Why the Traditional 401(k) Is the Worst Account to Die With, and What Affluent Investors Over 60 Are Doing Instead

A 63-year-old married couple holds $1.6 million in traditional 401(k)s. Pensions and Social Security cover their living expenses, so most of that money is destined for their adult children. The catch: every dollar carries a deferred tax bill, and the heirs will almost certainly pay it at higher rates than the parents ever would.

One listener to Suze Orman’s podcast put the problem plainly in January 2026: “I’m contributing to a Roth 401(k) so I can leave it to my children one day. Unfortunately, most of my retirement savings are in traditional IRAs and 401(k)s.” The worry is entirely justified.

Ten Years, No Step-Up, and Heirs at Peak Salary

Most non-spouse heirs must empty an inherited 401(k) within 10 years. If the parent had already started required minimum distributions (RMDs), the heir must also take annual withdrawals throughout the 10-year window. Every dollar comes out as ordinary income, taxed at whatever rate applies in the year of withdrawal.

Timing compounds the problem. Parents who die in their 80s typically leave money to children in their 50s, who are often at peak earning power. In 2026, the 24% federal bracket covers joint taxable income above $211,400, and the 32% rate kicks in above $403,550.

Picture an heir couple already reporting around $350,000 of taxable income. Six-figure inherited distributions push a portion of each withdrawal squarely into the 32% bracket. Their parents, with joint taxable income near $150,000, sit comfortably in the 22% bracket, which begins at $100,800. The same dollars face a steeper tax bill simply because they changed hands.

A taxable brokerage account treats the family far better at death. Stocks held there receive a step-up in basis, wiping out capital gains accumulated over decades of appreciation. A 401(k) receives no such step-up. With the federal estate exclusion sitting at $15,000,000 per person in 2026, estate tax is irrelevant for the vast majority of families. Income tax is the whole game.

Parents Feel the Tax Cascade First

Leaving the account untouched also costs the owners. RMDs begin at 73, or 75 for those born in 1960 or later. Those forced withdrawals stack on top of Social Security income, can make up to 85% of benefits taxable, and can trigger IRMAA Medicare surcharges based on income from two years prior. A couple nominally in the 22% bracket, once hit by both the Social Security inclusion effect and IRMAA, can face an effective marginal rate approaching 40%.

The widow or widower penalty arrives next. When one spouse dies, the survivor files as single. The 24% rate then begins above just $105,700 of taxable income, yet RMDs on the combined account continue unabated.

Moves Affluent Retirees Are Making Instead

1. Converting in the gap years. Income typically bottoms out between retirement and RMD age. Converting enough each year to fill the 22% or 24% bracket prepays tax at rates well below what heirs would likely owe. One important detail: the two-year IRMAA lookback means a conversion at 63 shows up in Medicare premiums at 65, so the math must account for that extra cost.
2. Routing late-career savings to Roth. Starting in 2026, workers 50 and older who earned more than $150,000 in prior-year wages from their employer must make all catch-up contributions on a Roth basis. Those aged 60 to 63 qualify for a supersized limit of $11,250, producing a combined total of up to $35,750 for 2026. Roth 401(k)s carry no RMDs, so the balance compounds untouched. Heirs still face the 10-year clock, but every withdrawal they take is tax-free.
3. Leaving pretax dollars to charity. A charity owes no income tax on an inherited retirement account. Naming a charity as beneficiary of traditional 401(k) money while directing Roth and taxable assets to children puts each dollar where it is taxed least. After rolling a 401(k) into an IRA, qualified charitable distributions of up to $111,000 per person in 2026 count toward RMDs without appearing in taxable income.
4. Holding bonds inside the traditional account. With the 10-year Treasury yielding around 5.1%, Treasurys and bond funds belong inside the traditional 401(k). Their more modest growth keeps the pretax balance smaller and future RMDs lower. The highest-growth equity positions belong in the Roth, where every dollar of appreciation escapes tax permanently.

Three Steps to Take Before December 31

First, project your 2026 taxable income and calculate how much room remains below the top of your current bracket. Convert that amount before year-end, because the window closes December 31. The years between your last paycheck and your first RMD often represent the lowest tax rates you will see for the rest of your life. That opportunity is the subject of our free Roth Window guide.

Second, pull every beneficiary form on file. Direct traditional account dollars toward charities where that fits your giving, and route Roth and taxable accounts to your children.

Third, if your income sits near an IRMAA threshold or the ceiling of the 24% bracket, hire a fee-only planner for a multiyear conversion schedule. One well-timed conversion can save your heirs far more than the planning fee ever costs.

Editor’s note: This article was updated to reflect the 2026 mandatory Roth catch-up requirement for workers earning more than $150,000 in prior-year wages, effective January 1, 2026, and to confirm the current 10-year Treasury yield of approximately 5.1% and the 2026 QCD annual limit of $111,000 per person per IRS Notice 2025-67.

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