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 turns 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. And thanks to IRS Final Regulations issued in July 2024 (T.D. 10001), there is now an additional twist: when the original account owner had already passed their required beginning date when they died, 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 the 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

Assume the $2 million traditional 401(k) keeps growing inside the 10-year 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. Distributing $100,000 a year from the inherited account pushes most of that money into the 32% bracket, which begins at $201,775 for single filers in 2026, with anything distributed in a particularly heavy year spilling into the 35% bracket above $256,225.

Blend the brackets across a decade of forced withdrawals and federal tax on $2 million of inherited traditional balances lands somewhere between $580,000 and $660,000. Add 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 become the single largest beneficiary of the account.

Run the same exercise through a Roth 401(k) and the picture inverts. Heirs still face the 10-year drawdown rule, but every qualified distribution is tax-free. Same $2 million, same 10 years, same kids. Federal tax bill: zero. The roughly $600,000 swing referenced in the title is, if anything, conservative.

Why conversion math favors the parent, not the heir

What matters is the rate at which tax ultimately gets paid. 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, the threshold at which the 32% rate kicks in. 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 continue adjusting for inflation in future years. Children in peak earning years tend to file one or two brackets higher than their retired parents, which is precisely where the inter-generational tax gap opens up.

For a 62-year-old born in 1964, SECURE 2.0 sets the required minimum distribution starting age at 75, not 73. That longer 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 the cheaper rate today and hand the next generation an account the IRS cannot touch.

Two cautions deserve close attention. Conversions raise current Modified Adjusted Gross Income, which can trigger IRMAA Medicare premium surcharges two years later. 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 a $150,000 conversion stacked on other income can add meaningful costs across both Medicare Part B and Part D. The Roth dollars also need to clear the five-year holding rule before heirs can withdraw earnings tax-free, so getting a Roth account on the books early matters even if only a token amount goes in at first.

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 kids absorb every dollar of that gap.
2. Open a Roth IRA today if you don’t 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, not 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 one heir to absorb the whole 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 really 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 article has been updated to reflect the July 4, 2025 signing date of the One Big Beautiful Bill Act, the 2026 standard Medicare Part B premium of $202.90 per month, and the IRS Final Regulations (T.D. 10001, July 2024) requiring annual minimum distributions from inherited accounts in years one through nine when the original owner died after their required beginning date. The expiration of the inherited-IRA penalty waiver series after the 2024 tax year has also been added as relevant planning context.

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