From 24/7 Wall St. · Vilma Rios · · 1m 50s
Who Pays the Tax on a $1 Million IRA?
Leaving a $1 million IRA to kids in peak earning years taxes them at 35% while converting in your 60s keeps 22% tax rate.
In brief
Leaving a $1 million IRA to kids in peak earning years taxes them at 35% while converting in your 60s keeps 22% tax rate. Parents leaving a $1 million traditional IRA to kids in peak earning years face $350,000 in federal taxes over 10 years versus $220,000 if converted to Roth in their 60s. Originally reported by…
Tax Code Decides Who Keeps IRA Money
Most parents assume leaving a traditional IRA to their kids is generous but the tax code decides who actually keeps the money.
Inherited IRA Tax Bill for High Earners
Adult children who inherit a $1 million IRA must empty it within a decade and pay $350,000 in federal tax over 10 years.
Roth Conversion Tax Rate Advantage
Parents converting $1 million to Roth in their 60s pay $220,000 in federal tax over nine years at a 22% tax rate.
Why the Tax Difference Matters
The tax bracket that pays makes all the difference: kids in peak earning years pay 35% versus parents at 22%.
10-Year Rule for Inherited IRAs
Children who inherit a traditional IRA must empty it within 10 years, with every dollar stacked on top of their paychecks.
Tax Calculation for Inherited IRA
Each child inherits $500,000 and files jointly with taxable income of $600,000, paying $17,500 in federal tax annually.
Tax Calculation for Roth Conversion
Parents with $133,000 income convert $110,600 annually at a 22% tax rate, paying $24,332 per year for nine years.
When Traditional IRA Still Wins
Leaving the traditional IRA still makes sense for parents whose heirs earn modest incomes or for money going to charity.
The Tax Advantage Consequence
Parents who convert to Roth in their 60s keep $130,000 more in the family after 10 years of tax payments.
In short
Parents leaving a $1 million traditional IRA to kids in peak earning years face $350,000 in federal taxes over 10 years versus $220,000 if converted to Roth in their 60s.
