Bequest Planning with Roth IRAs: Leaving Tax-Free Wealth to Heirs

When most people think about leaving money to their children or grandchildren, they think about estate plans, wills, and beneficiary designations. These matter. But for most households whose estates fall below the federal estate tax exemption ($15 million per person under 2026 law), the more consequential question is not how much passes to heirs, but which assets pass and in what form.

A dollar in a Roth IRA is worth more to a beneficiary than a dollar in a Traditional IRA, in most cases significantly more. The difference is not a technicality. It is a function of how the tax code treats each account after death.

The rules for inherited IRAs changed fundamentally with the SECURE Act of 2019. Prior to that legislation, non spouse beneficiaries could take distributions over their own life expectancy, a strategy that stretched the tax deferred or tax free growth over decades. Under current law, most non spouse beneficiaries must empty the account within ten years of the original owner's death.

The ten year rule applies differently depending on the account type. For an inherited Traditional IRA, the beneficiary must deplete the account within ten years and will owe ordinary income tax on every withdrawal. If the beneficiary is in their peak earning years, which is often the case when inheriting from a parent in their seventies or eighties, those withdrawals are taxed at their marginal rate, which may be 22%, 24%, or higher.

For an inherited Roth IRA, the ten year depletion rule also applies, but the withdrawals are tax free, provided the original owner satisfied the five year rule. The beneficiary can take all or nothing in any year, let the balance compound tax free, and withdraw on a schedule that suits them.

The difference in after tax value can be substantial. A $500,000 inherited Traditional IRA, drawn down over ten years at a 24% marginal rate, nets the beneficiary approximately $380,000. The same $500,000 in an inherited Roth nets $500,000, and potentially more if it continues to grow tax free while the beneficiary delays distributions.

For a beneficiary to receive Roth distributions tax free, the original owner must have had the Roth IRA open for at least five years before death. This is true even if the account was funded through a conversion.

The implication for conversion planning is direct: for the purposes of this inherited account rule, each individual has a single five year clock across all their Roth IRAs, starting from their first contribution or conversion to any Roth IRA. A Roth IRA opened in 2025 satisfies this rule in 2030. If the account owner dies in 2028, the beneficiary may owe tax on the growth portion of any distributions until 2030. (Note: a separate five year clock applies per conversion for the account owner's own penalty free access to converted amounts before age 59½. That is a different rule, relevant primarily for younger retirees.)

For anyone who has not yet opened a Roth account, even a small one, opening it sooner starts the clock. This is one of the few planning actions where the cost is minimal and the benefit is durable.

The conventional framing of Roth conversions focuses on the account owner's own tax situation: converting at lower rates now to avoid higher rates later, reducing future RMDs, or smoothing taxable income across retirement. All of these are valid.

But conversions also serve heirs. When you convert a Traditional IRA to Roth, you pay the tax now. When your heir inherits the account, they inherit the after tax value with no additional income tax owed. You have, in effect, prepaid their tax bill at your rate rather than theirs, which may be lower or higher depending on circumstances.

For parents with moderate income in retirement and children in high earning years, the comparison is often favorable. A parent paying 22% now to convert may be saving their child from paying 24% or 32% on the same money distributed over ten years during their peak career.

The window before Social Security is often the best time to do this, when income is temporarily low and tax brackets are underused.

Both Roth IRAs and taxable brokerage accounts can be efficient assets to leave to heirs, but for different reasons, and the comparison is worth understanding before deciding which accounts to draw from during your lifetime.

A taxable brokerage account benefits from the step up in basis at death. When a beneficiary inherits a taxable account, the cost basis resets to the market value on the date of death. Decades of embedded capital gains, potentially a substantial amount in a well managed account, disappear for tax purposes. An heir who sells inherited stock immediately owes no capital gains tax on appreciation that accumulated during the original owner's lifetime.

A Roth IRA works differently. There are no embedded gains to step up, because the account is already after tax. What heirs receive instead is tax free withdrawals during the ten year depletion window, with flexibility to let the balance compound and withdraw on a schedule that suits them.

Traditional IRAs, by contrast, are the least efficient assets to leave to heirs. Every dollar withdrawn is taxed as ordinary income, often at the beneficiary's peak earning year rate.

The planning direction that follows from this: if you hold both a taxable account with significant unrealized gains and a Traditional IRA, the bequest efficient approach is generally to draw from the Traditional IRA for living expenses, or convert it to Roth, while holding the appreciated taxable positions so they pass to heirs with the step up intact. Selling low basis taxable assets during your lifetime to fund retirement generates a capital gains bill that the step up would have eliminated entirely.

This doesn't describe every situation. But the direction is consistent enough that it's worth modeling.

A surviving spouse has options that other beneficiaries don't. A spouse who inherits an IRA can roll it into their own IRA, treat it as their own, defer RMDs according to their own age, and generally avoid the ten year rule that applies to non spouse beneficiaries.

This means that for couples, the inherited IRA problem is usually about what happens at the second death, not the first. The surviving spouse steps into the deceased spouse's accounts seamlessly. When the surviving spouse later dies and the accounts pass to children, the ten year rule applies.

The account structure at the second death is what matters for heirs. Planning Roth conversions during the surviving spouse's lifetime, particularly in the window before RMDs, before Social Security, or in years when taxable income is relatively low, affects what the children ultimately inherit and in what tax wrapper.

Bequest planning around retirement accounts doesn't require an elaborate estate plan. The relevant decisions are simpler:

Does the beneficiary designation on each account match your intent? Beneficiary designations override wills. An account can pass to an unintended heir if the designation wasn't updated after a life event.

If you are younger or planning for early retirement, have you opened a Roth IRA to start the five year clock? For those who may want penalty free access to converted principal before 59½, opening an account early, even with a small balance, preserves that flexibility.

Is there a conversion opportunity in your current tax bracket that would benefit your heirs more than it costs you? The after tax comparison isn't always favorable, but it's always worth running.