Do I Have to Pay Taxes on an Inherited Brokerage Account?

Inheriting financial assets raises questions about tax obligations. The tax treatment of inherited brokerage accounts varies by account type and asset nature. Understanding these distinctions helps manage the inheritance and its tax implications. This article clarifies common scenarios and their tax consequences.

Inherited Taxable Brokerage Accounts

When you inherit a taxable brokerage account, assets receive a “stepped-up basis.” This adjusts the asset’s cost basis to its fair market value on the date of the original owner’s death. This adjustment can significantly reduce or eliminate capital gains tax if the beneficiary sells the assets. For example, if shares purchased for $10 were worth $50 at death, the new cost basis becomes $50.

If you sell inherited assets for more than this stepped-up basis, the difference is a capital gain, taxed at long-term capital gains rates, which are lower than ordinary income rates. Conversely, selling for less than the stepped-up basis may result in a capital loss, usable to offset other capital gains and, to a limited extent, ordinary income.

Any income generated by the assets after inheritance, such as dividends or interest, is taxable to the beneficiary as ordinary income in the year received. Ensure the brokerage firm updates the cost basis of inherited assets to reflect the stepped-up value.

Inherited Retirement Accounts

Tax rules for inherited retirement accounts, such as IRAs and 401(k)s, differ from taxable brokerage accounts. Unlike taxable accounts, inherited retirement accounts do not receive a stepped-up basis. Instead, distributions are taxed as ordinary income to the beneficiary.

Distribution rules depend on the beneficiary’s relationship to the deceased account owner. Spousal beneficiaries have flexible options; they can roll over inherited funds into their own retirement account or treat the inherited IRA as their own. This allows for continued tax deferral and distribution based on their own life expectancy.

For most non-spousal beneficiaries, the Setting Every Community Up for Retirement Enhancement (SECURE) Act introduced the “10-year rule.” This rule requires the entire inherited account to be distributed by the end of the tenth calendar year after the original owner’s death. While annual required minimum distributions (RMDs) may not be necessary in years one through nine if the original owner died before their required beginning date for RMDs, the full balance must be withdrawn by the deadline.

Certain beneficiaries, known as Eligible Designated Beneficiaries (EDBs), are exempt from the 10-year rule. This group includes surviving spouses, minor children of the deceased account owner, disabled individuals, chronically ill individuals, and individuals not more than 10 years younger than the deceased. EDBs may stretch distributions over their own life expectancy, providing extended tax deferral. However, a minor child’s exemption ends upon reaching majority, when the 10-year rule applies.

Tax Reporting

Beneficiaries of inherited brokerage accounts receive specific tax forms to report their inheritance on their tax return. For sales of assets from an inherited taxable brokerage account, you will receive Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” This form reports gross proceeds from sales and, for covered securities, includes the cost basis.

For distributions from an inherited retirement account, such as an IRA or 401(k), the financial institution will issue Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form details the total distribution amount and its taxable portion. Regardless of the inherited account type, the beneficiary must accurately report all taxable income or gains on their tax return, typically Form 1040.