Why Leaving a $2 Million 401(k) to Your Children Could Hand the IRS $600,000 More Than a Roth Would

The scenario reads like a Boglehead success story: a 62-year-old with a $2 million traditional 401(k) plans to retire at 65, draw modestly from Social Security and dividends, and leave the bulk of the account to two adult children. The problem is that the IRS already has a claim on roughly a third of that balance, and the SECURE Act of 2019 rewrote the rules so the bill comes due faster than most heirs ever expect.

Since 2020, most non-spouse beneficiaries of a 401(k) or IRA must empty the inherited account within 10 years of the original owner’s death. That hard deadline is what transforms a generous inheritance into a tax amplifier. Every dollar pulled from a traditional 401(k) lands on the heir’s return as ordinary income, stacked on top of whatever they already earn. IRS Final Regulations issued in July 2024 (T.D. 10001) added another layer of complexity: when the original account owner had already passed their required beginning date at death, heirs cannot simply wait until year 10 to empty the account. They must take annual minimum distributions in years one through nine as well, or face a 25% excise tax on any shortfall. The series of IRS penalty waivers that shielded many inherited-IRA beneficiaries from this requirement expired after the 2024 tax year, and no new waiver has been issued for 2025 or 2026.

The math that ambushes the next generation

Consider what happens once the account passes to the next generation. Assume the $2 million traditional 401(k) keeps growing inside the 10-year drawdown window and the two adult children each inherit roughly $1 million. If both are mid-career professionals in their late 40s earning around $200,000 each, they already file in the 24% federal bracket. Drawing $100,000 a year from the inherited account pushes most of that distribution into the 32% bracket, which begins at $201,775 for single filers in 2026 per IRS Revenue Procedure 2025-32. A particularly heavy distribution year can push additional dollars into the 35% bracket, which starts above $256,225 for single filers.

Blend those rates across a decade of forced withdrawals and the federal tax on $2 million of inherited traditional balances lands somewhere between $580,000 and $660,000. Layer in state income tax in a high-rate state like New York, California, or New Jersey and the total can clear $800,000. At that point, the IRS has effectively become the account’s single largest beneficiary.

Run the same exercise through a Roth 401(k) and the picture inverts entirely. Heirs still face the 10-year drawdown rule, but every qualified distribution is tax-free. Same $2 million, same 10 years, same two kids. Federal tax bill: zero. The roughly $600,000 swing in the headline is, if anything, a conservative estimate. It also understates one additional advantage: SECURE 2.0 Section 325 eliminated lifetime RMDs on designated Roth 401(k) accounts after 2023, meaning the account can compound untouched for even longer before the 10-year clock starts.

Why conversion math favors the parent, not the heir

The core issue is which generation pays the tax, and at what rate. A 62-year-old in semi-retirement frequently sits in the 22% or 24% federal bracket. For 2026, the 24% bracket for joint filers covers income up to $403,550 before the 32% rate begins. The One Big Beautiful Bill Act, signed into law on July 4, 2025, made the Tax Cuts and Jobs Act bracket structure permanent, so these thresholds will keep adjusting for inflation in future years. Children in peak earning years tend to file one or two brackets higher than their retired parents, and that gap is precisely where the inter-generational tax loss opens up.

For a 62-year-old born in 1964, SECURE 2.0 sets the required minimum distribution starting age at 75. That runway opens a 13-year window for Roth conversions before the IRS forces withdrawals to begin. Converting $100,000 to $150,000 of the traditional balance to Roth each year from now until required minimum distributions begin at 75 lets the parent pay at the cheaper rate today and hand the next generation an account the IRS cannot touch.

Two cautions deserve careful attention. First, conversions raise current Modified Adjusted Gross Income, which can trigger IRMAA Medicare premium surcharges two years after the conversion year, because Medicare uses your tax return from two years prior to set current premiums. In 2026, a single retiree with MAGI above $109,000 already pays a Part B surcharge on top of the standard $202.90 monthly premium, and the IRMAA system operates as a cliff rather than a gradual phase-in. Crossing the $109,000 threshold by even one dollar immediately raises the total Part B premium to $284.10 per month and adds a $14.50 monthly Part D surcharge as well. A $150,000 conversion stacked on other retirement income can push a retiree into higher IRMAA tiers with meaningfully larger costs across both Medicare Part B and Part D. Second, the Roth dollars must clear the five-year holding rule before heirs can withdraw earnings tax-free, so opening a Roth account early matters even if only a token amount goes in initially.

Three moves before year-end

1. Model a partial conversion ladder. Fill the 24% bracket up to $403,550 (joint) each year from now until RMD age. Converting roughly $1 million across a decade at a blended 22% to 24% rate costs about $230,000 in federal tax. The same $1 million distributed later to heirs sitting in the 32% bracket costs $320,000 or more, and the children absorb every dollar of that gap.
2. Open a Roth IRA today if you do not have one. Even a $100 contribution starts the five-year clock that protects beneficiaries from tax on earnings. The clock attaches to your first Roth account rather than to each individual conversion, so the sooner it begins ticking the better.
3. Name beneficiaries deliberately. A surviving spouse can roll inherited 401(k) assets into their own IRA and escape the 10-year rule entirely. Adult children cannot. Splitting the account between a spousal rollover and a Roth balance earmarked for the kids preserves both options and avoids forcing any single heir to absorb the entire tax wave.

The point of building a 401(k) to $2 million is to outlive it and pass it on. The Roth conversion question is ultimately a question of which generation funds the IRS. At today’s brackets, the answer is almost always the one already retired.

Editor’s note: This pass added context on SECURE 2.0 Section 325’s elimination of lifetime RMDs on designated Roth 401(k) accounts after 2023, incorporated the Medicare two-year lookback rule explaining why a conversion today affects 2026 premiums only two years later, and expanded the IRMAA section to include the $14.50 monthly Part D surcharge that also activates at the first IRMAA tier above $109,000 for single filers.

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