A Retiree Who Dies at 80 With $600,000 in a 401(k) Leaves a Son Earning $150,000 Ten Years to Empty It, and About $60,000 a Year Lands in His 24% Bracket. Converting $40,000 a Year From 65 to 73 Would Have Moved Most of It Out at 12%

A parent who saves regularly in a 401(k) and spends carefully in retirement can still leave a tax bill that the next generation pays at twice the rate the parent would have paid. The cause is the 10-year rule for inherited retirement accounts, and the cost is highest when the heir is in his peak earning years. This article follows one household: a single retiree who dies at 80 with $600,000 in a traditional 401(k), and a son earning $150,000 a year who files as a single taxpayer and inherits the account.

How the 10-Year Rule Forces the Money Out

An adult child is a designated beneficiary who does not qualify as an eligible designated beneficiary. IRS Publication 590-B requires him to take the entire balance by December 31 of the year containing the 10th anniversary of the owner’s death. The parent in this example died at 80, well past the applicable age of 73 set by 26 U.S.C. § 401(a)(9)(C)(iii). The son therefore cannot leave the money untouched until year 10. Under Fidelity’s beneficiary guidance, he must take distributions every year.

Spread equally over 10 years, $600,000 produces $60,000 of taxable income per year. That figure excludes investment growth, which would increase each withdrawal, so it understates the cost.

Why Every Inherited Dollar Lands at 24%

Under the IRS’s 2025 schedule for single filers, the 24% bracket covers taxable income from $103,351 to $197,300. The son’s $150,000 salary minus the $15,750 standard deduction leaves $134,250 of taxable income, which is already well inside that band.

Adding the inherited distribution increases his taxable income to $194,250, just below the 24% ceiling. Every inherited dollar is therefore taxed at 24%, or $14,400 in federal tax each year before any state tax. If his pay rises during the decade, some withdrawals could move into the 32% bracket, which begins at $197,301.

What the Parent’s 12% Bracket Could Have Absorbed

For a single filer like the retiree, the 12% bracket covers taxable income from $11,926 to $48,475. After the standard deduction, a $40,000 Roth conversion creates $24,250 of taxable income. That leaves room in the 12% bracket for small pension or Social Security income, before the extra deduction available to filers 65 and older.

Under 26 U.S.C. § 408A(d)(3), a converted amount is included in gross income in the year of the conversion. At a 12% marginal rate, a $40,000 conversion costs no more than $4,800 in federal tax. Converting every year from 65 through 72, the eight years before required distributions begin, moves $320,000 out of the pre-tax account.

Comparing the Two Tax Bills

Taxed at the parent’s 12% rate, that $320,000 generates $38,400 in federal tax. If the son leaves it in the 401(k) and takes it at 24%, the same money generates $76,800. The family keeps the $38,400 difference.

The converted dollars also change character once they move into this tax-advantaged account. Under 26 U.S.C. § 408A(d)(2)(A)(ii), a payment made to a beneficiary on or after the death of the individual is a qualified distribution, excluded from income once the five-year period has passed. Conversions that start at 65 clear that period long before 80. The son still has to empty an inherited Roth within 10 years, but those withdrawals add nothing to his taxable income. He would also inherit a smaller pre-tax balance, so required withdrawals on top of his salary would be lower.

Where the Strategy Has Limits

The comparison simplifies several factors. Investment returns affect both paths, and a parent who depends on the 401(k) for living expenses may not have outside cash to pay conversion taxes. Conversion income can also make more of a retiree’s Social Security benefits taxable and trigger income-related Medicare surcharges. Those costs fall outside the bracket math. Married couples get a wider 12% bracket, $23,851 to $96,950, so a widowed parent filing single has less room than the same household did while both spouses were alive.

Using the Window Before Age 73

The case for converting depends on the gap between two tax rates. The family can choose which rate applies to its pre-tax savings only while the parent is alive and before required distributions begin to fill the low brackets (we sized up that quiet window between retiring and RMDs in a free Roth conversion guide). Three steps put the math to work:

• Project the heir’s bracket. Add one-tenth of the account balance to the heir’s expected taxable income and compare the total with the bracket ceilings.
• Target the available tax space instead of picking a fixed amount. Each year, convert enough to bring taxable income up to the top of the 12% bracket, which was $48,475 for single filers in 2025.
• Pay conversion tax from taxable savings. That way, the full converted amount keeps growing inside the Roth.

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