Retirement accounts — IRAs, 401(k)s, Roth IRAs, 403(b)s, and similar plans — are among the most valuable assets in most Americans' estates. They also have the most complex inheritance rules of any asset type, with major changes introduced by the SECURE Act in 2019 and the SECURE 2.0 Act in 2022.
How Retirement Accounts Transfer at Death
Retirement accounts pass directly to named beneficiaries via beneficiary designation — not through your will. This means:
- They avoid probate entirely
- They transfer based on who is named on the account, regardless of what your will says
- Keeping beneficiary designations current is critical (see our guide to beneficiary designations)
Who Inherits Determines the Rules
The rules governing inherited retirement accounts depend heavily on who inherits them:
Surviving Spouse
A surviving spouse has the most options:
- Roll into their own IRA: The inherited funds become part of the spouse's own retirement account, subject to their own rules and timeline. Often the best option for most spouses.
- Inherited IRA: Keep the funds in an inherited IRA, which allows more flexibility if the spouse is young (before age 59½) and needs to take distributions without the 10% early withdrawal penalty.
Non-Spouse Beneficiaries (Under the SECURE Act)
Since 2019, most non-spouse beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner's death (the "10-year rule"). This replaced the old "stretch IRA" strategy that allowed distributions over a lifetime.
Exceptions to the 10-year rule exist for:
- Minor children of the account owner (until they reach majority, then the 10-year rule kicks in)
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the deceased
Tax Implications for Heirs
Traditional IRA and 401(k) Distributions
Traditional retirement accounts are funded with pre-tax dollars — heirs owe income tax on every distribution they take. Under the 10-year rule, heirs must be strategic about when they take distributions to minimize their tax burden (for example, spreading distributions over 10 years rather than taking it all at once, or taking larger distributions in low-income years).
Roth IRA Distributions
Roth IRA distributions are generally tax-free for heirs (the contributions were already taxed). The 10-year rule still applies, but heirs can choose when within those 10 years to take distributions, and the distributions themselves don't increase their taxable income. Roth IRAs are particularly valuable assets to leave to heirs.
Converting to Roth as a Legacy Strategy
If your estate plan prioritizes leaving tax-efficient assets to heirs, converting traditional IRA funds to Roth before death can be strategic — you pay the taxes now at your rate, so heirs can take distributions tax-free. This is worth discussing with a financial planner or tax advisor.
Naming Beneficiaries on Retirement Accounts
Given the complexity of these rules, naming the right beneficiary is critical:
- For most people: name your spouse as primary and your children as contingent
- For families with minor children: a trust may be preferable to direct distribution to children under 18
- For large estates with estate tax concerns: specialized trusts (like a conduit trust or accumulation trust) can provide additional flexibility
For the complete picture of financial planning, see our complete guide to organizing your finances for your heirs.