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Last Updated: March 26, 2008
There is no stepped-up basis with an inherited IRA (or other qualified retirement plan). Thus, your heirs will owe federal income tax as they withdraw funds from the plan.
If heirs directly inherit the account as a designated beneficiary, they can stretch out distributions over their own life expectancy. That's where the term "stretch IRA" came from. As funds are withdrawn from the IRA, income taxes are due.
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