Traditional IRAs are a great way to fund retirement, but they’re not always the best way to transfer wealth to the next generation. Recent rule changes have made inherited IRAs less tax-friendly, especially for adult children.
Under current law, most non-spouse beneficiaries who inherit a traditional IRA are required to empty the account within 10 years. That means your kids can’t stretch the IRA over their lifetime like they could in the past. Instead, they’re forced to take taxable withdrawals on a compressed timeline.
That’s a problem, because when people pass away in their 70s or 80s, their children are often in their 40s or 50s. These are peak earning years. Inheriting a large IRA can push them into a higher tax bracket, increase the tax on their investment income, and trigger avoidable tax headaches. What was meant as a gift can end up feeling more like a tax burden.
Roth conversions offer a potential solution. By gradually converting a traditional IRA to a Roth IRA during your lifetime, you pay the taxes now at a rate you can plan around. Your heirs then receive tax-free distributions, even though they still have to withdraw the money within 10 years. It’s a way to turn a future tax liability into a tax-free legacy.
In addition to helping your heirs, Roth conversions can also benefit your own retirement. They reduce or eliminate future required minimum distributions (RMDs). That can make your retirement income more flexible and help avoid Medicare surcharges and unnecessary taxation of your Social Security benefits.
Still, Roth conversions aren’t something to jump into blindly. The tax cost can be significant in the short term, and the benefits play out over time. That’s why it’s important to approach conversions as part of a broader strategy that takes into account your income, your goals, and the legacy you want to leave.
Done thoughtfully, a Roth conversion strategy is about more than tax planning. It’s a way to align your financial decisions with your values, giving your loved ones a clearer, more flexible path forward.