$2 Million 401(k) Inheritance Could Cost Your Kids $600,000 More Than a Roth Conversion

A 68-year-old widower on the Clark Howard show recently laid out this problem: a paid-off house, $200,000 in a Roth, and $1.5 million in a 401(k), with the goal of leaving the balance to his kids. Scale that up to $2 million in a traditional 401(k), two adult children in their peak earning years, and you have one of the most expensive estate-planning mistakes in the current tax code. The kids inherit the account along with your unpaid tax bill, at their marginal rate, on a 10-year clock.

Why the 10-Year Rule Is the Real Beneficiary

Since the SECURE Act, non-spouse heirs of a traditional 401(k) or IRA must empty the account within 10 years of the original owner’s death. The IRS finalized those rules in July 2024, and 2025 was the first year enforcement began in earnest. Every dollar of that $2 million comes out as ordinary income on the kids’ Form 1040, stacked on top of whatever they already earn.

Assume two children, each inheriting $1 million and each already earning roughly $180,000. To drain the account evenly, each pulls about $100,000 a year for a decade. That extra income lands almost entirely in the 32% federal bracket, before state taxes even enter the picture. At federal-plus-state combined rates, each child surrenders a meaningful share to tax authorities every year, totaling hundreds of thousands per heir over the decade.

Push the withdrawals into fewer years, say a lump sum in year 10 while a child is still a high earner, and the top bracket climbs toward 37%. The math gets substantially worse.

The Roth Path, and Where the $600,000 Comes From

Now run the alternative. Between age 68 and the start of required minimum distributions at age 73 (or 75 for those born in 1960 or later, under SECURE 2.0), the account owner has a meaningful window to convert traditional 401(k) dollars to Roth. If Social Security and a small pension put taxable income around $80,000, there is significant headroom inside the 22% and 24% brackets before hitting the next cliff.

Converting roughly $150,000 a year for eight years moves about $1.2 million into a Roth at a blended federal rate near 22% to 24%. Total conversion tax comes to roughly $280,000 to $300,000. The remaining $800,000 stays traditional and still passes to heirs under the 10-year rule, but on a far smaller base.

Compare the two paths on the same $2 million:

1. Do nothing. Heirs pay roughly $700,000 to $760,000 in combined federal and state income tax over their 10-year drawdown, depending on their brackets and state of residence.
2. Convert aggressively before RMDs begin. You prepay roughly $280,000 to $320,000 at your own lower bracket. Heirs receive a Roth that distributes tax-free, plus a smaller traditional balance that generates far less taxable income.

The delta lands in the $400,000 to $600,000 range, and climbs higher if the heirs live in a high-tax state or inherit during their top earning decade.

The Traps That Blow Up the Plan

Two things quietly wreck Roth conversion math. The first is IRMAA. Conversion income counts toward the two-year Medicare lookback, and in 2026 crossing the first tier at $109,000 for a single filer adds $81.20 per month to Part B premiums plus an additional Part D surcharge. Stack conversions carelessly and a single year can trigger four figures in extra annual premiums.

The second trap is the reinvestment assumption. With the 10-year Treasury now yielding around 5%, the taxes paid today carry a real opportunity cost. Conversions still win when the heirs’ bracket is meaningfully higher than the owner’s, which is the typical case for families with $2 million balances and working-age children. The math simply requires honest assumptions on both sides of the ledger.

One more wrinkle worth noting: the SECURE 2.0 rule now forcing catch-up contributions to Roth for anyone who earned more than $150,000 in 2025 is quietly embedding the same Roth-first logic into the accumulation phase itself. That shift will compound the advantage for those who begin planning early.

Three Moves Before Year-End

1. Ask each adult child, in writing, for their expected marginal federal bracket during their 40s and 50s. If it is 24% or higher, every dollar converted at your 22% to 24% rate produces a net gain for the family.
2. Model conversions that fill your current bracket to the dollar, stopping short of the next IRMAA tier. A fee-only advisor earns their keep here. The personal savings rate has slipped to around 3% in recent months, which means heirs are less likely than ever to have liquid cash on hand to cover an inherited tax bill.
3. Name a charity as partial beneficiary for the traditional portion you cannot convert in time. Qualified charitable distributions and charitable beneficiaries pull dollars out of the taxable estate at a 0% rate, which no Roth conversion can match.

Editor’s note: This update corrects the 2026 IRMAA first-tier threshold from roughly $106,000 to $109,000 for single filers (the 2025 threshold was $106,000), revises the first-tier Part B surcharge to $81.20 per month, updates the 10-year Treasury yield reference from 4.69% to approximately 5%, refreshes the personal savings rate figure, and adds context on the July 2024 IRS final regulations that put the inherited-account 10-year rule fully into force beginning in 2025.

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