Key takeaways

• Traditional IRAs create three distinct tax problems that can affect different beneficiaries at different points in life, often when tax rates are higher than expected.
• The SECURE Act overhauled inherited IRA rules, forcing many beneficiaries to empty inherited accounts within 10 years and compressing those distributions into their highest-earning years.
• Proactive, multigenerational traditional IRA tax planning may help families reduce lifetime tax exposure, especially when large pre-tax retirement balances are involved.

Picture a couple in their early 60s who have spent the better part of three decades doing everything right. Consistently contributing to their 401(k)s and IRAs. Building a combined balance approaching $1.2 million. Updating their legacy plan. They feel confident their affairs are in order and everything is accounted for as they approach retirement.

What they haven’t fully accounted for is that at age 73, required minimum distributions (RMDs) will kick in and they will be forced to draw from those accounts whether they need the income or not, potentially pushing them into a higher bracket and making more of their Social Security taxable. Or if one of them passes first, the survivor will be left with the taxable income of two earners, in a higher tax bracket but filing alone. Or that when their children eventually inherit what remains, current inherited IRA distribution rules may give them just 10 years to empty those accounts on top of their own salaries, taxed at whatever rate applies to all that income together.

We have this conversation with clients all the time, and the families who tend to be most surprised are often the ones who have been the most disciplined. They saved carefully. They invested thoughtfully. They built real wealth. But what they have not always had is a plan for what that wealth may cost them, and the people they leave it to, when it comes time to use, transfer, or protect it.

What makes traditional IRAs a tax risk for families?

A traditional IRA tax planning conversation at Intelliplan Financial often starts with a simple question: do you know what you’ll owe on this money when you take it out?

We ask this because every dollar contributed pre-tax is money the IRS is still owed, and that obligation does not end with the account owner. It transfers at death to a surviving spouse and eventually to your children, often at an inopportune time in their working lives – when they are likely earning the most money.

Families with substantial traditional IRA balances are often the most exposed, because a large pre-tax balance can become a large future tax obligation that transfers after death, with planning challenges that can grow over time.

Here are three common tax problems built into that obligation, and what families may still be able to do about them.

1. Required minimum distributions increase taxable income whether you need the income or not

Starting at age 73, you generally must take required minimum distributions from your traditional IRA regardless of whether you need the income. The taxation of required minimum distributions is straightforward and unforgiving: these withdrawals are typically taxed as ordinary income and can push you into higher brackets than expected, increase the portion of your Social Security that is subject to tax, and trigger surcharges on Medicare premiums.

Many retirees are surprised to find that their tax bills in retirement are higher than they anticipated. The larger your IRA, the more pronounced this effect can be.

The planning opportunity here is to use lower tax brackets to your advantage before RMDs begin. The years between retirement and the start of required minimum distributions can be among the most financially flexible of your life. Utilizing Roth conversion strategies during that window — moving money from a pre-tax account to a tax-free one — may reduce the size of your future RMD obligation and help you manage your bracket exposure for years to come. This is one of the core opportunities we work through with clients as part of The Tax Management Journey®, a structured planning process designed to help families manage tax exposure across retirement rather than optimizing one year at a time.

2. The death of a spouse can dramatically increase the surviving spouse’s tax bill

We have a dedicated focus on helping women navigate retirement planning, and this particular tax risk comes up consistently in those conversations.

When one spouse passes away, the surviving spouse often ends up owing more in taxes — even if their income barely changes. That’s because filing as a single person comes with less favorable tax brackets and a standard deduction that’s half the size of what a married couple gets. So the survivor can end up in a noticeably higher tax bracket on income that looks about the same as before.

Financial planners commonly refer to this paradox as “the widow’s penalty.”  While not an official tax code term, it’s widely used to describe the tax increase that tends to follow the loss of a spouse and the resulting change in filing status. For many of the women we work with, this shift is not hypothetical. It is a transition they have already experienced, or one they are actively planning for. Women tend to live longer on average, which means their probability of facing this scenario as the surviving spouse is higher. And it often arrives at one of the most emotionally difficult moments in a person’s life, with little time or capacity to think through the financial mechanics.

This is precisely why we prioritize planning for this event during joint filing years. Implementing Roth conversion strategies while both spouses are alive can reduce the surviving spouse’s future taxable income, helping cushion the bracket shift before it happens and preserving more of what both spouses worked together to build.

3. Your beneficiaries may face a 10-year forced liquidation during their peak earning years

This is where many families often get caught off guard, and where the stakes can be highest.

The SECURE Act fundamentally changed inherited IRA rules for most beneficiaries. Under previous law, beneficiaries could spread inherited IRA distributions over their own lifetime, a strategy known as the stretch IRA. Under current inherited IRA distribution rules, most beneficiaries other than a surviving spouse, typically adult children, must empty the inherited account within 10 years of the original owner’s death. The 10-year rule for inherited IRAs applies broadly, and inherited IRA RMD rules within that window can add additional complexity depending on whether the original owner had already begun taking distributions.

For non-spouse inherited IRA beneficiaries, typically adult children or other heirs who are still working and earning strong incomes, this can mean stacking large inherited IRA distributions on top of salaries that are already in high brackets. Depending on their income and the size of the inherited account, they could face the highest federal income tax brackets, and potentially additional state income taxes, on dollars they worked decades to accumulate.

Every dollar in a traditional IRA is, in effect, a future tax bill. Under current law, your beneficiaries may be required to settle that bill in a compressed window, at a particularly inconvenient time in their tax life.

Many people with large IRA balances didn’t set out to accumulate them by choice — a 401(k) through an employer is often the default, and the balance grows from there. That doesn’t make the strategy wrong. It does mean that leaving large pre-tax balances unconverted may create more of a tax burden for your family than many people realize, and that there may still be time to address it.

Ways to help reduce traditional IRA taxes across generations

Multigenerational IRA planning looks at all three of these events together and develops a strategy to help manage the total tax impact across your lifetime, your spouse’s lifetime, and your children’s inheritance. At Intelliplan Financial, we approach this work through The Tax Management Journey®, a framework designed to help families see the full picture rather than making decisions year by year in isolation.

Depending on your situation, this may include Roth conversion strategies during low-bracket windows, distribution planning to reduce the surviving spouse’s future tax exposure, and beneficiary planning that accounts for the 10-year rule for inherited IRAs and your children’s likely income.

It’s worth noting that Roth conversions and IRA distribution strategies can be powerful planning tools, but they may not be appropriate for every situation. Working with a qualified financial professional can help you evaluate these options in the context of your income, retirement timeline, tax picture and long-term goals.

The right strategy depends on your retirement timeline, tax situation, and family goals. If you’re wondering how these concepts apply to your situation, schedule a complimentary consultation with our team.

Frequently asked questions about IRA tax planning for families

What is “the widow’s penalty”?

“The widow’s penalty” is not an official tax code designation, but a term commonly used among financial planners to describe the tax increase that tends to follow the death of a spouse. When one spouse passes away, the survivor loses access to married filing jointly tax brackets and the higher standard deduction. The result is that the surviving spouse often faces higher tax rates on a similar level of income, with little time to plan around it. Because the shift can be immediate and lasting, planning for this event during joint filing years can make a meaningful difference.

What are the inherited IRA rules for non-spouse beneficiaries?

Under current inherited IRA rules, most non-spouse inherited IRA beneficiaries, typically adult children or other heirs, must fully distribute an inherited IRA within 10 years of the original owner’s death. This is a significant change from prior law, which allowed beneficiaries to stretch distributions over their own lifetime. Inherited IRA RMD rules within that 10-year window may also require annual distributions depending on whether the original owner had already begun taking required minimum distributions. For beneficiaries in their peak earning years, the compressed timeline can result in a substantial tax burden on every inherited dollar.

Do the inherited IRA distribution rules apply to 401(k) accounts too?

The same general principles apply to traditional 401(k) accounts and other pre-tax retirement accounts. The specific rules around required minimum distributions and inherited accounts may vary, which is one reason working with a knowledgeable advisor can matter so much for your particular situation.

When is the right time to think about Roth conversions?

The right time for Roth conversion strategies is generally when your current tax rates are lower than you expect them to be in the future. For many families, that window falls between retirement and that start of required minimum distributions, while you still have flexibility in how much income you recognize each year. Other common opportunities include years with lower income, business transitions, or periods when both spouses are still filing jointly and have more flexibility to plan.

Is it too late to apply multigenerational tax planning strategies if I’m already in retirement?

For many families, the window to act remains open well into retirement. Even after RMDs begin, there may be strategies worth exploring depending on your account balances, income, family situation, and goals. A conversation with a holistic financial advisor who understands how all areas of your financial picture work together can help clarify what options may still be available.

Ready to review your IRA strategy?

If you have significant assets in a traditional IRA, a conversation around multigenerational traditional IRA tax planning may be one of the most valuable you have this year. Our team at Intelliplan Financial works with pre-retirees and retirees who want to understand how to pass on what they’ve built while also accounting for what it may cost them, their families, and their legacy over time.

Schedule a complimentary, no-obligation consultation to get started.