An inheritance can be a great financial gift, can provide you with an opportunity to really improve your financial situation. But there are always a lot of questions as it relates to taxes on what you owe, the different types of assets. So we have a question today run by John Stillman. Have him break it all down for us.
That's coming up next. Hello, welcome in. Glad to have you on the show. I'm Ben George with John Stillman at Rosewood Wealth Management.
Have a good show for you today. Another question I want to run by John. An inheritance is, John, I know probably come up quite a bit with you, right? I'm sure a lot of times it's really the starter for a lot of people to go in and sit down with someone. Yeah, a lot of times it is the first time that anybody feels like they've had any money that needs to be invested.
Usually that's not true. You could start out at any dollar amount. But for a lot of people, yeah, it's suddenly this huge windfall and they just don't know what to do with it. And it's, yeah, I probably need help with this. Well, one of the questions that comes up I'm sure is not only how do I invest it, but what do I owe on these taxes for everything that I got in this inheritance? So question I want to run by you today. And as I do this and you have something on your mind that you want to follow up with, please don't hesitate to call 800-545-2991 or just go to meetwithjohn.com, meetwithjohn.com, scheduled meeting with John.
All right, so here's a question for this video, John. I just inherited some assets from my mom, but it's in several different accounts. There's an IRA, an annuity, a bank account, her home that I'll eventually sell, and some AT&T stock that she's had for years. So how do I determine what I'm going to owe in taxes on all this inheritance? Let me know if you need me to go take you back through one one by one. Yeah, I probably will have you do that because there was a lot of items there. But I will say this first before I have you go back through that inventory. People usually get really concerned about the taxes associated with money that they're inheriting. And I'll tell you more often than not, the taxes that they're going to owe are much less than what they're thinking.
So usually inheriting money is a pretty tax efficient event, but it really depends on the type of money, the type of account, and exactly what you do with it. So yes, go through those items again, Ben. We'll take them one at a time.
All right. Let's start with the IRA. So the IRA, it's important to note, is different than it was several years ago. I feel like we've talked about this on the show a lot recently, so I won't spend a whole lot of time on it. I know we have an episode specifically dedicated to inherited IRAs.
So if you need any more detail on it, you can consult that video. But in general, the rule used to be that when you inherit an IRA, you could take a little bit of money out each year over the course of your lifetime. And then you could pass it on to your beneficiaries and they could do the same.
Keep stretching that tax liability out over the course of many, many years. Because what is an IRA? It's money that you have not yet paid taxes on. That money is going to be taxed when you take it out.
And so the rule was prior to 2020, that you could take that money out a little bit at a time each year. Well, now the rule is if you inherit an IRA and you're not a spouse of the person that gave it to you or some other nuanced type of beneficiaries, like maybe a disabled child or something like that. In most cases, if you inherit an IRA, you have to withdraw all of that money in 10 years and pay the taxes on it. So it's not taxable the moment that the inherited IRA gets passed into your name. The mechanics are you're going to have the IRA from mom or dad, let's say you're then going to set up a different account, an inherited IRA. So it will still have mom or dad's social security number attached to it as the original depositor.
But now you're also on it. And because it's an inherited IRA, you'll have 10 years to withdraw all the money and pay all the taxes. So it is taxable. It is taxable money, but it's not like, oh man, I got a $500,000 IRA.
I'm going to have to pay taxes on $500,000 of income this year. No, it doesn't work that way. It's as you withdraw it over the course of those years. So if you're going to have some years that you know are going to be lower income years for you, for whatever reason, like maybe you're in between jobs or something is causing your income to be down one year, that might be a good year to take a little bit more out of the IRA because maybe you're going to be in a lower bracket that year because your other income is lower.
So something to think about on that. Yeah. If you want a little more detail, it's the IRS update for IRAs. We had just four or five videos ago.
So check out that video. All right, John, next up is the annuity. So annuities are introduced. And now let's assume that this is not an annuity that's inside of an IRA. If it's an annuity in an IRA, then refer to what I just said 20 seconds ago.
And that's your answer, right? If it's a non-qualified annuity, meaning it's not inside of a retirement account, you're going to be taxed on the growth from the initial deposit to what it's worth when you cash it out. So let's suppose that mom put $100,000 in this annuity and it's now worth $150,000. Well, if you cash it out, you're going to be taxed on that $50,000 of growth. It'll be as if you took $50,000 out of an IRA, but you'll only be taxed on the $50,000, not the entire $150,000 as you would be if you were taking that money out of an IRA. You'd pay taxes on the entire $150,000.
In this case, you're only taxed on the growth. And what were the last two? Were there two more or three more items? Three more items, bank account, the home, she plans to sell, and then some AT&T stock that's been around for years. Okay. So we'll put the home and the AT&T stock in the same bucket because they're going to be treated the same way for tax purposes.
So we'll come back to that. Let's hit the bank first. The bank, there's essentially no tax liability here, right? You might be getting some interest as you go on that bank account. If mom was getting interest in her checking account or from a CD or a money market account, anything like that, if she was getting interest from it, you're now going to be getting that interest once that money passes to you. And yes, you're going to pay taxes on that interest as you earn it. But the money that was just in the bank account, the principal, that's not taxable to you unless we're talking about tens of millions of dollars in their bank account, in which case, we're having a different conversation about this. But for the most part, that money that's in mom or dad's bank account, you're not paying taxes on when it passes to you. Okay.
And then last, we had what? AT&T stock and the house. I realize those seem like two completely different things, but for tax purposes, they are the same. In this way, you're only going to be taxed on the growth of that asset. But unlike the annuity that we talked about, where you're taxed from where mom put the money in to what it grew to, in this case, you're only taxed on the growth from the day mom died until you sell it. So, let's say mom bought that house for $200,000 and when she dies, it's worth $500,000. Well, if that was the annuity, you would pay taxes on that $300,000 of growth.
Not the case with the house. You're going to sell the house, you're going to have what's called a stepped-up cost basis. So, your cost basis is not the $200,000 that mom paid for it. You're going to pay taxes $200,000 that mom paid for it. Your cost basis is the $500,000 that it was worth on the day that she died. So, if you sell it for $500,000, you don't owe any taxes on that transaction. If you put it off for a year or two and it grows to maybe $550,000 by the time you get around to selling, well, that's fine. You're only going to pay taxes on that $50,000 of growth from the date of mom's death until the time that you sold it. So, obviously, nobody has a price tag sitting on the front of their house. So, you just know at any given moment what the value of that property is.
So, sometimes you have to do a little bit of digging and figure out, okay, well, I didn't even know these rules and now I've been sitting on this house for a year. What happens now if I sell it? Well, you need to probably talk with either a realtor or somebody who can give you a decent idea of what that property was probably worth the day that mom died. And then you can calculate your gain from there.
You say, well, I don't know how I could figure that number out exactly. It doesn't have to be exact because the IRS also doesn't know the price of that house, the value of that house in the day mom died. So, you just have to make a reasonable case for it. If it was probably worth around $500,000, then you can say that. You can't say it was worth $600,000 and I sold it 10 years later for $600,000.
Well, that's not going to fly. But if you show some reasonable growth, if you did hold on to it for a year or two, or if you pretty much sell it immediately, I think you're mostly justified in saying the price that I sold it for was the value of that property on the day that she died because I didn't hold on to it long enough for it to really grow in value. All right. So, I put the AT&T stock in the same category as the house because it's treated the same way. The value of the stock the day that she died is your cost basis. So, if you sell it the next day, you basically pay no taxes. Now, the stock is a little different from the house from the standpoint that we do know exactly what the value of the stock was. And we can easily look back in history and see what the value of the stock was on any given day. So, if we know that mom died on April 13th of last year and she had 100 shares of AT&T stock, well, we can very easily look back and say, what was the price of AT&T stock on April 13th of last year?
What's it worth now? And if we sell it for a gain, we're going to be taxed on that gain. But again, you're not taxed on the entire sale, just on the amount that it grew from mom's death until you sell. So, all of that to say, as you can see, most of the things in that estate are more tax efficient than a lot of people probably think. The AT&T stock or any after tax stock that's not in a retirement account, pretty tax efficient.
Same with the house. Bank account, very tax efficient. The annuity, you're only being taxed on the growth.
The IRA, you're being taxed on everything because mom never paid any taxes on that money ever. So, that's kind of your lay of the land on that. So, surprisingly, it's all fairly logical, which isn't always the case as it relates to taxes. So, I guess the only thing I would follow up with, Jon, is if someone receives an inheritance, and let's say they just received one large asset and that was it versus the situation in this scenario today, does it require more planning if you do receive multiple items like this just to make sure you're as efficient as possible?
Yeah, the absolute best situation is that families were communicating before this money ever got passed on anyway. So, that it's not a surprise to you what you're getting when you get it, right? You kind of know what might be coming your way. That's going to help you plan.
But if you do have all these moving parts, all these pieces that you inherit, then yes, it's that much more important that you have a conversation and get a big picture plan put together. Because like I said earlier, it could be that, well, this is a down year for us. This actually is a good year to sell a lot of stocks in that IRA and realize some of that income, this will be a good year for it. Like let's say that your mom dies in October, you're pretty close to the end of the year, and that was a year that you happen to have a low income. Well, we only have a couple of months to get that money withdrawn from the IRA for it to count as income for you this year. And if we determine that this is indeed a good year for you to realize that income, you're probably realistically going to have a tough time doing all the funeral stuff, taking care of the burial things, collecting yourself emotionally. And oh, by the way, now let me get around to figuring out the deal with this IRA.
That's why if you can kind of have a plan ahead of time, it can make things much more efficient. What happens with a lot of people is they just kind of put it out of their mind for six months or 12 months, and then they get around to, okay, well, what do I need to do with this money that I inherited? Well, now, if it was actually in your best interest to have done something pretty soon after you inherited it, that ship has already sailed. All right. Very good.
Well, if you know you've got an inheritance coming, you think you might, or you just received one unexpectedly and want to sit down and do some planning with it, make sure you take full advantage of the money that was left to you. You can always get in touch with John. Go to meetwithjohn.com.
You can schedule a meeting right there through the website or rosewoodwealthmanagement.com. Good breakdown, John, as always. Appreciate the time. Yeah, man. Always a pleasure. Carolina Wealth Stores doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.
