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 expect.

Since 2020, most non-spouse beneficiaries of a 401(k) or IRA must empty the 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.

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 kids 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 starts at $201,775 for single filers in 2026, with anything lumpy 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 place like New York, California, or New Jersey and the total can clear $800,000. The IRS becomes 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, but every qualified distribution is tax-free. Same $2 million, same 10 years, same kids. Federal tax bill: zero. The roughly $600,000 swing is the headline number in the article’s title, and it is conservative.

Why conversion math favors the parent, not the heir

What matters is the rate at which that tax ultimately gets paid. A 62-year-old in semi-retirement frequently sits in the 22% or 24% federal bracket, which together cover joint income up to $394,600 in 2026. Children in peak earning years tend to be one or two brackets higher. Converting $100,000 to $150,000 of the traditional balance to Roth each year between 62 and 73, when required minimum distributions begin, lets the parent pay the cheaper rate today and hand the next generation an account the IRS cannot touch.

Two cautions matter. Conversions raise current Modified Adjusted Gross Income, which can trigger IRMAA Medicare premium surcharges two years later. A single retiree with MAGI above roughly $106,000 already pays a Part B surcharge, and a $150,000 conversion stacked on other income can add $70 to $400 per month per person in Medicare premiums. The Roth dollars also need to clear the five-year holding rule before heirs can withdraw earnings tax-free, so starting any Roth account early matters even if only a token amount goes in.

Three moves before year-end

1. Model a partial conversion ladder. Fill the 24% bracket up to $394,600 (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.