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 bills, so most of that money is going to their adult children. Every dollar comes with a deferred tax bill, and the heirs will likely pay it at higher rates than the parents ever would.

One listener to Suze Orman’s podcast described the same problem 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 well placed.

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 also takes annual withdrawals along the way. Every dollar comes out as ordinary income.

Timing makes it worse. Parents who die in their 80s usually leave money to children in their 50s, often at peak earnings. In 2026, the 24% bracket covers joint taxable income above $211,400, and the 32% rate starts above $403,550.

Picture an heir couple already earning around $350,000 of taxable income. Six-figure inherited distributions push a portion of each withdrawal into the 32% bracket. Their parents, with joint taxable income near $150,000, sit in the 22% bracket that begins at $100,800. The same dollars get taxed at a higher rate simply because they changed hands.

A taxable brokerage account works in the family’s favor at death. Stocks there receive a step-up in basis, which wipes out capital gains on decades of appreciation. A 401(k) gets no step-up. With the federal estate exclusion at $15,000,000 per person in 2026, estate tax is irrelevant for nearly every reader here. Income tax is the whole game.

Parents Feel the Tax Cascade First

Leaving the account alone also costs the owners. RMDs begin at 73, or 75 for those born in 1960 or later. Those forced withdrawals stack on Social Security, can make up to 85% of benefits taxable, and can set off IRMAA Medicare surcharges based on income from two years earlier. A couple in the 22% bracket hit by both effects can face an effective marginal rate near 40%.

When one spouse dies, the survivor files single. The 24% rate then starts above $105,700 of taxable income, while RMDs on the combined account keep coming.

Moves Affluent Retirees Are Making Instead

1. Converting in the gap years. Income usually bottoms out between retirement and RMD age. Converting enough each year to fill the 22% or 24% bracket prepays tax at rates below what heirs would likely owe. Mind the two-year IRMAA lookback: a conversion at 63 shows up in Medicare premiums at 65.
2. Routing late-career savings to Roth. Workers 50 and older who earned more than $150,000 in 2025 must now make catch-up contributions as Roth. Those aged 60 to 63 can add up to $11,250, for a total of $35,750. Roth 401(k)s have comes with no RMDs since 2024, so the money compounds untouched. Heirs still face the 10-year clock, but their withdrawals are tax-free.
3. Leaving pretax dollars to charity. A charity pays no income tax on an inherited retirement account. Naming charities as beneficiaries of traditional money and leaving Roth and taxable assets to children puts each dollar where it is taxed least. After rolling the 401(k) into an IRA, qualified charitable distributions of up to $111,000 per person in 2026 meet RMDs without adding to income.
4. Holding bonds in the traditional account. With the 10-year Treasury near 5.1%, Treasurys and bond funds belong inside the traditional 401(k), where their slower growth keeps the pretax balance and future RMDs smaller. The highest-growth stocks go in the Roth, where gains escape tax permanently.

Three Steps to Take Before December 31

First, project your 2026 taxable income and find how much room remains below the top of your current bracket. Convert that amount this year, since the window closes December 31. Between your last paycheck and your first RMD, the quiet years may bring the lowest tax rate you ever see again, which is the whole subject of our free Roth Window guide.

Second, pull every beneficiary form. Move traditional dollars toward charities if you give, and direct Roth and taxable accounts toward children.

Third, if your expected income sits near an IRMAA tier or the 24% ceiling, pay a fee-only planner for a multiyear conversion schedule. One well-timed conversion can save your heirs more than the fee costs you.

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