What heirs actually receive from a retirement account

Most non-spouse beneficiaries of a retirement account must now empty it within ten years rather than stretching distributions across a lifetime. Certain beneficiaries — a surviving spouse, a minor child of the owner, someone chronically ill or disabled, or someone close in age to the owner — are treated differently.

The compression matters because withdrawals from a pre-tax account are taxable to the heir, often during their highest-earning decade. A large inherited pre-tax balance can therefore be worth considerably less after tax than its statement value suggests.

This is one reason planners look at which asset goes to which heir. A Roth account, an appreciated taxable asset that receives a step-up in basis, and a pre-tax account are very different inheritances.

The rules are detailed and have been amended repeatedly. Confirm the current treatment with your tax professional before acting on any of it.