$500K Inheritance: 90-Day Deployment Order (Tax First)

The worked decision: Maria’s $500K, three buckets, 90 days

Maria, 54, married filing jointly, lives in Arizona. Her mother died in March and left her $500,000 in three forms: $150,000 in cash (a savings account and a CD), $200,000 in a taxable brokerage account (index funds her mother bought decades ago, with a date-of-death value of $200,000), and a $150,000 inherited traditional IRA. Maria and her husband have a combined W-2 income of $140,000, which puts their 2026 taxable income squarely in the 22% federal bracket ($96,951–$206,700 MFJ). They have an $18,000 car loan at 7.4% and a $310,000 mortgage at 3.1%.

The instinct is to treat $500K as one number and ask “stocks or pay off the house?” That question produces the wrong answer because the three buckets carry completely different tax bills. Here is what each one actually costs Maria to touch:

Two-thirds of Maria’s windfall — the $350,000 of cash and stepped-up stock — is fully spendable with no income-tax cost. Only the $150,000 IRA is taxable, and it is the one she must touch slowest. That inversion — deploy the tax-free money first, ration the taxable money — is the entire strategy.

Step 1 (Days 0–7): Park everything, change nothing

Move all liquid cash into a high-yield savings or money-market account paying around 4%. On $350,000 of accessible funds, that is roughly $1,150 a month in interest while you decide — enough to remove any urgency. Leave the inherited IRA and the brokerage account exactly where they are for now; do not sell, do not transfer, do not let a salesperson “help you reposition” anything.

The first move is administrative, not financial. Re-title the inherited IRA correctly as a “[Decedent’s name], deceased, IRA for the benefit of [your name]” account. A non-spouse beneficiary cannot roll an inherited IRA into their own IRA — doing so is treated as a full taxable distribution. Get the registration right before anything else.

Step 2 (Days 7–30): Kill the debt that beats the market

Now use the cash bucket. The rule is a clean rate comparison: pay off any debt whose rate exceeds what your money can reliably earn after tax. Maria’s two debts split cleanly:

• Car loan at 7.4% — pay it off. A guaranteed 7.4% after-tax return is better than any safe investment in 2026. Using $18,000 of the cash bucket to retire it frees up the monthly payment and earns a risk-free 7.4%.
• Mortgage at 3.1% — keep it. Paying off a 3.1% mortgage with money that earns 4% in a savings account, or ~6–7% in a diversified portfolio over time, is a wealth-destroying move. The emotional appeal is real; the math is not. Keep the cheap debt.

Also fund or top off an emergency reserve — three to six months of expenses — from the cash bucket if it isn’t already in place. A windfall is the cheapest moment you will ever have to build one.

Step 3 (Days 30–60): Fund the tax-advantaged buckets you couldn’t before

You cannot deposit inherited cash directly into a 401(k) or IRA — those require earned income. But a windfall lets you do something better: redirect your paycheck into tax-advantaged accounts and replace the lost take-home pay from the cash bucket. The inheritance funds your life so your salary can fund your future tax-free.

For 2026, Maria and her husband can each max:

Both are over 50, so each can defer up to $32,500 into a 401(k) ($24,500 + $8,000 catch-up) plus $8,500 into an IRA ($7,500 + $1,000 catch-up). By cranking their payroll deferrals to the maximum and backfilling their checking account from the cash bucket, they shovel roughly $82,000 of pre-tax and Roth contributions into protected accounts in a single year — money that would otherwise have been taxed at 22% as ordinary salary. The inheritance never enters the retirement account; it simply makes the salary diversion painless.

Step 4 (Days 60–90): Deploy the investable slice — and leave the stepped-up stock alone

After debt payoff, emergency reserve, and the cash used to backfill maxed paychecks, Maria has roughly $110,000 of cash left to invest, plus the $200,000 brokerage account that is already invested.

The $200,000 brokerage account needs almost nothing done to it. Its basis stepped up to $200,000 at her mother’s death under IRC §1014, so the decades of embedded gain vanished. If the funds are reasonable and diversified, she holds them. If she wants to reposition into her preferred portfolio, she can sell now while the gain is near zero — and because Arizona is a community-property state, assets her mother owned with a spouse may have received a full step-up rather than the half step-up common elsewhere, making the sale even cheaper. Selling later, after the account has grown, means a real taxable gain.

For the $110,000 of fresh cash, the question is lump-sum versus dollar-cost-averaging:

1. The math favors lump-sum. Historically, investing all at once beats spreading it out about two-thirds of the time, because markets rise more often than they fall.
2. Behavior often favors a glide path. After a windfall tied to a parent’s death, regret risk is high. Deploying the $110,000 over 6–12 months costs only about 0.2–0.4 percentage points of expected return — cheap insurance against panic-selling if the market drops the week after you go all in.
3. Never DCA money already invested. The $200,000 brokerage account stays in the market. Selling it to slowly “ease back in” means realizing gains and sitting in cash — the worst of both worlds.

The taxable bucket: why the inherited IRA goes last and slowest

The $150,000 inherited IRA is the only piece that generates a tax bill, and the SECURE Act controls the clock. As a non-spouse, non-eligible beneficiary, Maria must empty the account by December 31 of the 10th year after death (26 CFR §1.401(a)(9)-5). Because her mother had already started RMDs, Maria must also take annual RMDs in years 1 through 9, then clear the balance in year 10.

Every dollar she withdraws stacks on top of her $140,000 of W-2 income as ordinary income. Watch what happens if she ignores the IRA and lets it ride to a year-10 lump sum:

The even-spread approach keeps every dollar taxed at 22–24%. The year-10 dump shoves the top slices into the 32% bracket — a difference of roughly $15,000–$20,000 in extra tax on the same money. The lever is timing, not amount. Front-load withdrawals in any year your income dips — a sabbatical, a layoff, or the gap years between retirement and Social Security — to fill up the lower brackets on purpose.

What most people get wrong about a $500K inheritance

Three myths cost inheritors real money:

• Myth: “I’ll owe inheritance tax on $500K.” There is no federal inheritance tax, and the federal estate tax only bites estates over $13.99M in 2026 (IRC §2010) — and the estate pays it, not the heir. A handful of states levy their own inheritance tax (Pennsylvania, New Jersey, Kentucky, Nebraska, Maryland, Iowa), but Arizona is not one. Maria’s cash and stock arrive clean.
• Myth: “Inherited stock is taxed when I sell it.” Only the gain after the date of death is taxable, because the basis stepped up under §1014. Sell soon after inheriting and the gain is near zero. In fact, if a MFJ couple’s total taxable income is at or under $96,700 in 2026, long-term gains fall in the 0% LTCG bracket — a small post-step-up gain can be harvested entirely tax-free.
• Myth: “The IRA is just more inherited money.” The IRA is the one bucket that never got a step-up and never will — §1014 does not apply to retirement accounts. It is fully taxable on the way out and is on a 10-year shot clock. Treating it like the cash is how people accidentally hand the IRS an extra five figures.

The 90-day order, on one page

1. Days 0–7: Park all liquid funds at ~4%. Re-title the inherited IRA correctly. Sell nothing.
2. Days 7–30: Pay off debt above ~6–7% (Maria’s 7.4% car loan). Keep the 3.1% mortgage. Top off the emergency fund.
3. Days 30–60: Max 401(k) ($24,500 + $8,000 catch-up), IRA ($7,500 + $1,000), and HSA ($8,750) by diverting salary and backfilling cash flow from the windfall.
4. Days 60–90: Invest the remaining cash slice (lump-sum, or glide over 6–12 months for behavioral comfort). Hold the stepped-up brokerage account; reposition now if needed while the gain is near zero.
5. Years 1–10: Withdraw the inherited IRA evenly (~$16K/yr) to stay in the 22–24% bracket; front-load in any low-income year. Never let it ride to a year-10 lump sum.

The one decision that matters most

The lever on a $500,000 inheritance is not “which fund” or “pay the house or not.” It is whether you sort the money by tax character before you touch any of it. Deploy the $350K of cash and stepped-up stock first — they are free to move. Ration the $150K inherited IRA across all 10 years to keep it in your current bracket. Get that ordering right and the same $500,000 either funds your future tax-efficiently or quietly leaks $15,000–$20,000 to the IRS for no reason. The math is fixed; the sequence is your choice.