Chapter 7: Retirement Accounts and Investments

Why this chapter is more technical than the others

I'm going to warn you up front: this chapter has more numbers, more acronyms, and more "but if you do this, then that happens" than anywhere else in this book. I apologize for it, but I cannot help it. Retirement accounts have been a forty-year experiment in tax code complexity, and the estate planning rules are exceptionally unforgiving. Getting them wrong costs real money, sometimes a lot of it.

If you want just the action items, skip to "What to do this week" at the end. If you want to understand why the rules are what they are and what to tell your CPA, read straight through.

As always: I am not a CPA. I am not a financial advisor. The technical rules in this chapter are correct as of 2026 to the best of my knowledge. Check with a qualified professional for your specific situation.

The landscape: what retirement accounts can exist

When a parent dies, their retirement "accounts" may include any or all of:

• Traditional IRA. Pre-tax contributions, tax-deferred growth, taxed at withdrawal.
• Roth IRA. Post-tax contributions, tax-free growth, tax-free qualified withdrawals.
• 401(k). Employer-sponsored retirement plan. May have traditional (pre-tax) and Roth (post-tax) sub-accounts.
• 403(b). Like a 401(k) but for nonprofits and schools.
• 457(b). Like a 401(k) but for government employees.
• SEP-IRA. Self-employed / small business IRA.
• SIMPLE IRA. Small business retirement plan.
• Pension (defined benefit plan). Older traditional company pensions, still around in some industries. Pays monthly benefits; may have survivor provisions.
• Thrift Savings Plan (TSP). Federal government employee retirement.
• Inherited IRA. If your parent was already the beneficiary of someone else's IRA, they may hold an "inherited IRA" — which has its own rules and passes differently than a regular IRA.

Each of these has slightly different rules for beneficiaries. In practice, they roughly cluster into three categories:

1. IRAs (traditional, Roth, SEP, SIMPLE). These pass to beneficiaries via the designation form. The beneficiary sets up an "inherited IRA" at the custodian.
2. Employer plans (401(k), 403(b), 457(b), TSP). Also pass to beneficiaries via designation, but the employer plan may have quirky rules about how quickly the beneficiary must take the money. Some plans force immediate lump-sum distribution.
3. Pensions. Usually end at death unless the plan has a "joint and survivor" election that was made at retirement. If the retiree chose a single-life annuity, the pension dies with them. If they chose joint-and-survivor, the surviving spouse continues to receive benefits (usually reduced).

All of them share the feature that the beneficiary designation on file is the controlling document. Will is irrelevant. See Chapter 5 for the beneficiary basics.

The SECURE Act killed the stretch

Before 2020: any beneficiary of an IRA could "stretch" distributions over their own expected lifetime, which for a young grandchild could mean 50–60 years of tax-deferred growth. This was one of the best-known estate planning tools in the country, and it was wildly tax-efficient.

The SECURE Act of 2019 ended this for most non-spouse beneficiaries. The SECURE Act 2.0 of 2022 clarified and expanded. Current rules (as I write this in 2026):

Eligible Designated Beneficiaries can still stretch:

• Surviving spouses
• Minor children of the decedent (until they reach majority)
• Disabled beneficiaries
• Chronically ill beneficiaries
• Beneficiaries not more than 10 years younger than the decedent

These people can still take distributions over their lifetime.

Everyone else (non-eligible designated beneficiaries) must fully distribute the inherited IRA within 10 years. This is "the 10-year rule."

Non-designated beneficiaries (an estate or a non-see-through trust) must distribute faster — usually within 5 years.

The 10-year rule is the default for most adult children inheriting from parents. If you are 45 and inherit your father's $600,000 IRA, you must take everything out within 10 years. You can spread withdrawals across those 10 years to manage taxes, but by the end of year 10, the account must be empty.

Tax implication: for a traditional IRA, every dollar you pull out is ordinary income to you. A $600,000 inherited traditional IRA, pulled out over 10 years at $60,000/year, adds $60,000 to your taxable income each year. At a 24% marginal rate, that's $14,400 in extra tax per year, or $144,000 total. Maybe more if the distributions push you into higher brackets.

Roth IRA exception: Inherited Roth IRAs follow the same 10-year rule for most non-spouse beneficiaries, BUT qualified distributions from a Roth are tax-free. So the 10-year rule doesn't cost you much in taxes for a Roth, just limits the stretch opportunity.

Spousal treatment is special (and better)

A surviving spouse has unique options unavailable to other beneficiaries:

Option 1: Spousal rollover. The surviving spouse rolls the inherited IRA into their own IRA. It becomes fully theirs. They continue to defer taxes until their own required minimum distribution (RMD) age. This is almost always the best option for a surviving spouse.

Option 2: Treat as inherited IRA. The spouse leaves it as an inherited IRA in the decedent's name. This is useful if the surviving spouse is younger than 59½ and might need to take withdrawals — inherited IRAs don't have the 10% early withdrawal penalty.

Option 3: Five-year rule (if decedent died before RMD age). The spouse must distribute the entire account within 5 years. Rarely the best choice.

For a surviving spouse, the spousal rollover is usually right. Consult a financial advisor on timing — if the spouse is young and might need access to the money before 59½, there can be reasons to delay the rollover.

Required Minimum Distributions (RMDs)

RMDs are the IRS forcing you to take money out of tax-deferred accounts so they can eventually tax it. Understanding these matters because:

1. The RMD rules affect what heirs receive.
2. RMDs not taken carry a massive penalty.
3. RMD age has moved around a lot lately.

RMD age for account holders:

• Born before July 1, 1949: RMD age was 70½ (old rule)
• Born July 1, 1949 through 1950: RMD age is 72
• Born 1951–1959: RMD age is 73
• Born 1960 or later: RMD age is 75

First RMD must be taken by April 1 of the year after you reach RMD age. Every subsequent year, the RMD is due by December 31.

If a decedent was already taking RMDs, the beneficiaries generally must continue taking annual RMDs within the 10-year window AND fully distribute by the end of year 10. (This is the SECURE Act "at least as rapidly" rule, refined by the IRS in 2024.)

If a decedent died before starting RMDs, beneficiaries have more flexibility — no annual RMDs required in years 1–9, but must empty by end of year 10.

Missed RMD penalty: 25% of the shortfall (reduced from 50% by SECURE 2.0). Still devastating. File IRS Form 5329 to request a waiver if you missed one — waivers are often granted for reasonable cause.

Tax planning for the 10-year window

If you are a non-spouse beneficiary subject to the 10-year rule, you have real tax planning decisions to make. These are the big levers:

Spread withdrawals evenly. Roughly 10% each year is the default. This smooths the tax impact.

Bigger withdrawals in low-income years. If you're between jobs, in a sabbatical, or in retirement with no other income, pull more from the inherited IRA in those years. Your marginal tax rate is lower.

Smaller withdrawals in high-income years. If you had a great bonus year, take just enough from the IRA to stay under the next tax bracket threshold.

Coordinate with Roth conversions. If you have your own traditional IRA and are considering converting to Roth, you may want to do those conversions in low-income years BEFORE you start the inherited IRA distributions, or in years you're taking less from the inherited.

Know the bracket cliffs. Especially important: Medicare IRMAA surcharges (extra Medicare premiums at higher incomes), net investment income tax (additional 3.8% above certain AGI thresholds), and state tax brackets. A poorly-planned withdrawal can push you over a threshold that costs more than you expected.

Consider Qualified Charitable Distributions (QCDs) if you are 70½+. You can donate up to a certain amount (about $100,000+ per year, indexed for inflation) directly from an IRA to a charity and it counts toward your RMD but does NOT count as taxable income. Highly tax-efficient for charitably-inclined retirees.

This is CPA work. If the inherited IRA is over $100,000, spend the money on a CPA who specializes in retirement tax planning. The tax savings from good planning will pay for the CPA many times over.

Naming beneficiaries: the design choices

Now working forward from the grantor side — if you are the one thinking about your own retirement accounts and heirs, here's how to think about beneficiaries.

Default for married couples: primary is spouse (100%), contingent is children (split, per stirpes). Simple, usually right.

For non-married with children: primary is children (split, per stirpes). Name contingents — usually grandchildren, siblings, or charity.

If you have charitable intent: lean toward leaving retirement accounts to charity and other assets to family. Charities don't pay income tax; your kids would. This is tax-efficient.

If you have a special needs beneficiary: do NOT name them directly. Use a properly drafted special needs trust as beneficiary. Direct designation will disqualify them from means-tested benefits.

If you're worried about a beneficiary being irresponsible with money: you have limited options for retirement accounts, because trust-as-beneficiary can be complicated for tax purposes. Consult a specialist attorney. Possibilities include naming a qualified "see-through" trust with restrictions, or using a Conduit Trust.

If you're in a blended family: this is where it gets dangerous (see Chapter 17). A common mistake is naming "my spouse" as primary with no contingent, or naming the spouse with the intention that the spouse will pass to your children — the spouse is under no obligation to do so. Consider leaving retirement to your biological children (at least partially) directly, or using a trust structure to force the outcome.

Employer plan quirks

401(k), 403(b), 457(b), and TSP plans each have their own quirks. A few to know:

Spouse consent: Most employer plans require the surviving spouse's written consent to name someone other than the spouse as primary beneficiary. If you want to name your kids from a prior marriage as primary beneficiary of your 401(k), your current spouse must sign a consent form. If they don't sign, your primary beneficiary defaults to them. This surprises people.

Lump sum pressure: Some employer plans force the beneficiary to take the full balance as a lump sum within 60 days of being notified of death. This can be devastating tax-wise — all of it becomes ordinary income in one year. If this is a risk, consider rolling the 401(k) to an IRA before death (if you're the account holder) or immediately after notification (if you're the beneficiary), because IRAs have more flexible distribution options than employer plans.

Orphaned 401(k)s: Many people have multiple 401(k)s from former employers, sometimes forgotten. If you have old 401(k)s from jobs you left years ago, confirm the beneficiary designations on each. Better yet: roll them to an IRA you actively manage.

TSP and federal plans: Federal employee plans have their own beneficiary forms (TSP-3 for Thrift Savings Plan). Don't assume your general estate paperwork covers federal plan beneficiaries.

Pensions (defined benefit plans)

Traditional pensions are increasingly rare, but if a parent has one, the rules are different from everything above.

At retirement, the pensioner chose a distribution option:

• Single life annuity: Highest monthly payment. Ends at the pensioner's death. No benefit to spouse or heirs.
• Joint and survivor annuity: Reduced monthly payment. Continues (often at reduced rate) to surviving spouse.
• Period certain: Guarantees payments for a set number of years regardless of longevity. If pensioner dies during the period, payments continue to named beneficiary for remaining years.
• Lump sum: Some pensions allowed a lump-sum election at retirement.

What to check if a parent had a pension:

• Is it still paying? To whom?
• What option did they choose?
• Are there any remaining survivor benefits?
• Are there any one-time death benefits (some pensions have a small lump-sum death benefit)?
• If the plan is through a former employer that has since gone bankrupt, check with the PBGC (Pension Benefit Guaranty Corporation) for federal pension insurance coverage.

Brokerage and investment account transfers

Beyond retirement accounts, your parents probably have "taxable" investment accounts — brokerage, mutual funds, individual stocks, bonds, maybe crypto. These go through different mechanisms.

TOD / POD designation: If the account has a Transfer on Death or Payable on Death designation, it transfers to the named beneficiary automatically. Fast, clean, no probate.

Joint with right of survivorship: Passes to the co-owner.

Held in trust: Passes according to the trust.

No designation, individual account: Passes through probate per the will or intestacy.

For each inherited investment account, the beneficiary must contact the custodian, provide a death certificate, and either:

• Transfer the assets to their own account at the same custodian, or
• Liquidate the position.

Step-up in basis applies here too. Stocks, bonds, mutual funds in a taxable account get a stepped-up cost basis at the date of the owner's death. This is huge. Appreciated investments held for decades can be sold by heirs at near-zero capital gains tax if sold shortly after inheritance.

Important caveat: step-up does NOT apply to retirement accounts (IRAs, 401(k)s). Those assets are pre-tax and heirs pay full ordinary income on withdrawal, no step-up. So the step-up benefit is for taxable investment accounts, not retirement accounts.

This creates a planning insight worth noting: if you (as an estate planner for your own assets) have both a taxable brokerage and an IRA, and you plan to leave some money to kids and some to charity — leave the IRA to charity and the brokerage to kids. The kids get the step-up; the charity doesn't care about tax treatment.

The "digital" retirement account problem

Increasingly, retirement accounts are held at online-only institutions — Fidelity, Schwab, Vanguard, Betterment, Wealthfront, Robinhood. All of these have legitimate beneficiary designation systems, but there are wrinkles:

• Heirs need the account number and custodian name to claim. A password alone is not enough, and you should not rely on your family logging into your account to move money.
• Some platforms are slow or confused about death claims. Big names (Fidelity, Schwab, Vanguard) have dedicated estate teams. Smaller platforms may be chaotic.
• Crypto holdings in exchange accounts (Coinbase, Kraken, etc.) have beneficiary options but often limited. Self-custody crypto (cold wallets) has NO beneficiary system and can be lost entirely if the heirs don't have access. See Chapter 9.

For each retirement or investment account, in addition to the beneficiary designation:

• Document the custodian, account type, and approximate value annually.
• Note whether TOD/POD is set (for non-retirement) or what the retirement beneficiary is.
• Keep this list findable (see Chapter 30).
• Do NOT put passwords in the document locator list — use a password manager (Chapter 9) instead.

What to do this week

If you have retirement or investment accounts (this is most adults):

1. Inventory every account. Custodian, type, approximate value, primary beneficiary, contingent beneficiary. Any blank or wrong designations are the priority.
2. Update anything out of date. If you named your mother in 2003 and you now have a spouse and kids, update it today.
3. Check per stirpes language on any account with multiple beneficiaries who have descendants.
4. For employer plans, check spousal consent if you've named anyone other than your spouse as primary.
5. Consider whether your plan is tax-efficient. If you have both taxable brokerage and IRAs, and you have charitable intent, rethink which assets go to whom.
6. Coordinate with your will and trust. Beneficiary designations should match your overall plan.

If a parent has recently died and there are retirement accounts:

1. Do not rush to take lump sums. Take the time to understand the 10-year rule and plan withdrawals.
2. Engage a CPA specializing in retirement distribution if the account is significant (over $100,000).
3. Establish inherited IRAs rather than liquidating immediately, where possible.
4. Make sure you meet any required first-year distribution deadlines so you don't trigger penalties.
5. For 401(k)s, evaluate whether to roll to an inherited IRA for more flexibility.
6. Document the step-up basis on any taxable investment accounts inherited.

If your parents are alive and you want to help them:

1. Encourage them to do the inventory and audit described above.
2. Offer to help them consolidate old 401(k)s into a single IRA for simplicity.
3. If they are charitably inclined, introduce them to the QCD option and the "IRA to charity / brokerage to family" tax-efficient pattern.

Next chapter: personal property — the stuff that is usually worth the least and causes the most fights. The turquoise vase chapter.