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Have You Received an Inheritance?

By April 19, 2022 No Comments

Watch this video below to learn how to handle receiving an inheritance.



Trillions of dollars will be received as inheritance over the next few decades by Gen X (those born from ~1965-1980) passed down by the Baby Boomer generation. Many stand to receive inheritances, but few really know what they plan to do with that money – that is where a retirement planning specialist can help. Let’s dive into a case study of two children receiving an IRA inheritance with very different goals in mind.

Dad’s IRA – $300,000

Custodian – Insurance Company

Child #1 – Age 50

  • Inherited IRA – $150,000
  • Annual Income – $80,000
  • Goal – pay off mortgage – $100,000

Child #2 – Age 55

  • Inherited IRA – $150,000
  • Annual Income – $300,000
  • Goal – Defer Taxes/Retirement

In this example, let’s first start with the logistics of claiming an inheritance. After the father dies, the beneficiaries (in this case, the two children) would inform the insurance company of his death. The insurance company would then send the beneficiaries something called “death claim forms.” These forms cannot be submitted until there is a certified copy of the death certificate available to send in to the company as well.

NOTE: It is important to get SEVERAL death certificates. You will need an original copy for each account owned by the decedent. 

When completing the claim paperwork, depending on how the money was invested by the decedent, they may have claim options on how they’d like to receive the money as beneficiaries. So, let’s consider the possible tax ripple effect of inheriting money.

Child #1 makes $80,000 a year and their goal with this inheritance is to pay off their mortgage ($100,000) by taking a lump-sum distribution. An important consideration is that this person is usually in a 12% Federal income tax bracket; however, by electing for the lump-sum, they will be pushed up into the 22% tax bracket!

Child #2 is married and their combined annual income is $300,000. They do not want any large distributions because they’re already in the 22% tax bracket and large distributions could push them into the 35% tax bracket. The best option in this case is to defer paying taxes on this money for up to 10 years (SECURE ACT). Taking distributions later when their annual income/tax liability is lower.

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