Planning Ahead for the Inheritance of a Retirement Plan or IRA
Scott C Turner CPA, Tax and Accounting Advisor · October 2026
Why plan now?
A traditional IRA or 401(k) is often the largest asset a family passes on, and it is also the most heavily taxed one at inheritance. Unlike a house or a brokerage account, a traditional retirement account gets no step-up in basis: every pre-tax dollar is taxed as ordinary income to whoever withdraws it.
Since the SECURE Act took effect in 2020, most children and other non-spouse heirs must empty an inherited account within 10 years. That compresses decades of income into a single decade, often during the heir’s own peak earning years. The good news is that both the parent and the heir have choices that can reduce the total tax, and many of those choices must be made before death. And fortunately, recent legislation and court cases have now clarified what can and what cannot be done.
The rules heirs will face
Who inherits decides how fast the money must come out.
Beneficiary | Payout rule |
Surviving spouse | May roll the account into their own IRA, or keep it as an inherited IRA. The most flexible position. |
Minor child of the owner, disabled or chronically ill heir, or heir not more than 10 years younger than the owner | “Eligible designated beneficiary”: may still stretch withdrawals over life expectancy (a minor child switches to the 10-year rule at age 21). |
Adult children, grandchildren, most other individuals | Must empty the account by December 31 of the 10th year after death. |
Estate, charity, or a trust that doesn’t qualify as a “see-through” trust | Often a faster 5-year payout, or payouts tied to the owner’s remaining life expectancy. |
A second wrinkle catches many families. If the owner had already reached the age when their own required distributions began, heirs under the 10-year rule must also take annual minimum withdrawals in years 1 through 9. The IRS confirmed this in final regulations issued in July 2024, effective for 2025 (Ed Slott and Company). A missed withdrawal carries a 25% penalty, reduced to 10% if corrected promptly.
Inherited Roth IRAs are treated more kindly. They are still subject to the 10-year rule, but no annual withdrawals are required, and qualified withdrawals are tax-free.
Can the heir convert to a Roth after death?
Only in some cases, and the answer turns on what kind of account it is when the owner dies (Greenleaf Trust).
Inherited IRA, non-spouse heir: no. A child or other non-spouse beneficiary cannot convert an inherited traditional IRA to a Roth. Withdrawals will be taxed as ordinary income.
Inherited 401(k), 403(b), or governmental 457(b), non-spouse heir: yes. The heir can direct a trustee-to-trustee rollover into an inherited Roth IRA and pay the tax once. That option is lost if the money is first moved to an inherited traditional IRA.
Surviving spouse: yes. A spouse can treat the account as their own and convert under the normal rules. A spouse under age 59½ who needs the money may want to keep it as an inherited IRA first, since inherited withdrawals carry no 10% early-withdrawal penalty.
When conversion is available, it doesn’t add tax so much as choose when it is paid. It makes the most sense when the heir is in an unusually low-income year now, expects higher income or tax rates later, or plans to move to a higher-tax state. It also ends the annual-withdrawal requirement and lets the remaining years of growth come out tax-free.
A planning point for parents: if you still have a 401(k) or 403(b), think before rolling it into an IRA late in life. Leaving it in the plan preserves your heirs’ option to convert. Weigh that against the IRA’s broader investment choices and simpler administration.
Strategy: the parent converts to a Roth while living
Because most heirs can’t convert an inherited IRA, the most powerful conversion is usually the one the owner makes during life. The parent pays the income tax now, and the children later inherit a Roth IRA they can withdraw tax-free.
This works best when the parent’s tax bracket is lower than the heirs’ will be. A retired couple in the 12%, 22%, or 24% bracket often pays less than children in their peak earning years would, especially if those children must absorb the account on top of salaries within 10 years. The 2025 tax law made today’s federal brackets permanent, so families can plan multi-year conversions with more confidence about rates (Kiplinger).
Other advantages:
No more required distributions for the parent. Roth IRAs have no lifetime minimum withdrawals.
Simpler for heirs. An inherited Roth still must be emptied within 10 years, but with no annual withdrawals and, generally, no tax. Heirs can let it grow for the full decade.
A smaller taxable estate. Paying the conversion tax from savings outside the IRA moves more value into the tax-free account. For larger estates, it also lowers the amount exposed to estate tax.
How to do it well:
Convert in pieces over several years, filling a chosen bracket rather than taking one large hit.
Pay the tax from non-retirement money when possible.
Take any required distribution for the year first. It cannot be converted.
Watch the side effects of the added income: higher Medicare premiums (IRMAA) two years later, more of your Social Security becoming taxable, and partial or full loss of the new $6,000 senior deduction (2025–2028), which begins phasing out above $75,000 of modified adjusted gross income ($150,000 joint).
Remember California taxes the conversion as ordinary income too, with no break for retirees.
Start sooner rather than later. A Roth must be open five years for earnings to be tax-free, and heirs inherit the owner’s clock.
When not to convert: if the heirs will be in a lower bracket than you, if a charity is the beneficiary, if you would have to use IRA money to pay the tax, or if you may need the funds for long-term care, where large medical expenses can offset IRA withdrawals.
Other strategies worth considering
Keep beneficiary forms current. The beneficiary form, not your will, controls who gets the account. Name individuals directly with contingent beneficiaries, and avoid naming your estate, which can force a faster payout. Review the forms after any marriage, divorce, birth, or death.
Match the account to the heir. Leave traditional IRA money to heirs in lower brackets or to charity, which pays no income tax on it. Leave Roth accounts and taxable investments, which get a step-up in basis, to heirs in higher brackets. If you plan a charitable bequest, funding it from the IRA rather than from cash or property is usually the most tax-efficient choice.
Give from the IRA while living. At age 70½ or older, you can send up to $111,000 in 2026 directly from your IRA to charity as a qualified charitable distribution. It counts toward your required distribution, stays out of your income, and shrinks the account your heirs will owe tax on. A one-time QCD of up to $55,000 can also fund a charitable remainder trust or gift annuity (Capital Group).
Name a charitable remainder trust as beneficiary. For charitably minded families, the IRA can pass to a CRT at death without income tax. The trust then pays your children over their lifetimes or a term of up to 20 years, with the remainder going to charity. This recreates much of the old “stretch” (The Tax Adviser).
Review any trust named as beneficiary. Many trusts written before 2020 are “conduit” trusts that may now push the entire account out to the heir by year 10, defeating their purpose. “Accumulation” trusts can hold the money back for protection, but trust income is taxed at the top rate above about $16,000. A trust for a disabled or chronically ill child can still qualify for lifetime payouts if drafted correctly.
Use life insurance to replace the tax. Owners who don’t need their required distributions can use them, after tax, to pay premiums on a policy held in an irrevocable life insurance trust. The death benefit passes income-tax-free and, if properly structured, estate-tax-free.
Keep records of after-tax contributions. If you ever made nondeductible IRA contributions, keep your Form 8606 filings. Without them, heirs may pay tax again on money already taxed.
Tell heirs about their own tools. An heir can disclaim all or part of an account within nine months so it passes to the contingent beneficiary, such as a grandchild or charity. Heirs should also spread withdrawals across the 10 years rather than waiting, and claim the income-in-respect-of-a-decedent deduction if federal estate tax was paid.
Where to start
Pull current beneficiary forms for every IRA, 401(k), and 403(b), and confirm primary and contingent names.
List each heir’s likely tax bracket and state of residence.
Before rolling a 401(k) or 403(b) into an IRA, weigh keeping it in the plan so heirs can convert.
Model a multi-year Roth conversion plan, including Medicare premium and Social Security effects.
If you give to charity and are 70½ or older, route gifts through QCDs.
Have your attorney review any trust named as a beneficiary under the post-2020 rules.
Locate Form 8606 records for any after-tax IRA contributions.
Share the plan with your heirs so they know their deadlines and options.
Every family’s numbers are different, and these strategies interact with each other and with Medicare, Social Security, and estate planning. Please contact our office before acting on any of them; we’re glad to run the projections with you.
Scott C Turner CPA, Tax and Accounting Advisor
P.S. I aimed to keep this article brief and straightforward, but the topic is complex. Please let me know if you have questions or would like help planning for this inheritance.
This article is general information, not tax or legal advice for your specific situation.
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