Inheritance questions

Taxes
#1

I have a few questions about an inheritance coming my way so I wanted to get a few of them out now. I am 31 for the record.

One of the things that we are looking at is a Tax Sheltered Annuity account. When we are looking at options for this, it looked like we can take the distributions either as annual payments over ten years or roll it straight into an inherited IRA. The total amount here is about $40k. My initial thought is to roll it into a Roth IRA and pay taxes on the lump sum up front so the remaining balance can grow tax free. What are the major pros and cons to either approach?

My second questions is with regard to investment accounts. We have an investment portfolio that appears to be comprised of various types of accounts. Are those subject to taxes upon transfer, are the subject to a “cost basis” when it comes to capital gains taxes like a house? Or how does that work?

Hopefully that isn’t too vague! Thanks so much in advance.

#2

Hi @King130

Thank you for the question! I would not use an annuity - in this case it likely won’t actually work. And in general, young people (and most people) should stay far away form annuities since they are expensive and offer significantly lower returns than you can get from the stock market.

Yes, rolling it all into a Roth and paying taxes upfront is an option. The main thing to consider is if it would be beneficial to spread out the tax liability of recognize it all in year one. It depends on your situation (e.g., tax rate now vs tax rate in coming years).

Are the investment accounts inherited also? Non-retirement accounts receive a “step up in basis” so the cost basis is the value of securities based on when the original account holder passed away. There are no transfer taxes. Depending on the state you’re in and the dollar amount of the portfolio, there may be state or local taxes.

I hope this helps! If you haven’t already, check out our FB Group since we get a lot of similar questions to this as well!