What to Know Before You Transfer Assets to Your Heirs

Inheriting an IRA or 401(k)? Here’s What You Really Need to Know

If you’re planning to leave assets to your children or other loved ones—or you’ve recently inherited a retirement account yourself—it’s important to understand what happens next. The truth is, inheriting a tax-deferred account like an IRA or 401(k) isn’t as simple as it sounds.

There are rules. Many of them. And they’ve changed significantly in recent years, especially after the passage of the SECURE Act and SECURE 2.0.

At Lucia Capital Group, we work with clients every day to help them transfer assets efficiently and avoid the tax traps that can catch heirs off-guard. Here’s what you need to know about inheriting tax-deferred retirement accounts, whether you’re a spouse, a non-spouse, or planning your own legacy.

First: What’s the Big Deal?

Tax-deferred accounts—like traditional IRAs and 401(k)s—allow your investments to grow without being taxed each year. But that “deferral” ends eventually. When the account is passed on, the beneficiary becomes responsible for taking Required Minimum Distributions (RMDs) and paying taxes on those withdrawals.

The problem is that the timing, flexibility, and tax consequences depend on who the beneficiary is—and when the original owner passed away.

If You’re a Surviving Spouse

Spouses have the most flexibility when inheriting an IRA. You typically have two choices:

1. Treat it as an inherited IRA

2. Roll it over into your own IRA and become the new owner

Option 1: Inherited IRA

You leave the account in the name of the deceased spouse and treat it as a beneficiary account. This is often the best option if you’re under age 59½ and may need to access the funds early—there’s no 10% penalty on withdrawals from an inherited IRA.

Also, you won’t have to take RMDs until your deceased spouse would have reached RMD age (currently 73 or 75, depending on their birth year).

Option 2: Rollover to Your Own IRA

If you’re over 59½ or don’t need immediate access, rolling the assets into your own IRA may be the better long-term option. You take over the account as the owner—but keep in mind, if you’re under 59½, early withdrawals could be penalized.

If You’re a Non-Spouse Beneficiary

Things get trickier here.

As a non-spouse, you can’t roll the inherited IRA into your own account. Instead, you must create a beneficiary IRA, and you’ll face distribution requirements—even if you’re nowhere near retirement age.

Here’s what else you need to know:

• Distributions are always taxable at ordinary income rates (unless it’s a qualified Roth distribution)

• No 10% early withdrawal penalty, no matter your age

• You can’t convert it to a Roth or use a 60-day rollover

• You must follow specific RMD timelines—and they vary based on the year of death and other factors

What If the IRA Owner Died Before 2020?

Under the old rules, non-spouse beneficiaries had two options:

1. Stretch IRA: Begin RMDs in the year after the original owner’s death, based on your life expectancy

2. 5-Year Rule: Empty the account by December 31st of the 5th year following death

The Stretch IRA was the preferred method—it allowed you to keep the account growing tax-deferred for decades. But if you missed the first RMD, you defaulted to the 5-year rule.

That window closed in 2024 for anyone who inherited before 2020.

What If the IRA Owner Died in 2020 or Later?

This is where SECURE Act rules kick in—and they eliminated the lifetime stretch for most non-spouse beneficiaries.

Instead, you now fall under the 10-Year Rule:

• You must fully distribute the account by December 31st of the 10th year after the original owner’s death

• Some beneficiaries must also take RMDs in years 1–9, depending on when the original owner died and whether they had started RMDs

Special Cases and Exceptions

Some beneficiaries are exempt from the 10-year rule and still qualify for a lifetime stretch:

• A minor child (until they reach age 21)

• A beneficiary who is disabled or chronically ill

• A beneficiary who is less than 10 years younger than the original owner

These individuals can still take RMDs over their life expectancy, giving them more time and flexibility.

The Roth IRA Twist

Even Roth IRAs must be distributed within 10 years by most non-spouse beneficiaries. But there’s a key distinction:

• The original owner was never required to take RMDs from a Roth

• So, if they died before their RMD age, there are no RMDs for years 1–9—just a full distribution required by the end of year 10

This makes tax planning critical, especially if a large Roth is inherited. Waiting until year 10 to withdraw it all could create a significant taxable event if the Roth wasn’t qualified.

Planning Opportunities (and Pitfalls)

If you’re inheriting a retirement account—or planning to leave one—it’s critical to work with an advisor who understands the rules and can help avoid common mistakes.

Some examples:

• Taking out too much too soon (and creating a large tax bill)

• Waiting too long and facing a 25% penalty for missed RMDs

• Failing to plan ahead and losing out on years of tax-deferred growth

• Treating inherited Roth IRAs the same as traditional IRAs (they’re not)

The bottom line: these rules are complicated, and they keep changing. It’s easy to slip up if you don’t have guidance.

What You Can Do Now

Whether you’re inheriting assets or planning your legacy, here are some steps to take:

• Work with a financial advisor before taking withdrawals

• Introduce your heirs to your advisor so they’re prepared

• Understand the timing rules and plan withdrawals accordingly

• Avoid rushing into decisions that could create avoidable tax burdens

We Do This Every Day

At Lucia Capital Group, we help individuals and families navigate the rules around inherited retirement accounts—and build plans that minimize taxes, preserve legacies, and avoid costly missteps.

Whether you’re the beneficiary or the one doing the giving, we’re here to guide you through every step of the process.

How can we help you the most? Just give us a call.

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