IRD Assets: No Step-Up, Section 691(c), and the 10-Year Rule

Income in respect of a decedent, usually shortened to IRD, is money a person earned or had a right to receive before death but never actually collected or reported on a tax return. Whoever ends up receiving that income, whether the estate or a named beneficiary, owes income tax on it at the same character it would have had in the decedent’s hands. Unlike most inherited property, IRD does not get a stepped-up basis, which is why a $500,000 traditional IRA is worth considerably less to an heir than a $500,000 brokerage account.

What Counts as IRD

The IRS defines IRD as any gross income the decedent was entitled to receive but that was not properly includible on the decedent’s final return or any prior return.¹ Practically, it’s income that was in the pipeline at death: the work had been done, or the investment had been made, but the money hadn’t been taxed yet.

The assets that most often turn out to be IRD:

Traditional IRAs and 401(k) plans. Every dollar withdrawn is ordinary income, whether the original owner or a beneficiary takes it out.
Unpaid wages, bonuses, and commissions the decedent had earned but not yet received.²
Deferred compensation owed under an arrangement the decedent hadn’t collected on.
Installment sale notes. The unreported gain built into remaining payments is IRD.³
Accrued interest on U.S. savings bonds when the decedent used the cash method and never elected to report interest annually.²
The untaxed gains portion of a non-qualified deferred annuity. The original after-tax basis is not IRD.
Remaining payments representing a partner’s distributive share or guaranteed payments in liquidation of a partnership interest.²

One important boundary: Roth IRAs are generally not IRD. Because Roth contributions were made with after-tax dollars and qualified distributions come out tax-free, an inherited Roth typically produces no income tax bill for the beneficiary, though distribution timing rules still apply. Ordinary appreciated assets in taxable accounts, such as stocks, mutual funds, and real estate, are also not IRD; they receive a stepped-up basis to fair market value at death.⁴

Why There Is No Stepped-Up Basis

Most inherited property has its cost basis reset to fair market value at death. Stock purchased for $50,000 and worth $300,000 on the date of death passes to the heir with a $300,000 basis, and the pre-death appreciation escapes income tax entirely.

IRD is explicitly carved out of that treatment. Section 1014(c) of the Internal Revenue Code denies the stepped-up basis to any property that represents a right to receive income in respect of a decedent.⁵ The reasoning is that this income was never taxed to anyone; giving it a stepped-up basis would let it disappear from the income tax system entirely.

The result changes how you should read an inheritance. A $500,000 traditional IRA is not really $500,000 to the beneficiary. After federal income tax at ordinary rates, the after-tax value can be closer to $315,000 to $370,000, depending on the beneficiary’s bracket. Executors who divide an estate as though IRD and non-IRD assets were equivalent are quietly shifting real wealth between heirs.

Who Pays the Tax and When

Three rules govern the income tax side of IRD.

Who reports it. If the estate collects the income, it goes on the estate’s fiduciary return, Form 1041.⁶ If the right to the income passes directly to a named beneficiary, that person reports it on their own return. The tax follows whoever actually receives the income.⁷

What kind of income it is. IRD keeps whatever character it would have had in the decedent’s hands. A traditional IRA distribution is ordinary income to the beneficiary. Gain built into an installment note keeps its capital gain character. The recipient steps into the decedent’s shoes for character purposes.⁷

When it becomes taxable. Only when the IRD is actually received, sold, or otherwise disposed of. For inherited retirement accounts, that means the amount withdrawn in a given year, not the whole balance at once. For unpaid wages, it’s the year the employer pays. For installment notes, each payment triggers its share of the built-in gain. If a beneficiary gifts or sells the right to receive IRD, that transfer itself triggers immediate income recognition equal to the fair market value of the right transferred.²

Inherited Retirement Accounts and the 10-Year Rule

Traditional IRAs and employer-sponsored plans are the largest pool of IRD in most estates, and the distribution rules for non-spouse heirs tightened under the SECURE Act. Most non-spouse beneficiaries who inherit a retirement account from someone who died after December 31, 2019, must empty the entire account by the end of the tenth year following the year of death.⁸

That 10-year window compresses what used to be a life-expectancy stretch into a much shorter period. A beneficiary inheriting a $1 million traditional IRA must recognize the full $1 million as ordinary income within a decade. Bunching those withdrawals into fewer years pushes the recipient into higher brackets, so the effective tax rate on inherited retirement money is often meaningfully higher than what the original owner would have paid across a normal retirement.

A limited set of “eligible designated beneficiaries” can still take distributions over their own life expectancy:

A surviving spouse.
A minor child of the account owner; once the child reaches the age of majority, the 10-year clock starts.
Disabled or chronically ill individuals.
Beneficiaries not more than 10 years younger than the original account owner.⁸

Adult children, the most common IRA beneficiaries, fall under the 10-year rule. How they spread withdrawals across those ten years is one of the most consequential tax decisions attached to the inheritance.

Double Taxation and the Section 691(c) Deduction

IRD is included in the decedent’s gross estate at fair market value for federal estate tax purposes, and the beneficiary then pays income tax on the same dollars when they collect. For estates below the federal exemption, this is a non-issue because no estate tax is owed. The federal estate tax exemption for 2025 is $13.99 million per individual.⁹ For 2026, the exemption rises to approximately $15 million per individual after legislation made the higher amounts permanent.

For estates that do owe federal estate tax, the combined bite is heavy. With a 40% top estate tax rate and a 37% top income tax rate, a dollar of IRD can lose more than sixty cents to combined taxes before the beneficiary sees it. Section 691(c) is Congress’s partial fix.

When the estate actually pays federal estate tax and some of that tax is attributable to IRD, the beneficiary who receives the IRD gets an income tax deduction for the estate tax generated by that income.⁷ It’s a deduction, not a credit. A beneficiary in the 37% bracket saves 37 cents of income tax per dollar of deduction.

The deduction is an itemized deduction, but Section 67(b)(7) specifically excludes it from the “miscellaneous itemized deductions” category.¹⁰ That matters, because miscellaneous itemized deductions are currently disallowed. The 691(c) deduction remains fully available. If the IRD is ordinary income, the deduction offsets ordinary income. If the IRD produces long-term capital gain, the deduction reduces the gain before the capital gains rate is applied.

How the Deduction Is Calculated

The calculation compares two versions of the estate tax return. First, the estate’s actual federal estate tax. Second, a hypothetical tax computed as if the net IRD had been removed from the gross estate. The difference is the estate tax attributable to the IRD.⁷ “Net IRD” means total IRD reduced by deductions in respect of the decedent that relate to that income, such as accrued but unpaid business expenses or interest.

An example: an estate contains $1 million of net IRD, and removing that $1 million would have cut the estate tax by $400,000. The total 691(c) deduction is $400,000. A beneficiary who receives 25% of the IRD claims $100,000 of that deduction in the year they recognize the income. State estate or inheritance taxes are not part of the calculation.

When multiple beneficiaries share the IRD, each person’s deduction is proportional to their share. The executor has to run the calculation and tell each beneficiary what they’re entitled to. No IRS form exists for that communication, and if it doesn’t happen, the deduction generally goes unclaimed. Beneficiaries who suspect the estate paid federal estate tax should ask the executor for the 691(c) numbers before filing their own returns.

Planning Moves That Change the Tax Outcome

The distribution decisions around IRD often matter more than the underlying investment returns.

Send IRD to charity when possible. A qualified charity pays no income tax, so the embedded tax liability on an IRD asset disappears. When an estate plan mixes charitable and individual bequests, funding the charitable share with a traditional IRA and leaving stepped-up-basis assets to individual heirs preserves substantially more total wealth than the reverse.

Match IRD to the lower-bracket beneficiary. Directing a large IRD asset to an heir in the 12% bracket instead of one in the 37% bracket can save roughly $120,000 in federal income tax on a $500,000 traditional IRA. This usually requires flexibility in how the will or trust is drafted, but the math justifies the effort.

Spread the withdrawals. For an inherited retirement account under the 10-year rule, taking roughly even annual distributions across the full decade almost always produces a lower cumulative tax bill than deferring everything to year ten. Model several schedules against projected income for each year and choose the one that keeps you out of the top brackets.

Don’t accidentally accelerate. If a will directs the executor to liquidate an IRD asset and distribute cash, the estate recognizes the full income at once, at the estate’s compressed rates, which reach the top bracket at low income levels. Distributing the right to the IRD directly to the beneficiary lets that person control the timing. Careless drafting or titling can trigger immediate recognition of the whole amount, and there is no unwind once it happens.

1
eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent
2
Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
3
Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method
4
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: (c)
6
Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
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Office of the Law Revision Counsel. 26 U.S. Code 691 – Recipients of Income in Respect of Decedents
8
Internal Revenue Service. Retirement Topics – Beneficiary
9
Internal Revenue Service. What’s New – Estate and Gift Tax
10
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions