA, sit down with a tax professional or financial advisor to discuss the IRS rules governing these types of accounts.
Liquidate the investments and withdraw the cash
There's always the option to liquidate inherited investments, and this might be a match for your goals if:
- You immediately need the money for other expenses.
- You have inherited a Roth IRA and can withdraw the money at any time tax-free and without penalty.
- You prefer to invest outside of the stock market in assets like real estate.
Special considerations for inherited retirement accounts
For inherited retirement accounts, different IRS rules apply2 depending on:
- Your age.
- The age of the deceased account holder.
- Your relationship with the deceased account holder (non-spouse, spouse, or minor child).
- Required Minimum Distribution (RMD) requirements.
Before liquidating any inherited investments, and especially inherited retirement accounts, it's always wise to sit down with your tax advisor or financial advisor. There may be tax penalties for withdrawing assets in a retirement account before you reach a certain age. There can also be tax benefits to keeping the inherited investments in a tax-advantaged account.
A financial professional can review the investments and types of accounts you've inherited and offer the tax implications for each possible action you could take with the account.
Decide where to keep the accounts
Some custodians also require that you transfer your assets to a new account within their firm. Once your new account is open, where you ultimately decide to house your accounts will likely have a lot to do with what you decide to do with the assets inside.
Once you have a plan of action for your inherited investments, you might consider keeping the investments in place with their current custodian if:
- You aren't sure yet what you'll do with your inherited investment.
- Your spouse passed away, and you held your accounts with the same custodian.
- You've inherited shares of company stock from a loved one's previous employer or a direct stock purchase plan, and moving the stock could be cumbersome.
You might choose to transfer your inherited assets to a different custodian if:
- You've inherited a taxable brokerage account and prefer to consolidate your investments into a single account at a single custodian.
- Your spouse passed away, and you want to roll their IRA over into your existing IRA at another custodian.
With inherited investments, especially inherited retirement accounts, there are a few more moving parts to consider than with a life insurance policy. However, inherited investments allow you to reap the rewards of a loved one's lifetime of savings. Be sure to understand the tax implications before you liquidate any accounts. You can also speak with a tax professional or financial advisor to help you receive your inheritance and then put a plan to manage the assets.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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