by Danielle Woods
If something happened to you tomorrow, do you know how much of your IRA your children would actually get to keep?
You have spent decades working hard, managing your household, and saving for retirement. . As you enjoy your post-career years, your thoughts naturally shift toward the future and the legacy you will leave behind for your children and grandchildren.
You want your hard-earned assets to provide financial security, open doors of opportunity, and make life a little easier for the people you love most. You probably also want to limit the amount of money that goes out of your account to tax payments.
The Assumption of the Simple Will
Many thoughtful parents assume that having a Will or a Revocablerust in place means their estate planning is completely finished. You sit down with an attorney, write out your wishes, and assume your assets will smoothly transfer to your adult children when the time comes.
Unfortunately, standard estate planning documents often fail to address the hidden tax rules attached to modern retirement accounts. If a significant portion of your wealth is held in pre-tax accounts like traditional IRAs or workplace 401(k) plans, passing those accounts directly to your children willset off a major tax event for them.
When you do not have visibility into how these accounts are treated after your passing, disorganization and hesitation take over. You want to feel confident that your estate is structured properly, but the sheer complexity of federal tax laws can leave you frozen in place. You put off reviewing your beneficiary designations or updating your financial strategy because confronting these scenarios feels daunting. But avoiding the conversation guarantees that your children will have to navigate a stressful, tax-heavy situation during an already emotional time.
The SECURE Act and the 10-Year Inheritance Rule
The primary reason inherited retirement accounts have become a tax minefield for adult children stems from major legislation known as the SECURE Act.
Prior to 2020, if your children inherited a traditional IRA or 401(k), they could take small, required distributions stretched out over their entire natural lifetimes. This allowed the remaining account balance to continue compounding tax-deferred for decades, resulting in minimal annual tax impacts for your heirs and possibly for the heirs of your beneficiaries. This was known as a “stretch IRA.”
Under current federal law, thatstrategy is gone for non-spouse beneficiaries. Today, most adult children who inherit a pre-tax retirement account are required to withdraw 100% of the account balance within 10 years of the original owner's death.
This 10-year rule creates a significant financial challenge. Adult children typically inherit wealth when they are in their 40s or 50s. These years are frequently their peak earning years, when their salaries are at their highest and they may already be in elevated federal tax brackets. Forcing them to withdraw a large inherited IRA within a strict 10-year window stacks additional taxable income directly on top of their existing paychecks.
For example, if your child is earning a strong salary and is forced to take large distributions from an inherited $500,000 IRA over a decade, those withdrawals can easily push them into the 32% or 37% federal tax brackets. A significant portion of the legacy you worked a lifetime to build ends up going directly to the IRS rather than supporting your family.
Where Taxes Enter the Picture
When planning your legacy, it is important to distinguish between federal estate taxes and income taxes on inherited accounts. Many retirees worry that the government will assess a massive estate tax on everything they own, but for the vast majority of families, that fear is misplaced.
In 2026, the federal lifetime estate and gift tax exemption is $15,000,000 per individual (and $30,000,000 for a married couple filing jointly). Unless your total estate exceeds that threshold, your estate will not owe a single dollar in federal estate taxes. (State estate tax rules differ and should be reviewed!)
The real tax threat to your legacy is likely not the estate tax - it is the ordinary income tax your children will pay on pre-tax retirement accounts under the 10-year rule. Fortunately, proactive tax planning during your retirement years can help defuse this tax bomb before it ever reaches your children and can provide longer-lasting available funds for you during the remainder of your lifetime.
Strategies we evaluate with clients include:
Partial Roth Conversions in Retirement: Converting portions of your traditional IRA into a Roth IRA during your lower-bracket retirement years allows you to pay taxes at your current lower rate. Roth IRAs pass to your children completely tax-free. While non-spouse heirs must still empty an inherited Roth IRA within 10 years, every dollar withdrawn is 100% tax-free, protecting them from higher tax brackets. They can then strategize with those funds to maximize the tax efficiency in their own portfolio.
Qualified Charitable Distributions (QCDs): If you are age 70½ or older and support charitable causes, using QCDs to satisfy your required distributions allows you to give up to $111,000 per year directly from your traditional IRA tax-free. This reduces the overall pre-tax balance that would otherwise pass to your children. Even if you are not especially charity-minded, using this strategy can still lower the amount sent to the government in the form of taxes while allowing you to provide much needed funds to causes of your choice.
Strategic Beneficiary Coordination: Aligning specific asset types with specific heirs (such as leaving tax-free Roth accounts or appreciated taxable assets to high-earning children, and pre-tax accounts to lower-earning heirs or charities) ensures maximum tax efficiency across the entire family.
Watch: Purge Your Phantom Beneficiaries
Defusing an inheritance tax bomb begins with ensuring your account logistics and beneficiary designations match your actual plan. In this episode of Connecting the Dollars, Emily Agosto and Amanda Vaught share why checking your account beneficiaries is an essential financial move. They explain why beneficiary designations override your Will and how a simple review today can prevent unexpected legal and tax surprises for your loved ones down the road.
You Do Not Have to Sort Out Your Legacy Alone
Leaving a meaningful legacy should bring you a sense of joy and accomplishment, not ongoing tax anxiety. You do not have to navigate the 10-year rule, estate exemptions, and tax strategies by yourself. If you are ready to get your accounts organized, protect your children from an unexpected tax burden, and build a clear estate plan, we are happy to help.