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

Rank the accounts you can leave behind by what your heir actually keeps. A Roth balance comes first, because qualified withdrawals arrive tax-free. A taxable brokerage account comes second, because it gets a fresh cost basis at death. A traditional 401(k) comes last, because every dollar in it is a dollar the IRS has not taxed yet.

Your Heir Inherits the Tax Bill Along With the Balance

A traditional 401(k) passes to heirs with the balance and deferred income tax on it. Beneficiaries “must include in their gross income any taxable distributions they receive.” Those distributions are taxed at the heir’s marginal rate.

Most non-spouse beneficiaries (any heir other than the owner’s husband or wife) move the money into an inherited IRA. That account stays “in the name of the deceased IRA owner for the benefit of you as beneficiary,” and the heir cannot add contributions or treat it as their own.

A Ten-Year Clock Hits Your Children’s Peak Earning Years

Before 2020, heirs could spread withdrawals over their lives. The SECURE Act ended that for most. A designated beneficiary must now empty the account by December 31 of the 10th year following the owner’s death. Under final IRS regulations, most beneficiaries must continue to take RMDs annually throughout the 10 years when the owner had already begun required distributions. Skipping one sets off a 25% excise tax.

The compressed window does real damage. Parents die when children are mid-career and making most. Stack inherited distributions on top of salary and income climbs brackets fast.

In 2026, a single filer hits 32% at $201,776 of taxable income and 35% at $256,226. Dollars a retiree took at lower rates end up taxed at higher ones in a child’s hands.

Surviving spouses avoid this pressure. A spouse can “treat it as your own IRA by designating yourself as the account owner.” Minor children, disabled or chronically ill heirs, and anyone not more than 10 years younger than the account owner are also exempt from the 10-year rule.

Two Accounts That Pass to Heirs Cleanly

Roth distributions “aren’t taxed as long as you meet certain criteria.” An inherited Roth must be emptied within the 10-year window. Roth owners never take lives RMDs, so heirs can let the balance compound untouched until the deadline and took it tax-free.

Taxable accounts get a step-up in basis, meaning the heir’s cost basis resets to the asset’s fair market value on the date of the individual’s death. Decades of unrealized gains go away for income tax purposes, and a later sale counts as long-term regardless of how long you held the property.

How Investors in Their Sixties Defuse the Bill

Years between retirement and RMDs at age 73 are usually your lowest-bracket years. Use them for partial Roth conversions.

This year, joint filers stay in the 22% bracket up to $211,400 and in the 24% bracket up to $403,550. Each converted dollar is taxed at your rate today so your heir never pays theirs.

Watch the tax cascade. Medicare sets IRMAA (income-related monthly adjustment amount) surcharges using income from two years earlier, so large conversions at 63 or later raise premiums at 65. After claiming Social Security, extra income can make up to 85% of benefits taxable. Do the most converting early in your sixties.

Waiting gets expensive. With the 10-year Treasury yield above 5%, even the bond portion of a 401(k) keeps growing the tax bill your heirs inherit.

When Converting Costs Your Family Money

Skip conversions if your heir is in a much lower bracket. The 2026 12% bracket tops out at $50,400 for someone filing individually. A child making that little pays less on inherited withdrawals than you would pay to convert at 24%.

Charities change the math entirely. A qualified charity pays no income tax, so traditional dollars reach it whole. Leaving the 401(k) to charity and the Roth and taxable accounts to family puts each asset where it carries the least tax.

Our Take: Pay the Tax While Your Rate Is Lower

For most wealthy families, the traditional 401(k) is the account to spend down or convert, and the Roth is the one to pass on.

1. Estimate your heirs’ brackets. Compare their expected income during the 10-year window with your own bracket in retirement. If theirs is higher, converting pays off.
2. Build a conversion schedule before RMDs. Fill the 22% or 24% bracket each year, front-loading conversions before Medicare lookback and Social Security claiming add to the cost.
3. Match beneficiaries to accounts. Name a charity on the traditional balance if you plan to give, and direct the Roth and taxable assets to your children.

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