Benjamin Franklin wrote in 1789, “In this world nothing can be said to be certain, except death and taxes.” Ultimately, those two certainties drive the conversation around legacy planning. The primary question people have if they receive an inheritance is, “Do I owe any tax?” While there can be nuances to any situation, I’m going to try to answer that question in the simplest manner. If the inheritance was held in an account that deferred taxes, then you will likely owe tax. If the assets were not tax-deferred, there’s a good chance you will not owe tax.
The primary vehicle used for retirement savings in the United States is the 401(k). As of March 31, 2026, Americans held $13.8 trillion in employer-based defined contribution plans. Defined contribution plans are employer-sponsored retirement savings plans such as a 401(k), 403(b), and 457 plans. In addition, there was $18.2 trillion invested in IRAs. While after-tax Roth contributions are included in these numbers, the majority is pretax, tax-deferred money. You can see in the chart below that those numbers have more than doubled since 2015.
I bring these numbers to your attention because, for the majority, inheriting an IRA or 401 (k) has taxable implications. Prior to January 1, 2020, the rules for inheriting an IRA were friendlier, in which an eligible beneficiary could take distributions from the account based on a life expectancy table. However, with the introduction of the SECURE Act, an IRA inherited after January 1, 2020 generally must be depleted by the end of the 10th year following the year of the IRA owner’s death. There are exceptions for certain eligible designated beneficiaries, defined by the IRS, as someone who is:
- The IRA owner’s spouse.
- The IRA owner’s minor child.
- An individual who is not more than 10 years younger than the IRA owner.
- Disabled (as defined by the IRS).
- Chronically ill (as defined by the IRS).
Generally, an eligible designated beneficiary may use the lifetime distribution rules that were in effect prior to January 1, 2020. (For more information, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements)
As a result of the Secure Act, tax planning and legacy planning have become more important. Taking additional distributions and investing in taxable accounts or considering Roth conversions while the IRA owner is alive may result in less tax being paid over the life of the account. Roth IRAs must also be depleted within 10 years of the account owner’s death; however, the beneficiary is not required to take distributions, so the account can continue to accumulate tax-free growth for up to 10 years. Investments held in a taxable non-qualified account currently pass to a beneficiary with a step-up in basis. This means that if an investment has any unrealized capital gains, those gains are not realized by the decedent or the beneficiary. Real estate generally is received in the same manner with a step-up in basis.
There are exceptions to every rule, and laws change. Proactive planning helps you to stay a step ahead of those changes and adjust as needed. Simple actions, like making sure you’ve named beneficiaries on your accounts, may lessen the tax burden for your beneficiaries and may provide additional options for how they receive the money. In the end, developing a plan and strategy can create a bigger impact for the people and causes that you care about most.
