Estate and Investment Planning Around Inheriting a US Retirement Account
Inheriting a US IRA or 401(k) as a UK resident is where two disciplines collide. Estate investment planning for inheriting a US retirement account means coordinating estate tax, income tax, and portfolio decisions at once — the account is taxed inside the estate, the withdrawals are taxed on both sides of the Atlantic, and the clock starts the day you inherit.
Why an inherited retirement account is two problems, not one
When a US retirement account passes to you, it never behaves like a simple cash bequest. It sits at the junction of the deceased's US taxable estate and your own future income stream, and each side carries its own rules, deadlines, and reliefs. Treating the account purely as an estate matter — or purely as an investment you can leave alone — is how heirs lose a quarter or more of the value to avoidable tax.
The grief makes this harder still. Most heirs inherit in the worst possible frame of mind to make a decade-long financial plan, and the default — do nothing, leave the account where it is, deal with it later — feels safe but is often the most expensive path of all. The rules do not pause for bereavement, and several of the reliefs described below are lost simply by letting deadlines drift.
The estate question is settled first, at the account owner's death. The investment question then runs for a decade afterward, shaped by the required minimum distribution rules for IRA beneficiaries and by how you draw down the money. Good estate investment planning, including inheriting a US retirement account, keeps both timelines in view from the start, because a decision that saves estate tax can quietly worsen your income tax, and vice versa.
The estate side: what the account owes before you touch it
A US retirement account is included in the deceased's US taxable estate at full market value. For 2025, the federal estate tax exclusion is $13.99 million per person, rising to roughly $15 million in 2026 under the One Big Beautiful Bill Act, with the top estate tax rate at 40% on the portion of the estate above the threshold. You can read the federal position directly on the IRS estate tax overview.
The trap that catches heirs is the absence of a basis step-up. Ordinary inherited assets — a house, a share portfolio — usually reset to market value at death, wiping out latent capital gains. Pre-tax retirement accounts do not. They are income in respect of a decedent under Internal Revenue Code section 691, meaning every dollar you eventually withdraw is taxed as ordinary income exactly as it would have been for the original owner. Our explainer on income in respect of a decedent walks through how this interacts with the estate return.
There is a compensating relief. Where US estate tax was actually paid on the account, you can claim an IRD deduction — an itemized income tax deduction for the estate tax attributable to the retirement asset — so the same value is not taxed twice. It is easy to overlook, and it is worth real money on larger estates.
The relief is not automatic, and it is not a single event. Because the IRD deduction tracks the estate tax paid, it must be apportioned across each year's withdrawals rather than claimed in full up front. That means the estate return the executor files and the personal income tax returns you file over the following decade have to speak to one another. When they are prepared by separate advisers who never compare notes, the deduction is routinely understated or missed entirely — one more reason the estate and income sides belong on a single plan rather than in separate files.
Where UK inheritance tax enters
If the heir is a long-term UK resident, UK inheritance tax may apply to the same account. Since 6 April 2025, the UK has replaced domicile with a residence-based test: broadly, being UK-resident for 10 of the previous 20 tax years brings worldwide assets, including inherited US pensions once distributed into your estate, within the scope of UK IHT at 40%. The current rules are set out on the GOV.UK inheritance tax guidance.
To stop the same asset being taxed to the hilt in both countries, the US-UK estate and gift tax treaty allocates taxing rights and provides credits. The mechanics live in the estate tax treaty text itself, and we summarise the practical order of operations in our guide to the US-UK estate tax treaty. The headline point: the treaty coordinates; it does not automatically exempt, so the position must be modeled rather than assumed.
The investment side: the 10-year rule sets your schedule
For most non-spouse beneficiaries, the SECURE Act imposes a 10-year rule: the entire inherited account must be emptied by the end of the tenth year after death. If the original owner has already begun their required minimum distributions, you must also take annual distributions in years one to nine, then clear the balance by year ten. We break down the timing traps in our note on the inherited IRA 10-year rule.
This is where estate investment planning, inheriting a US retirement account, becomes an active investment exercise rather than a filing formality. Draining the account in a single year can spike you into the top US and UK bands simultaneously. Spreading roughly equal, deliberately sized withdrawals across the full decade — filling lower brackets each year and stopping before the next threshold — is usually the difference between an effective rate in the twenties and one in the forties. The IRS FAQs on IRA distributions and withdrawals confirm how each payment is taxed as it leaves the account.
Asset location and the PFIC trap
Once money leaves the tax shelter, where you reinvest it matters as much as when you withdrew it. A UK resident who buys UK or European pooled funds with the proceeds can walk straight into the punitive Passive Foreign Investment Company regime, with its highest-rate tax and interest charges. Holding the reinvested proceeds in US-domiciled funds instead sidesteps that regime — the reasoning is set out in our piece on PFIC reporting on Form 8621. Careful estate investment planning when inheriting a US retirement account, therefore, decides the reinvestment vehicle before the first distribution, not after.
Currency adds a further layer. Every distribution is a dollar receipt converted to sterling for UK purposes, so drawing in a weak-dollar year or during a market dip can lock in a poor rate. Sequencing withdrawals around exchange rates and market levels — within the ten-year window — is a genuine investment decision, not an afterthought.
The withdrawal schedule should also flex around the rest of your income. A year in which you sell a business, receive a bonus,s or realize a large capital gain is a year to draw less from the inherited account; a low-income year — a career break, a move between countries, a gap before a pension starts — is a year to draw more. Because the tax cost of each distribution depends on the band it falls into, the account is best treated as a flexible reservoir to be released into whatever headroom your brackets offer that year, rather than a fixed annual installment set on autopilot.
Roth accounts and the beneficiary question
A Roth IRA changes the calculus. Qualified Roth distributions are tax-free in the US, and the UK generally respects that treatment. Hence, an inherited Roth is often best left to grow untouched until year ten before a single tax-efficient withdrawal — the opposite of the traditional-account strategy. Our article on Roth IRA UK tax treatment covers the cross-border position. Whether the account should ever have been left to a trust rather than an individual also matters: only a properly drafted see-through trust preserves the beneficiary's payout timeline, and a defective trust can force a far faster, costlier distribution.
Bringing estate and investment together: a worked case
Consider Rachel, a UK-resident US citizen who inherits a $900,000 traditional IRA from her American father in 2026. His estate is below the $15 million exclusion, so no US estate tax is due — but the account remains full income in respect of a decedent, with no basis step-up, and Rachel is a long-term UK resident.
A naive plan would let the account ride and cash out in year ten: a $900,000-plus lump sum taxed at the top US rate, then tested again for UK tax, with a brutal foreign-tax-credit reconciliation on Form 1116. Instead, Rachel draws roughly $95,000 to $110,000 per year over the decade, keeping each year within manageable US and UK bands, claims UK relief for US tax paid under the treaty, and reinvests each net distribution into US-domiciled ETFs to avoid the PFIC regime.
Decision point
Do-nothing approach
Coordinated approach
Withdrawal timing
Single lump sum in year 10
Level draws across years 1-10
Effective combined tax rate
Near 45%
Roughly 28-32%
Reinvestment vehicle
UK funds (PFIC exposure)
US-domiciled funds
Estate tax relief used
IRD deduction missed
IRD deduction claimed where estate tax paid
The numbers are illustrative, but the structure is the point. Effective estate investment planning for inheriting a US retirement account treats the estate facts (no step-up, treaty coverage, IRD relief) and the investment facts (10-year schedule, bracket management, asset location, currency) as a single decision, taken together in a single plan.
Talk to a US-UK specialist before the first withdrawal.
The costliest mistakes here happen in year one, before anyone has run the numbers. If you have inherited — or expect to inherit — a US retirement account while living in the UK, get the estate and investment plan built together from the outset. Email hello@taxyork.com, call 020 3488 8606, or visit taxyork.com to arrange a review with a dual-qualified adviser. Sound estate investment planning for inheriting a US retirement account starts with a conversation, not a deadline.