Using IRAs to Pass on Wealth Efficiently

3 November 2026

Most people treat their IRA like a retirement tool. That is fine while you are alive. But the second you die, that same account turns into a tax trap for whoever inherits it, and the rules got a lot less forgiving after the SECURE Act of 2019 and the follow-up regulations that came later. If you have built real money inside an IRA and you care what happens to it after you are gone, you need to think about this now, not in your final years. The difference between a well-planned IRA inheritance and a sloppy one can easily run into six figures of avoidable tax. Let's talk about how to keep that money where it belongs.

Why IRAs Are a Different Animal in Estate Planning

A brokerage account gets a step-up in basis at death. Your heirs inherit the assets, the cost basis resets to the date-of-death value, and the embedded capital gains tax simply vanishes. An IRA does not work that way. Every dollar inside a traditional IRA is pre-tax money, and someone, somewhere, eventually owes ordinary income tax on it. The account itself is not the gift. The tax bill is.

That single fact should reframe how you think about IRA wealth. You are not passing on a pile of cash. You are passing on a future tax liability wrapped in a government-sponsored wrapper. Your job as a planner is to decide who pays that liability, when they pay it, and how much of it you can legally shrink before the bill comes due.

Roth IRAs are the opposite story. You already paid the tax, so the inheritance is clean. That asymmetry creates planning opportunities that most people ignore until it is too late.

The Ten-Year Rule Changed Everything

Before the SECURE Act, a non-spouse beneficiary could stretch required minimum distributions over their own lifetime. A 30-year-old inheriting a million-dollar IRA might have taken withdrawals across 50 years, letting the rest compound tax-deferred. That stretch strategy is mostly dead.

Now, most non-spouse beneficiaries must empty the inherited IRA within 10 years of the original owner's death. The account can keep growing tax-deferred during that window, but the final withdrawal must happen by December 31 of the tenth year. There is no annual requirement to take a little each year, which sounds generous until you realize the beneficiary can wait nine years, let the balance balloon, and then face a massive taxable distribution in year ten that pushes them into a higher bracket.

A few categories still qualify for the old stretch treatment. Surviving spouses, minor children of the deceased (until they reach the age of majority), disabled or chronically ill beneficiaries, and beneficiaries no more than 10 years younger than the deceased can still spread distributions. Everyone else is on the clock. If you are leaving money to adult children, grandchildren, or a trust, assume the 10-year rule applies.

The Spousal Rollover Is Usually the Best Move

A surviving spouse has options nobody else gets. They can roll the inherited IRA into their own IRA, which means they can delay required minimum distributions until their own RMD age, name new beneficiaries, and keep the account intact for decades. They can also treat it as an inherited IRA and take distributions based on their own life expectancy. For most couples, the rollover wins.

The catch is timing and paperwork. If the surviving spouse is under 59 and a half and needs money, taking it from an inherited IRA avoids the 10 percent early withdrawal penalty, while taking it from a rolled-over IRA does not. That detail matters for younger widows and widowers. Talk to a tax professional before signing anything, because once you roll it over, you cannot undo it.

Roth Conversions: Pay the Tax Now, Save Your Heirs Later

Here is the boldest move available to IRA owners with time on their side. Convert traditional IRA dollars to a Roth IRA while you are alive, pay the income tax yourself out of taxable savings, and leave your heirs an account that grows tax-free and comes out tax-free. Your beneficiaries still face the 10-year rule, but every dollar they pull is tax-free. That is a completely different inheritance.

The math works because you are trading a future tax bill at your heirs' rates for a current tax bill at your rate. If you are in a lower bracket now than your high-earning adult children will be in when they inherit, the conversion is a gift that keeps giving. If you are in a high bracket and your heirs are in low ones, the conversion may not pay off.

Consider a concrete case. A 68-year-old widow with a 1.2 million dollar traditional IRA converts 100,000 dollars per year for five years, paying roughly 24 percent federal tax from a taxable brokerage account. Her two children, both in their peak earning years at 32 percent marginal rates, inherit a Roth worth well over 1.5 million dollars after growth. They pull it out over 10 years with zero tax. Had she left the traditional IRA, they would have owed hundreds of thousands in income tax and possibly triggered higher Medicare premiums along the way.

That is not a magic trick. It is arithmetic. But it requires you to have cash outside the IRA to pay the tax, and it requires you to survive long enough for the conversion to make sense. If you die shortly after converting, the strategy still helps your heirs, but the benefit shrinks.

Name the Right Beneficiaries, and Keep It Current

Beneficiary designations override your will. That sentence deserves its own paragraph because people ignore it constantly. You can spend thousands on a beautifully drafted estate plan, and it will mean nothing if your IRA still lists your ex-spouse from 2009.

Review designations every time your life changes. Marriage, divorce, the birth of a grandchild, a falling out with a sibling, the death of a parent. All of these should trigger a beneficiary review. Name primary beneficiaries and contingent beneficiaries. If your primary beneficiary has already died and you never updated the form, the account goes to your estate, which means probate, which means delays and potentially a worse tax outcome.

For married couples, naming the spouse as primary is standard, but think carefully about the contingent tier. If both of you die in a common accident, who gets the money? An adult child outright? A trust? A charity? Each choice has different tax and control implications.

Trusts as Beneficiaries: Powerful but Easy to Botch

Naming a trust as your IRA beneficiary gives you control over how the money is used after your death. You can protect a spendthrift child, provide for a minor grandchild, or keep assets out of a beneficiary's divorce. But the rules are unforgiving, and a poorly drafted trust can accidentally destroy the 10-year stretch or trigger a five-year payout.

The critical distinction is between a see-through trust and a non-see-through trust. A see-through trust lets the IRA custodian look through the trust to the underlying beneficiaries, which preserves favorable payout treatment. To qualify, the trust must be valid, the beneficiaries must be identifiable from the trust document, and the trust must be irrevocable at death, among other requirements. Miss one and the IRA may have to be distributed under the five-year rule or even faster.

There is also the conduit versus accumulation trust question. A conduit trust requires all distributions from the IRA to pass through to the beneficiary, which preserves the stretch but gives up control. An accumulation trust lets the trustee retain distributions inside the trust, which protects assets but can create compressed trust tax rates that hit the top bracket fast.

This is not a do-it-yourself project. A trust that names an IRA as an asset needs to be drafted by an attorney who understands retirement account rules, not just general estate law. Ask specifically whether the trust is designed to qualify as a see-through trust and whether it is a conduit or accumulation trust. If your attorney hesitates, find another one.

Charitable Strategies That Do Double Duty

If you have charitable intent, your IRA is the best asset to give. A traditional IRA left to a qualified charity passes tax-free, and the charity pays no income tax on the distribution. Your heirs get nothing from that slice, but they also inherit no tax liability, and your estate may get a charitable deduction.

A more sophisticated version is the charitable remainder trust. You name a CRT as your IRA beneficiary. The trust receives the IRA assets, pays income to your chosen beneficiaries for a set term or their lifetimes, and then distributes the remainder to charity. The tax treatment is complex and the setup costs are real, but for large IRAs and charitably inclined families, it can stretch income over time and reduce the overall tax bite.

Qualified charitable distributions are a different tool, available while you are alive. Once you hit 70 and a half, you can send up to 105,000 dollars per year (the figure is indexed and has risen in recent years) directly from your IRA to a qualifying charity. That distribution counts toward your required minimum distribution but never hits your taxable income. If you are charitably inclined and facing RMDs you do not need, this is one of the cleanest moves in the tax code.

Required Minimum Distributions and the Inheritance Timeline

RMDs start at age 73 for most people under current law, and the age rises to 75 for those born in 1960 or later. If you do not take your RMD, the penalty is steep, though recent legislation reduced it to 25 percent of the shortfall, or 10 percent if corrected promptly. The point is not the penalty. The point is that RMDs reduce the IRA balance over time, which reduces what your heirs inherit and the tax they owe. In some cases, taking larger distributions than required, especially in low-income years, can be a deliberate strategy to shrink the account before it passes.

For inherited IRAs under the 10-year rule, the IRS has clarified that annual RMDs may be required during the 10-year window if the original owner had already started taking them. That detail trips up a lot of beneficiaries who assume they can wait until year ten. If the deceased owner was already in their RMD years, the beneficiary generally must take annual distributions and empty the account by year ten. Miss the annual withdrawals and you owe penalties on top of the eventual tax bill.

Common Mistakes That Cost Real Money

The first mistake is doing nothing. An outdated beneficiary form, an IRA left to the estate, a trust that does not qualify as see-through. These are not exotic failures. They happen constantly.

The second is assuming the 10-year rule means ten years of tax-free growth with a single withdrawal at the end. Beneficiaries who wait until year ten often face a distribution so large it pushes them into the top bracket and triggers surtaxes. A smarter approach is to spread withdrawals across the decade, ideally in years when the beneficiary's income is lower.

The third is ignoring state income tax. A beneficiary in a high-tax state inheriting a large IRA faces a double hit. Some planning strategies, like moving the IRA owner's domicile before death, are legitimate, but they require genuine residence changes, not just a mailing address. States audit this.

The fourth is naming a minor child as a direct beneficiary. The court will appoint a guardian to manage the money, the 10-year clock may start ticking immediately depending on the rules, and the child gets full control at 18 or 21. A trust is almost always better.

The fifth is forgetting about the inherited IRA's own RMD rules. Beneficiaries who inherit a traditional IRA cannot roll it into their own IRA. They cannot convert it to a Roth. They must take distributions under the rules that apply to inherited accounts, and those rules are different from the ones governing their own retirement accounts.

Building a Coherent Plan

The best IRA inheritance plan is not a single move. It is a stack of decisions that fit together. Start with beneficiary designations, because they are the foundation and they are free to fix. Then look at Roth conversions, especially in the years between retirement and the start of Social Security or RMDs, when your taxable income may be unusually low. Consider whether a trust makes sense for any beneficiary who cannot manage money or who faces creditor or divorce risk. If you are charitably inclined, route your IRA to charity and your taxable assets to heirs, since the taxable assets get a step-up in basis and the IRA does not.

Review the whole structure every few years. Tax law changes. Beneficiaries change. Your own health and income change. A plan built in 2020 may not fit in 2026.

The blunt truth is that most people spend more time choosing a fund inside their IRA than deciding who inherits it and how. That is backwards. The fund choice might move your return by a fraction of a percent. The inheritance structure can move your family's after-tax outcome by 20 percent or more. Treat the IRA as an estate planning instrument, not just a retirement account, and the payoff goes to the people you love instead of the tax authorities.