Your Heirs Have a Tax Problem. Your Retirement Plan Isn't Showing It.

You spent 30 years building a retirement account. Your financial plan shows it growing to $2M by age 75. Your plan says you’re fine.

Here’s what your plan probably doesn’t show:

When you die with $2M in a traditional IRA, your heirs don’t inherit $2M. They inherit a 10-year countdown to distribute a fully taxable account — at their income tax rates, not yours.

If your child is 45, working, and already in the 24% bracket, that inherited IRA is worth significantly less than $2M by the time the IRS is done with it.

That’s what estate forecasting is for.

The SECURE Act Changed Everything for Inherited IRAs

Before 2020, non-spouse beneficiaries could “stretch” distributions from an inherited IRA over their own life expectancy — potentially 30-40 years. A $1M inherited IRA, distributed slowly over decades, is very manageable.

The SECURE Act of 2019 eliminated the stretch IRA for most non-spouse beneficiaries.

The replacement: the 10-year rule.

Non-spouse beneficiaries must fully distribute an inherited IRA within 10 years of the original owner’s death. The entire balance — taxable.

There is no requirement on how to pace the distributions across those 10 years, but the full balance must be out by December 31 of year 10.

What this means in practice:

Your child inherits a $1M traditional IRA at age 45. They have until age 55 to distribute everything. Those are typically peak earning years — the 10-year window is probably the worst possible time to take forced taxable income.

If they spread it $100k/year for 10 years, and they’re already earning $120k, each year’s distribution pushes their taxable income to $220k — squarely in the 32% bracket.

The Income in Respect of a Decedent Problem

Traditional IRAs carry what the IRS calls “Income in Respect of a Decedent” (IRD) — income that was earned but never taxed during the original owner’s lifetime.

This matters because traditional IRA money:

• Was never subject to income tax when earned
• Grew tax-deferred for decades
• Has never been taxed — ever

When your heirs inherit a traditional IRA, every dollar they distribute is ordinary income. Not capital gains (which would be preferential). Ordinary income. At their marginal rate.

The Double Tax Exposure: Income Tax + Estate Tax

Here’s where it gets complicated for people with larger estates.

The estate tax problem:

Federal estate tax applies to taxable estates above the exemption threshold. The TCJA significantly raised those exemptions. Future law changes may adjust them again. Regardless of where exemptions land, if you have a seven-figure portfolio, a paid-off home, business interests, or life insurance, your estate tax position is something to track — not assume.

The double hit:

A large traditional IRA hits your heirs twice:

1. Estate level: The full value of the IRA is included in your gross estate
2. Income level: Every dollar distributed from the inherited IRA is taxable income

A $2M traditional IRA is $2M of estate value and $2M of future ordinary income — a combination that can significantly reduce what heirs actually receive compared to what your retirement plan projects.

Roth IRAs: Still included in your estate, but distributions to heirs are income-tax free. The estate exposure remains, but the income tax hit disappears.

Who This Actually Affects

Estate planning isn’t just for the ultra-wealthy. If you have any combination of:

• $500k+ in traditional IRAs or 401(k)s
• A paid-off home in an appreciated market
• Life insurance with a large death benefit
• Business interests or investment real estate
• Long retirement (assets continue growing for decades)

…your heirs likely have a tax problem of some kind. The exact nature of it depends on the value, timing, and applicable law — which is why you need to look at the numbers, not assume.

The typical scenario we see:

Engineer retires at 62. Traditional IRA: $1.4M. House: $600k. Taxable brokerage: $400k. Total estate: $2.4M. Feels modest. Not “estate tax territory.”

But the $1.4M traditional IRA is fully taxable to heirs, distributed across 10 years into their peak earning window. Real after-tax value to heirs: closer to $950k-$1.1M depending on their situation.

What to Analyze

The goal isn’t to optimize your estate — the app doesn’t do that. The goal is to see your estate clearly so you can make informed decisions.

Estate Value Over Time

Project your estate year by year from now through the end of your plan. This includes:

• All accounts (traditional, Roth, taxable brokerage)
• Real estate (at current or projected values)
• Other assets

You want to see how the estate grows during accumulation, how it responds to spending and withdrawals in retirement, and what’s actually left at various points.

Most people are surprised — estates often grow larger during early retirement than during peak earning years, because spending comes from Social Security and taxable accounts while IRAs continue compounding.

Legacy Goal Tracking

If leaving something behind matters to you, set a target. Then see whether your current plan actually meets it.

This is different from “hoping” you’ll have something left. It’s looking at specific projections and seeing whether your withdrawal strategy, spending level, and conversion approach are consistent with your estate goals.

If they’re not, you can see that now — while you have decades to adjust.

Beneficiary Exposure

Understanding what heirs actually receive — after income tax on inherited IRA distributions — changes how you think about account composition.

Key questions:

• How much of your estate is in traditional (taxable-to-heirs) accounts vs Roth (tax-free)?
• What’s the effective after-tax inheritance value at different estate compositions?
• Does aggressive Roth conversion (paying tax now) materially improve what heirs receive?

Estate Tax Threshold Tracking

Regardless of current exemption levels, if your estate is in a range where tax exposure is plausible under various scenarios, you want to know.

Track your projected estate value against federal exemption thresholds. If you’re well below any plausible threshold across all scenarios, you have one less thing to worry about. If you’re in a range where law changes could matter, you should know that before the law changes.

The Roth Conversion Connection

The most actionable thing many people can do for their estate is convert traditional IRA money to Roth — especially during low-income years before RMDs begin.

The estate impact of Roth conversions:

The math is more nuanced in practice — conversions cost you tax now, and the money in Roth grows differently — but the direction is consistent: a higher Roth proportion means more after-tax value to heirs.

The compounding benefit:

Roth IRA money grows tax-free. A traditional IRA compound to $2M; heirs pay tax on $2M. A Roth IRA compounds to the same $2M; heirs receive $2M tax-free. The tax bill your conversions paid came out of lower brackets in your 60s, not your heirs’ 32% bracket in their 50s.

This is why the Roth vs traditional decision isn’t just about your retirement. It affects what your heirs inherit.

What Most Retirement Plans Miss

Generic retirement calculators show you:

• Will I run out of money?
• What’s my success rate?

They rarely show you:

• What does my estate look like at various ages?
• What do heirs actually receive after taxes?
• How does my account composition (traditional vs Roth) affect the after-tax inheritance?
• At what estate values would federal tax exposure become a concern under different law scenarios?

These aren’t exotic questions. They’re basic estate planning questions that belong in any serious retirement plan.

The Bottom Line

You’ve spent decades building wealth. The retirement planning question isn’t just “will I have enough?” — it’s “what actually happens to everything I’ve built?”

If most of your retirement assets are in traditional IRAs, your heirs are inheriting a tax obligation as much as an inheritance. The SECURE Act’s 10-year rule means that tax comes due during their peak earning years — often the worst possible time.

Seeing this clearly doesn’t require an estate attorney (though working with one for complex situations is smart). It requires a retirement plan that shows your estate, not just your retirement account balances.

Questions? Email: fbfinancialplanner@gmail.com

Related reading:

• Roth Conversion Ladder Strategy: Pay Less Tax Over Your Lifetime
• IRMAA: The Medicare Surcharge Nobody Plans For
• The One Big Beautiful Bill Act: What Changed and What It Means for Your Retirement