A Retiree in the 12% Bracket Who Dies With $350,000 in a 401(k) and Leaves It to a Son in the 32% Bracket Hands the Family Nearly Three Times the Tax Bill Converting It Over Ten Years Would Have Cost

A traditional 401(k) comes with a tax bill that’s only been put off, and who pays it can matter as much as the account’s size. This article walks through a common family case: a retired couple in the 12% federal bracket who holds $350,000 in a 401(k). Their son is in his peak earning years, sits in the 32% bracket, and stands to inherit the account. Under current rules, the same dollars can be taxed at nearly three times the rate depending on which generation takes them.

How a $350,000 Balance Compares With Typical Retirees

To start, a $350,000 balance is above average for older savers. Fidelity’s data puts the average 401(k) balance at $251,400 for savers aged 65 to 69 and $250,000 for those 70 and older. Large accounts pull those averages up, so the typical retired person likely keeps less. Still, this range is common among long-tenured workers who saved steadily.

Almost all of that money is usually pre-tax, as only 12.2% of Baby Boomers in Fidelity’s plans use a Roth 401(k). That means nearly every dollar in these accounts still carries income tax to someone, either the saver or the heir.

Why the Son Owes More Under the 10-Year Rule

Most adult children who inherit a retirement account can no longer stretch withdrawals over their own life. Under 26 U.S.C. § 401(a)(9)(H)(i), the old five-year payout rule now reads “10 years”, and it applies whether or not the parent had already started distributions. IRS Publication 590-B says a beneficiary who is not an eligible designated beneficiary must fully distribute the IRA by the 10th anniversary of the owner’s death.

A high-earning adult son falls under that 10-year deadline, with each tax dollar added on top of his salary. In 2025, the 32% bracket for a single filer covered taxable income from $197,301 to $250,525.

If he has $205,000 of taxable income and takes $35,000 a year, he reaches $240,000, so every withdrawn dollar is taxed at 32%. This amounts to $11,200 in federal tax a year, or $112,000 over the full decade. Leaving the money in the account until the last year would push much of the balance into the 35% and 37% brackets. Even steady withdrawals are the son’s best case.

What Ten Years of Conversions Would Have Cost

The parents had a cheaper option. A Roth conversion counts as income in the year it happens because the converted amount is included in gross income. The 10% early withdrawal penalty in section 72(t) shall not apply. In 2025, the 12% bracket for joint filers covered taxable income from $23,851 to $96,950.

A couple with $50,000 of taxable income could convert $35,000 a year and end up at $85,000, which is still inside the 12% band. Each year’s conversion costs $4,200 in federal tax, or $42,000 over ten years.

The son’s bill is about 2.7 times the parents’ bill, a $70,000 difference. An inherited Roth still follows the 10-year rule, since the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs after the owner dies. But qualified Roth distributions aren’t includible in gross income, so his withdrawals wouldn’t raise his taxable income.

Where the Math Gets More Complicated

These figures assume the account doesn’t grow, which makes the gap look smaller than it would be. The 10-year Treasury yield was 5.1% on October 15, 2026, a rough guide to what even conservative assets can earn. Growth inside a converted Roth comes out tax-free. Growth inside an inherited traditional 401(k) is taxed at the son’s rate.

Some factors work against converting. Conversion income can raise Medicare premiums through income-based surcharges and make more of a retiree’s Social Security benefits taxable. Paying the conversion tax from the account itself leaves less money to grow. State income taxes, the timing of the parents’ deaths, and changes in the son’s career all change the result. The conversion depends on the bracket gap between the generations holding.

Steps Families Can Take Before the Bill Comes Due

• Compare both brackets. Measure how much room the retired person has left in the 12% band against the bracket the heir expects in his peak earning years. The wider the gap, the stronger the case for converting.
• Convert up to the bracket’s ceiling each year. For 2025 joint filers, the 12% bracket ended at $96,950 of taxable income, so every converted dollar below that line is taxed at 12%.
• Pay the tax from other savings. Covering the annual tax bill from a taxable account keeps the entire conversion growing tax-free inside the Roth.

Converting suits some families better than others. A 401(k) left alone gets taxed at the rate of whoever takes the money. When the heir earns far more than the parent, the family pays a higher rate on the same dollars. Ten years of modest, planned conversions at 12% can replace a forced ten-year withdrawal window at 32%. Those still years between the last salary and the first required withdrawal are often the lowest-rate window a saver will ever see again, which is the whole subject of our free Roth Window guide.

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