Most people assume that if they’ve worked hard, saved diligently, and built a smart retirement plan, the legacy they leave will be straightforward. You can meet with your advisor, understand your withdrawal strategy, and maybe even know the projected amount you’ll pass on to your heirs.
But here’s the catch: the money your children actually keep may be very different from the number you see on paper.
Why? Because inheriting retirement accounts comes with tricky rules—and the IRS is often first in line.
Under today’s laws, non-spouse heirs must empty an inherited IRA within 10 years. That sounds simple, but the way your child chooses to take distributions can make a huge difference.
Imagine you pass down a $750,000 IRA. If your child takes the entire balance in one year, and they’re in a 32% tax bracket, nearly $240,000 goes straight to taxes. That’s almost a third of your life’s work gone in an instant.
By spreading the withdrawals over 10 years instead, the tax hit is smoothed out. The total bill could be tens of thousands less, leaving far more of your legacy intact.
The timing can make things even more complicated. If you pass away in your 80s or 90s, your children are likely to be in their 50s or 60s—their peak earning years when they are already in high tax brackets. That inherited IRA doesn’t arrive as a windfall; it arrives as taxable income stacked on top of everything else.
And if they have kids in college, the timing of those withdrawals could affect financial aid eligibility or reduce valuable education credits.
The good news: with careful planning, you can make things much easier for your heirs. For some families, strategies like partial Roth conversions during retirement can reduce future tax burdens and give your children a more flexible inheritance.
Because ultimately, the question isn’t just how much you leave—but how much they get to keep.
Want to learn more about protecting your legacy? Let’s talk about how proactive planning can make all the difference.