When the IRA is liquidated, the heirs will then have to pay income tax on the withdrawal, which itself may put them into a higher tax bracket. A spouse can roll an inherited IRA into his or her own IRA and make a new set of beneficiary and withdrawal choices. All the money will have to be withdrawn by the end of the year following the year of death. To reduce their tax bill, heirs can itemize the estate and income taxes paid on inherited IRAs in the year that they must pay those taxes. More flexible withdrawal rules than traditional IRAs.
Distributions are income-tax free to holders and heirs if they follow the rules.
Heirs can avoid an income tax liquidity trap. Defined-contribution balances can't be rolled directly into a Roth. Money must be first placed in a traditional IRA and then converted to a Roth. Conversion from a traditional to a Roth IRA may be costly in terms of taxes owed. You must meet income eligibility rules in order to either open a new Roth or make a conversion.