A 22-year-old inherited $1.7 million after her mom's sudden death. These are the tax and IRS rules she needs to know now

Vawn Himmelsbach

Sun, August 23, 2026 at 1:30 PM GMT+3 6 min read

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An unexpectedly large inheritance can feel like winning the lottery — but it can also be an unexpected burden. From taxes and RMDs, to fending off friends and family who suddenly expect financial favors, the experience can be overwhelming.

Take Chloe, for example. She's 22 and her mom just died from a sudden illness. Since Chloe grew up in a rather frugal household, she was stunned to learn that she had inherited $1.7 million. She'd been planning to go to med school, so this money is a game-changer.

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But, while she's navigating her grief, she's also overwhelmed — and she'd rather keep the inheritance private. While she's worried about taxes and IRS rules, she's also worried that people will treat her differently if they know she has money.

Before making any money moves, here's what to consider if you find yourself in a similar situation.

What to do (or not do) right away

With any sort of windfall, it's often a good idea to take a beat before making any big decisions. That's very much the case with an inheritance, when you're still grieving a loved one. Grief can cloud your judgment and you don't want to make financial decisions that you'll later regret — especially if they come with tax consequences.

As well, the probate process (which is how an estate's assets are distributed by the courts) can take weeks or months — even years for more complex estates. On average, it takes from six to nine months.

Assets with designated beneficiaries typically bypass probate, but assets in the deceased's name go through probate — which highlights the importance of drafting a will and ensuring you've designated beneficiaries to your retirement accounts.

Many financial experts suggest that you park inherited cash in an easily accessible account until you're ready to make a decision.

For example, a federally insured high-yield savings account will insure up to $250,000 per depositor, per financial institution. In Chloe's case, she could spread the money among several accounts and/or institutions.

Tax considerations

Most likely, you won't just inherit cash — you'll inherit a mix of assets, such as securities, retirement accounts and real estate. However, unless you inherit a lot of money, you probably won't have to worry about federal estate taxes.

Typically, you don't have to pay federal estate tax unless it exceeds the exemption, which is $15 million in 2026 (or $30 million for married couples). At a state level, 12 states and the District of Columbia have their own estate tax, which is paid by the estate. Five states also have an inheritance tax.

Inheritances aren't considered "income" when you file your taxes. But earnings on inherited assets — like interest and dividends — could be taxable.

If Chloe inherits stocks, mutual funds or other investments, she'll be able to take advantage of something called a step-up in basis. That means the amount you're taxed on those investments is 'stepped up' to the amount they're worth on the day of the original owner's death.

So, if her mom bought shares at $50 that were worth $500 on the day of her death, then Chloe's tax basis would be $500.

Chloe wouldn't owe taxes if she were to sell those shares immediately. However, if she holds onto them, she'll owe taxes (or can claim a loss) when she eventually sells. But she'd pay taxes on the difference between the stepped-up rate (in her case, $500 per share) and the sale price.

Retirement accounts and RMDs

Inherited retirement accounts can get a bit tricky, which is where a financial planner or tax advisor can help. Rules vary, depending on the type of account and your relationship to the original account owner.

With a workplace retirement savings plan such as a 401(k) or a traditional individual retirement account (IRA), a non-spousal beneficiary is generally required to follow the 10-year rule.

That means the account must be converted to an inherited IRA and liquidated by the end of the 10th year following the death of the original account owner. (A widow or widower can roll that into their own IRA and postpone distributions until they're 73.)

You could opt instead to take a lump-sum payout, but that could result in a massive tax bill, especially if it bumps your annual income into a higher tax bracket.

If the original account owner had already begun taking required minimum distributions (RMDs) — the minimum amount that must be withdrawn from retirement plans once the owner reaches a certain age — then you must continue taking RMDs and empty the account within 10 years. There are a few exceptions, such as if you're a disabled heir.

Failing to take distributions comes with a hefty 25% penalty.

Roth IRAs are made with after-tax dollars, which means your withdrawals are tax-free, but you're still required to empty the account within 10 years.

Making a plan for the future

After giving herself some breathing room — and perhaps consulting with a financial planner and/or tax advisor — Chloe can decide what to do with her inheritance.

If she's in debt, she may want to use some of that money to pay off her credit cards and other high-interest debt, as well as beef up her emergency fund. And she may want to use some of that money to pay for med school and avoid racking up student loan debt.

While earning an undergraduate degree typically takes four years, becoming a licensed doctor also requires residency training, which can take anywhere from three to seven years depending on your chosen specialization. So those costs add up fast.

However, if Chloe's invested inheritance earns a higher return than the interest rate on her student loan, she might want to consider keeping the money invested and applying for a low-interest student loan instead (the same goes for a mortgage).

After accounting for her debts and expenses, Chloe can then decide what to do with the rest of the money. If she's investing a portion of it, she'll want to aim for a diversified portfolio across industries, geographies and asset classes.

Since she's young and has decades to benefit from the power of compounding, she can afford to take a few more risks in her portfolio — if she wants to.

She might also want to invest that money over a stretch of time, rather than all at once, to benefit from dollar-cost averaging, which lowers her timing risk. Some of those funds could be used to save for retirement, while some could be used for future goals such as putting a down payment on a house.

Aside from her team of professionals, Chloe is under no obligation to tell friends or family members about her windfall. To keep it private, she's best off to maintain her current lifestyle and avoid buying major assets that will flaunt her new wealth.

If the money is invested, it will continue to build wealth over time — and it's a lot easier to avoid impulse purchases.