If you have a large traditional IRA, your children could inherit more than an investment account. They could also inherit a significant future income-tax obligation.
The SECURE Act did not create a new inheritance tax. But for many families, its inherited IRA rules can create a similar practical challenge: taxable retirement income that once might have been spread over a beneficiary’s life expectancy may now need to be distributed within 10 years.
That raises an important planning question:
Could decisions you make now help reduce or better manage the tax burden your children may face later?
In some cases, yes. But the right strategy depends on your tax situation, retirement needs, beneficiaries, and broader financial plan.
Why Can a Large Inherited IRA Become a Tax Headache?
Traditional IRA assets generally grow tax-deferred, which means taxes are usually paid when money is distributed.
Before the SECURE Act, many individual beneficiaries could stretch inherited IRA distributions over their life expectancy. For many beneficiaries today, that option is no longer available.
A designated beneficiary who is not an eligible designated beneficiary generally must empty the inherited account by the end of the applicable 10-year period.
Consider a simplified example.
A parent leaves a $2 million traditional IRA equally to two adult children. Each child inherits about $1 million in tax-deferred assets.
If both children are in their peak earning years, inherited IRA withdrawals may stack on top of salaries, bonuses, business income, and other taxable income.
That is why a $1 million traditional IRA is not necessarily the same economic inheritance as $1 million of after-tax assets.
What Is the 10-Year Inherited IRA Rule?
For many nonspouse beneficiaries, the inherited IRA must be fully distributed by the end of the tenth year following the original owner’s death.
But that does not always mean the beneficiary can simply wait until year 10.
If the owner died before their required beginning date, annual distributions generally are not required during years one through nine, provided the account is emptied by the end of year 10.
If the owner died on or after the required beginning date, a non-eligible designated beneficiary may also have annual required minimum distributions during the 10-year period.
That creates an important distinction:
The tax rules tell you when money must come out. Tax planning considers when it may make sense for additional money to come out.
Who Is Exempt From the Standard 10-Year Rule?
Certain eligible designated beneficiaries may qualify for different distribution treatment.
These generally include:
- A surviving spouse
- A minor child of the deceased account owner
- A disabled individual
- A chronically ill individual
- An individual who is not more than 10 years younger than the account owner
Trusts, estates, and other beneficiary arrangements can involve additional rules, so the actual beneficiary structure matters.
What Can Owners of Large IRAs Do Before Their Children Inherit?
The most useful inherited IRA planning may begin while the original owner is still alive.
Here are five areas worth evaluating.
1. Project the Tax Situation Your Children May Face
Start by looking beyond the IRA balance itself.
Will your children still be working when they inherit? Could they be in their highest-earning years? Will inherited IRA distributions be added to salaries, bonuses, or business income?
Projection work cannot predict the future perfectly, but it can help estimate whether a large tax-deferred account may create a concentrated tax burden for the next generation.
For someone with a substantial IRA, the key number may not simply be the account balance.
It may be what your beneficiaries are likely to keep after taxes.
2. Could Roth Conversions Reduce the Future Tax Problem?
Potentially.
A Roth conversion generally means recognizing taxable income today and moving assets from a traditional IRA into a Roth IRA.
The better question is not simply:
“Should I convert?”
It is:
“How does paying tax at my projected rate today compare with the taxes my family may face later?”
That analysis can include your current and future tax rates, future RMDs, your children’s likely tax circumstances, state taxes, available cash, retirement needs, and Medicare implications.
For 2026, Medicare income-related premium adjustments begin above modified adjusted gross income of $109,000 for an individual and $218,000 for married couples filing jointly.
Roth conversions are not automatically beneficial. They should be evaluated through multiyear projections.
3. Should You Preserve Your Traditional IRA for Your Children?
Not automatically.
Many retirees want to preserve IRA assets as long as possible so there is more left for their heirs.
But if your children may eventually have only 10 years to distribute the account, preserving every traditional IRA dollar may also mean preserving a larger future tax obligation.
Depending on your broader plan, it may be worth comparing whether retirement spending should come from traditional IRA assets, taxable investments, Roth assets, or some combination.
There is no universal withdrawal order.
The goal is to compare your own lifetime tax and cash-flow needs with the tax characteristics of the assets your children may eventually inherit.
4. Can Charitable Planning Help?
For families that are already charitably inclined, retirement accounts can sometimes be useful assets to incorporate into charitable planning.
Individual beneficiaries generally face income tax when they withdraw money from an inherited traditional IRA. Qualified charitable organizations generally do not face that same income-tax burden.
That can create planning opportunities when charitable giving is already part of the family’s goals.
The point is not to give assets away just to avoid taxes.
It is to consider whether the type of asset used for charitable and family bequests matters.
5. How Should Your Children Manage the 10-Year Window?
Planning does not end when the IRA is inherited.
A beneficiary should generally consider the entire 10-year period rather than automatically taking one-tenth each year or waiting until the final year.
Income can change significantly over a decade.
A beneficiary may retire, change careers, sell a business, or experience unusually high or low income.
Those differences can affect the tax cost of inherited IRA withdrawals.
The objective is not simply to meet the deadline. It is to coordinate distributions with the beneficiary’s broader tax picture while satisfying any required minimum distributions.
Can You Avoid Taxes on an Inherited IRA?
Usually, the more realistic goal is tax management rather than tax avoidance.
Traditional IRA dollars generally represent income on which taxes have been deferred. At some point, taxes will commonly become due when funds are distributed.
Planning may help determine:
- Who recognizes the income
- When the income is recognized
- What other income exists in the same year
- Which assets ultimately pass to family or charity
But accelerating withdrawals or completing large Roth conversions simply to shrink an IRA is not automatically a good strategy.
The owner may already be in a high tax bracket. Beneficiaries may ultimately have lower incomes. The owner may need the assets for retirement. Large conversions could also increase current taxes or Medicare premiums.
The objective is not to eliminate taxes at any cost. It is to make informed decisions about when, where, and by whom those taxes may eventually be paid.
What Should Owners of Large IRAs Review Now?
If a significant portion of your wealth is held in traditional IRAs or other tax-deferred retirement accounts, five areas may deserve attention:
- Your family’s projected tax picture
- Potential Roth conversion opportunities
- Your retirement withdrawal strategy
- Your charitable intentions
- How your beneficiaries may use the 10-year window
These decisions are connected, which is why projection work can be valuable before taking action.
Is a Large IRA Still a Good Asset to Leave Your Children?
A large IRA can absolutely remain an important part of a family’s wealth.
The issue is not that IRAs suddenly became “bad” assets.
The issue is that the rules governing what happens after the original owner dies have changed.
Instead of asking only:
“Who gets my IRA?”
Owners of substantial retirement accounts may also want to ask:
“What will they actually keep after taxes?”
“How quickly might they have to recognize that income?”
“Could they inherit the account during their highest-earning years?”
“Are there planning decisions available to me now that could give my family more flexibility later?”
The SECURE Act did not create a literal new “inheritance tax” on IRAs. But for families with significant tax-deferred retirement savings, compressing distributions into a 10-year period can create a meaningful tax-planning challenge.
And the time to understand that challenge may be before your children inherit it.
Bring Tax Planning and Long-Term Wealth Planning Together
If you have accumulated a substantial traditional IRA, the MidCoast tax team can help evaluate potential tax exposure and use projection work to compare Roth conversions, retirement withdrawals, and other planning scenarios.
But a large IRA is rarely just a tax issue.
Retirement income, investments, charitable intentions, estate goals, and the wealth eventually passed to your family are interconnected.
If you have a significant IRA balance, learn how MidCoast Wealth Advisors can help incorporate these decisions into a coordinated long-term financial plan.
The appropriate strategy depends on your individual circumstances. Projections are estimates, not guarantees. Tax, retirement, estate, Medicare, and investment rules can change, and decisions should be reviewed with qualified professionals before taking action.
