Inheritance Order for Assets to Help Owners and Heirs- How you decide which accounts to use during retirement can undo tax and estate planning, says a recent article from 24/7 Wall Street, “Leave the Kids the Roth, Spend the IRA Yourself: The Inheritance Order Most Families Get Backward.”
When Boomers spend funds from their traditional IRAs first and leave the Roth to heirs, they create a much better inheritance from a tax standpoint. Retirees who can convert traditional IRA funds to a Roth between retirement and age 73, when their income is lowest and before RMDs require taxable withdrawals, are maximizing tax planning.
Leaving a traditional IRA untouched because the Roth is growing tax-free feels like the right move, as the Roth feels like a “bonus” account. But the tax code makes the opposite true. If the goal is to leave more after-tax wealth on both sides, the traditional IRA is the one to use first.
This is the result of two federal rules. The SECURE Act eliminated the stretch IRA for most non-spousal beneficiaries. For many nonspouse beneficiaries, an inherited IRA generally must be fully distributed by the end of the applicable 10-year period, whereas prior rules often permitted distributions over a beneficiary’s life expectancy. Those distributions are taxed as ordinary income to heirs, usually during their own highest-earning years.
A person who inherits a $500,000 traditional IRA at age 55 may generally need to fully distribute the account within the applicable 10-year period, which is often during their own peak earnings years. Add this income to a six-figure salary and those distributions could be taxed at 32% or higher at the federal level—plus state taxes.
With an inherited Roth IRA, qualified distributions are generally income-tax-free, although applicable distribution rules still must be followed. Even better, the heir can allow the account to compound tax-free for ten years before emptying the account. Growth occurring during those ten years is not taxable either.
By converting traditional IRAs over an extended period of time, retirees can pay the tax at their own rate. The time between retirement and the start of required minimum distributions may provide a lower-income period when Roth conversions are worth considering.
This needs to be done in tandem with budgeting for cash flow. Families with credit card debt or mortgages don’t always have the cash on hand to pay for a Roth conversion.
Estate planning includes planning for how assets will be distributed, what their value will be to heirs, and what taxes will be generated by the inheritance. Talk with an estate planning attorney to evaluate assets and their potential costs to heirs. Discuss whether converting a traditional IRA to a Roth IRA could make sense for the grantors as well as the heirs.
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Inheritance Order for Assets to Help Owners and Heirs
Reference: 24/7 Wall Street (Aug. 6, 2026) “Leave the Kids the Roth, Spend the IRA Yourself: The Inheritance Order Most Families Get Backward”
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