In general, non-retirement assets are more valuable to leave to children.
When inherited, non-retirement assets are often received with no tax liability and no unrealized capital gains (depending on the estate plan). If you leave your children a non-retirement account when you die, the assets will generally get a step up in basis and the value to your children will be the full value of the account.
Excluding Roth IRAs and Roth 401(k)s: For retirement assets inherited in 2020 and beyond by non-spousal beneficiaries, the account generally must be fully distributed to by December 31 of the tenth year after the year in which the owner died, and these distributions will be taxed as ordinary income. The retirement assets your children receive come with an imbedded tax liability, so the value of the account to your children is less than the full value of the account.While there are benefits of having a portion of the retirement assets compound tax free for up to ten years, for moderate to higher income earners, income tax rates are much higher than capital gains tax rates, also making these assets potentially less attractive.
What about Roth accounts? Great assets to leave to children! See our Roth question below for more details.
Leaving Roth accounts to your children is optimal. This should be the last money you spend for yourselves, which gives it more time to grow tax deferred. When your children inherit a Roth account, they will be required to take distributions and fully empty the account by December 31 of the tenth year after the year in which the owner died, but those distributions are tax free to them. There is no imbedded tax liability under current law.
For those who have a federally taxable estate, and within the context of your overall estate planning goals, consider whether a full or partial conversion of your existing retirement accounts to Roth accounts makes sense.