Roth vs. Traditional: The Better Inheritance?
Episode 48
Roth vs. Traditional: The Better Inheritance?
Published on Aug 19th, 2026
Episode Summary
Episode 48 of Retirement Tax Matters evaluates the financial trade-offs of inheriting a Roth IRA versus a Traditional pre-tax IRA for high-net-worth families in the $2M to $8M range. Garrett and Adam break down why adult children in their peak earning years face compressed 10-year distribution windows under the SECURE Act, which often makes proactive parent-level Roth conversions at lower rates the superior decision for the family balance sheet. The conversation flips the script to examine scenarios where leaving pre-tax balances intact makes sense, such as when parents occupy higher tax brackets today than their heirs. The discussion adds real-world layers, factoring in state income tax disparities when parents reside in zero-tax states like Tennessee or Florida while adult children live in high-tax states like California or New York. Garrett also shares a practical perspective on lifetime giving, encouraging retirees to focus on simplicity and family unity rather than getting caught in over-engineered death benefit calculations. By running an annual fall tax projection, retirees can evaluate their total balance sheet and determine some of the best ways to pass down wealth in a tax-thoughtful way.
Key Tax Planning Questions
Question 1: What is it like to inherit a Traditional IRA from a recently deceased parent?
In my practice as a financial planner I have walked through this process many times with adult children after a parent passes away. Parents spend a lot of time thinking through the exact percentage of assets they want to leave to each child, but they rarely consider what the actual administrative and tax experience will look like for their kids when they begin to engage with their parents’ custodian like Schwab or Fidelity.
The first step for a child is securing certified death certificates and notifying the custodian or advisor. Most heirs assume they can simply take over their parent's existing account number or merge the pre-tax funds directly into their own Traditional IRA. In reality, custodians require a completely separate account registration called an Inherited IRA. While the inherited IRA funds remain tax-deferred, an Inherited IRA carries a different set of IRS rules.
For many adult children, the SECURE Act classifies them as Designated Beneficiaries. This places them under a strict 10-year distribution window where the entire account balance must be emptied by December 31st of the tenth year following the parent's death. Furthermore, if the parent passed away on or after reaching their Required Beginning Date, the IRS requires the child to take annual Required Minimum Distributions during years one through nine before liquidating the remaining balance in year ten. Because adult children frequently inherit these accounts during their peak income-earning years, taking only the minimum required distribution each year can cause a significant tax spike if a massive remaining balance is forced out all at once at the end of the 10-year window. Especially so if market growth is good during those 10 years. Deferring as much as you can until the 10th year might not be a great strategy.
If you are a disabled child, a charity, or a trust (among other non-traditional child inheritors) you should due diligence to make sure you understand the distribution rules that apply to you. For example, a disabled child can still take advantage of the Stretch IRA method. If a trust is inheriting an IRA which can shorten the 10 year distribution period to 5 possibly.
Handling an Inherited IRA requires a proactive distribution plan. Spreading withdrawals thoughtfully, evaluating state income taxes if a child resides in a high-tax state like California or New York, and coordinating with a tax preparer allows families to manage these distributions efficiently without taking an unnecessary tax hit.
Also, don’t forget to handle the final year of death RMD that is owed by your parents. You will likely need to work with your other beneficiary siblings (if you aren’t an only child) and your tax preparer / financial planner to make sure you take care of it the correct way.
Question 2: What is it like to inherit a Roth IRA from a recently deceased parent?
From an administrative standpoint, inheriting a Roth IRA begins the exact same way as a Traditional IRA. You must notify the custodian or financial planner of your parent's passing, provide a certified death certificate, confirm your identity, and establish a newly registered Inherited Roth IRA account. Just like a pre-tax account, an Inherited Roth IRA cannot accept new contributions and must be titled specifically to reflect the deceased owner and the beneficiary.
Where the experience diverges for adult children is the administrative simplicity and tax treatment. When a child inherits a Traditional IRA, they enter a complex set of SECURE Act rules, forced 10-year distribution windows, potential annual Required Minimum Distributions, and ordinary income taxes that stack directly on top of their peak earning years. Inheriting a Roth IRA removes much of that friction because the original account owner already paid the income taxes.
Under current IRS regulations, an Inherited Roth IRA is subject to the 10-year distribution rule for adult children, but it carries no mandatory annual Required Minimum Distributions during years one through nine. This holds true even if your parent passed away after reaching their Required Beginning Date. As a beneficiary, you have complete flexibility over the withdrawal timeline. You can choose to distribute the entire account balance in year one without owing a dollar in federal or state income taxes, or you can allow the assets to compound tax-free for ten full years before taking a single tax-free distribution at the end of the tenth year.
For parents evaluating their legacy, leaving behind a Roth IRA offers 10 additional years of tax-free growth for their heirs without imposing a distribution headache. However, whether converting to a Roth IRA today is the better method depends on many aspects, perhaps most notably comparing your current tax bracket as a parent against your adult children's projected tax brackets during their peak earning years.
As I mentioned above, making sure you understand your beneficiary type, the types of funds being inherited, etc. are very important to follow. I recommend making sure you are adhering to the latest IRS guidance by double checking with a financial planner or tax preparer.
Question 3: When thinking about leaving money for my adult children who are in very different financial seasons and tax brackets, what is the best way to handle taxes so everything stays equal without over-engineering my estate plan?
In my conversations with retirees in the $2M to $8M asset range, this question comes up frequently. Many parents have seen their retirement accounts grow significantly larger than they anticipated due to long-term bull markets over the past decade. When they look at leaving that wealth behind, they realize their adult children do not fit into tidy, identical boxes. One child might be a physician in a high tax bracket living in California, while another might be a teacher in a lower tax bracket living in Tennessee.
I think High Net Worth Retirees between $2M-$8M often get caught over-engineering this issue, trying to figure out how to equalize the net after-tax inheritances at death. They may consider (for a short time at least) leaving the Roth IRA to the high-earning child and the pre-tax Traditional IRA to the lower-earning child, or adjusting percentage splits on beneficiary forms. In practice, that strategy is nearly impossible to execute cleanly. Investment balances fluctuate, tax laws change, and custodian forms operate strictly on percentages. Trying to fine-tune an after-tax equal distribution at death usually creates administrative headaches and can inadvertently lead to family disagreements.
Instead of trying to optimize a complex death benefit formula, a better approach for many families could be shifting the conversation toward lifetime giving. If you have more than you need for your own retirement, you do not have to wait until you pass away to help your children. You can pull funds out of your portfolio, pay the ordinary income tax at your current rate, and write equal cash checks directly to your kids today.
While gifting limits and issues may come into play (oftentimes they don’t impact you much at all — listen to this podcast episode for more details), lifetime giving solves the equality issue cleanly because every child receives the exact same dollar amount in cash. More importantly, it shifts the focus away from tax math and toward family values. You get to be present to watch your children use those funds to pay off a mortgage, invest in their own households, or take a family vacation, turning your wealth into a tool for joy and unity while you are here to experience it.
Full Episode Transcript
Adam: Good morning, and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional, and this morning we're talking inheritance. Right?
Garrett: That's a fun subject.
Adam: Yeah.
Garrett: Or actually a sad subject. I don't know. Both of them.
Adam: Depends. Are you at the receiving or the giving end? Obviously, both ways are probably sad, but hey, if any of you out there don't have anybody to inherit, give us a call. We'd love to be stand-in grandchildren or children, whatever you'd like. Today we are talking, and I think it's a topic we've touched on a lot. Maybe if you're a regular listener, you've heard us talk about Roth versus traditional, some of these different things, and inheritance, but we thought we'd do a more comprehensive discussion, talking through the nuance of it.
Garrett: Yeah.
Adam: Because sometimes we mention it in a drive-by, and just like everything with financial planning, there's a, "Well, what about this? Well, what about that?" At the end of this video, there will still be, "What about this, and what about that?" But hopefully less of it than in previous episodes where it's been a side tangent, not the main topic. I know at the end, if you stick around, you're going to share an epiphany you had when you were thinking through this, something that colors in the whole conversation.
Garrett: Yeah.
Adam: Not specifically the X's and O's. So maybe to kick us off, explain to us, 40 trillion, the deficit for the country, the One Big Beautiful Bill Act, making some of these tax brackets longer term. Tell me why this conversation about inheritance is so important for a lot of the people we're talking to in this $2 million to $8 million space. Why is this such an important conversation, and why is it not something you can just kick down the road and say, "I'll take care of that later in life"? Why is it a good conversation to have today?
Garrett: I think the national debt, when you hear 39, 40 trillion, it mystifies. It doesn't compute with the human brain what an additional trillion dollars means. But I was reading this morning that about every eight months or every 12 months, the national debt is naturally growing by another trillion dollars. That's a lot of money, and I think that's a problem. I think there will be consequences of that down the road. I'm not an economist. I am not somebody qualified to comment on that, but I do think there will have to be some type of outflowing from carrying 40 trillion dollars worth of debt down the road. Is that something we can fix? Is it something that the GDP can continue on down the road? I don't know. I know a lot of people talk about it, and I know neither Republican nor Democrat necessarily wants to tackle that one due to reelection concerns. I think they call that the third rail. But underneath that umbrella is the Medicare and Social Security programs which make up half of government spending. So how do we manage those programs in the future when they're such a critical lifeline for our economy? The backdrop of that, meaning that if the only way to take care of that is by potentially raising taxes or some creative way there, we see that on the backdrop of last summer, actually right around when we launched this podcast, the One Big Beautiful Bill Act, OBBBA, passed. Was it July 4th?
Adam: Yeah.
Garrett: Is that what it was? I'm getting all these tariffs and things mixed up. But OBBBA was passed on July 4th, 2025, and as the national debt is increasing, we're also locking in lower permanent tax brackets. I think two things can be true. The first one is, is the national debt a problem, and is that growing uncontrollably? I would say probably yes, as somebody that doesn't know a lot about it, but it seems like it. And then two, we have this locked-in window where taxes are lower, and that seems opposite of our problem. So if we're thinking ahead for people getting ready to go into retirement, 20 to 30-year timelines, do we take advantage of lower taxes expecting that maybe one day they might have to go up in order to better take care of our problem? Then really my third one is, and I think this has just been something over the past decade, I'm seeing anecdotally through our practice and through our firm, more people are putting more money into Roth IRAs because of that backdrop, and they're in their 50s and 60s when they're doing it, and they've got a long time to go. So these Roth balances are getting bigger and bigger and bigger, which ultimately just cyclically hurts the problem down the road where less tax revenue comes from IRAs because people are accelerating that income to make today's budgets look better. So that's a long intro to say this conversation of doing Roth conversions, and today we want to talk about if you're the person inheriting that money, would you rather inherit a Roth or an IRA based on your situation?
Adam: Exactly. So quick 10-second commercial for what we do. Hey, like, subscribe, follow. If you do that already, thank you. Check out the year-end tax planning checklist on our website in the description down below. If you haven't already done that, what are you doing with your life? Down in the comments, tell me below, what are you doing with your life? It's awesome. Great content. Back to what we were talking about. I think one of the common scenarios we see with a lot of people, especially the generation that has just retired or is in retirement or is retiring, hardworking, saves well, it is very rarely we're having to tell people, "Spend less, spend less." Almost 90% of our conversations are, "Spend more, spend more." Because of that, a lot of our clients, even though they have these large IRA balances, large brokerage accounts, we still see them in the top of the 12%, 22% bracket, maybe the 24% bracket. So help me wrap my mind around somebody that's in that maybe 22% bracket, and they have some kids that are doing great. They made it through med school, they're a doctor, they're a lawyer, they're doing great for themselves. They're in an even higher tax bracket, maybe the 24 or 32% bracket. They're in the peak of their earning years, 40s, 50s, 60s, when maybe that inheritance may come their way. Help me think through what we would be encouraging a client if they worked with us or encouraging our listeners to think through as they plan for passing on that wealth to the next generation.
Garrett: Sure. Adam sent me some of these questions this morning and I was looking through them and as he sent it to me, I was thinking, "Wait, when is the Roth better if the parents are at the higher tax rate and the kids are at the lower tax bracket, or is it reversed?" And I'm doing this stuff all the time, but I just had to recalibrate because I think initially I was like the opposite and then I started thinking through and it was different. But in this situation that you're describing, the parents have the lower tax bracket and the kids have a higher tax bracket. It kind of puts our niche on a swivel here, where we're usually talking about parents, our clients being somewhere between 2 million and 8 million dollars, which is high net worth and what we're talking about is a little bit higher than most of your peers. The crazy part is that even kids of that type of net worth could end up ultimately having a higher income tax bracket where maybe you have two kids and they're married and they are both working and they're in a higher tax bracket than you are, even though you've saved your whole life and have 6 million dollars in an IRA and maybe their net worth is smaller, but their tax bracket is higher because of their income. So I don't think it's far-fetched that a high net worth family could be worth more than their children, but their children be in a higher tax bracket. As we're thinking about that, we've mentioned this a lot, high net worth does not actually equate to high marginal tax rate because people can sometimes spend less than they are capable of. In this example Adam's talking about, parents are in a 22% tax bracket, kids, let's say they're doing great and in the 32% tax bracket. If parents are in their 60s, that means their kids are traditionally somewhere in their 30s. And if Mom and Dad, one of them lives into their 90s, that's going to put the kids somewhere 30 years younger in their 60s. Ed Slott and others in our industry would say the IRS is thinking way ahead. They got you right where they want you, that your kids are going to inherit your large IRA balances at the peak of their earning careers. If they're in the 32% already, or even if they're in the 24%, if they inherit a million dollar IRA or maybe even more than that from Mom and Dad, they're going to be hit in their peak income earning years and it goes up. So the idea here would be that if you know that money is going to be left over for your kids down the road, if they have a higher income tax bracket than you, doing a Roth conversion could make sense for you to pay the taxes now, even if it's just you and your spouse that are thinking through it. But the downstream effect is if there's money left over, your kids inheriting that money in their 60s could be better in a Roth.
Adam: And I think I don't ever like fear-based or urgent, "Watch this video before you do anything." But I do think this is one of those where there is a sense of urgency because if you decide converting to Roth is a good idea, every year you wait, you get constrained on your tax brackets and how much you're really going to be able to do with that. So if it is something you're interested in doing, I would encourage you to go look at this tomorrow. Go check out the year-end tax planning checklist, sit down with your tax preparer, your financial planner, sit down with your spreadsheet whatever you like to do, and start calculating some of these things because every year you wait, you're going to be constrained by your tax brackets on how much you can convert to Roth. And if it's a really attractive plan for you, starting sooner than later would be a good idea. With that being said, let's flip the script now. You mentioned that's one side of the coin. The other side of the coin would maybe be, we're older in retirement, we're spending quite a bit. We've got big Social Security, a pension, RMDs are kicking out. We got this big portfolio. We're up through the 24%, almost to the 32% bracket, maybe into the 32% bracket, and we've got a couple of kids and they're lower income. Not lower income like they're not making anything, but less than the 32% bracket. So maybe they're in the 12%, 22%, maybe the 24% bracket. Help us think through that relationship and how you might view Roth versus traditional and what might be the optimal inheritance there.
Garrett: So I think in the lab, in the theoretical classroom, and even when I started in this industry 13 years ago now, I feel like there was more discourse on just keeping things theoretical. But in this case, Mom and Dad are wealthier. Mom and Dad have a much higher income than the children. And so just to keep it super simple, why would somebody do a Roth conversion if they know that money is going to be left over for their kids, and their kids are in the 12% tax bracket, married filing jointly, or maybe they're not married, they're just an individual person? Why convert that money and pay a 32% marginal tax rate on that when it's going to end up at the kids at a lower rate? And I think there's a real argument for that. So I'm not saying don't do that, but the challenge of whether you receive a Roth or an IRA, and specifically for the traditional IRA pre-tax, is that money has got to come out within 10 years. So again, let's say there's 2 million dollars left over and two kids, and each kid gets a 1 million dollar traditional pre-tax IRA. This is what I was thinking about this morning too. We get in this habit of you know what your RMD is on 2 million dollars and you think that's going to split two ways to your kids. But in this post-SECURE Act rule with a 10-year consolidated window, that 2 million dollars that goes a million to each kid, if that's in a pre-tax IRA, that 1 million is going to grow, but you have to divide that by 10, so that's an extra 100,000 dollars a year. So if you have a child that's in the 12% tax bracket, maybe that's not a terrible thing to get 100,000 dollars per year. It probably puts them up into the 22% tax bracket. Maybe even touches the 24% tax bracket. But that's a lot of extra income, though it still works out better than you doing a Roth conversion at 32%. So I think the challenge with that one is you're assuming that tax brackets won't go up in the future. You're assuming that kids' income won't go up in the future, and it works both ways, but it can be a difficult thing to predict. But I think the idea is that you don't want to convert to Roth money that you're going to leave to kids that are in a lower tax bracket than you.
Adam: And I think one other thing to keep in mind that we see more and more, and I think we'll see it even more as time goes forward, is being mindful too of where your children live. If they're in a high state income tax state, it might be a good idea to reconsider the Roth conversions. Maybe they are in a lower tax bracket, but once you factor in the state income tax and you're in a no state income tax state, that might alter your decisions as well. Or maybe your kids live in a no state income tax state. And so that's just another nuanced thing to think about with families. It seems like every day I have a client come in and they're like, "We got four kids, one in Washington, one in Florida." I'm like, "You guys have covered the country. You guys get good vacations wherever you go visit." So I think that's a more common thing as travel is easier and cheaper to get to people. So be mindful of that as well. And so I think I'll throw it back to you to land the plane here for us with travel on our mind. Help me think through this epiphany moment for you. I know we've talked through Roth versus traditional, when it might be better, when it might be more favorable to go one way or the other. But give me your closing thoughts on maybe this whole topic, the psychology of giving and gifting to kids.
Garrett: So I'm sitting at Starbucks this morning. I've had this conversation many times with clients, and maybe it was the caffeine kicking in, maybe it was divine inspiration, I'm not sure. Or maybe 10 years in the future I'll say I believe something a little bit different. But I just had this moment this morning where I was thinking through giving our listeners some technical answers where somebody's in the 32% tax bracket and kids are this. And I just kept bumping my head, and I think I kept bumping my head because clients bump their head on this all the time, and we talk through it. One, we don't know how long we're going to live, which is a big question mark. But even more than that, oftentimes when there are children involved and there's going to be extra money left over, those kids don't fit in a nice tidy box where one kid is a physician and they're in the 35% tax bracket, and the other kid is also a physician, they're the same age, they're twins, so everything's the same. They do the exact same profession, and they're also in the 35% tax bracket. Both are doing wonderfully. There's no issues. And my wife and I, we're going to die on the same day. Life just doesn't work out like that. Oftentimes there are multiple children involved. They're living in multiple states, like you just mentioned. Their income levels are different. And when it comes to beneficiary designations, it's difficult because custodians will want you to put a percentage in there. You can get in this engineering game where you try to make sure at the end of your life both kids have the exact amount of money because I don't want my physician child to get 500,000 dollars and have to pay tax on all that money, and then my other child is a teacher. Love teachers, but a lower paying career. If I give them 500, they're going to get more, and so there's going to be conflict. So maybe I'll convert to Roth, and I'll give the Roth to the older child, but the younger child I'll give a larger amount. At the end of the day, you can play that game, but it's really hard to execute. Because it's really hard to execute, because we don't know how long we're going to live, and maybe one spouse that doesn't care as much is going to be the one ultimately making those decisions, and you don't want to revisit every year, people are basically like, "I'm just going to do half and half, or one-third, one-third, one-third." People enjoy the exercise of thinking through that, but I think it's practically impossible. The eureka moment is that when it comes to beneficiaries and funds being left over, a lot of people think that is a luxury, that you have more than you need. I think this idea of the after-tax net amount going to kids is a secondary issue to the primary issue, which most people would say is, "If I have kids and there are beneficiaries, I do not want tussles, I don't want disagreements. I want my kids to be on the same page." At the end of the day, if you really push forward, the child that makes more income is going to understand that part of the downflow effects of going to medical school and getting a higher paying job means paying more taxes. And because I have a higher income, it's actually kind of cool that my sibling is going to net out a little bit more money. Relationally that stuff works out, and kids understand when they get 50% or 33% each that Mom and Dad are trying to do the best that they can. But if I said epiphany part two, it is that you can go down this road of is it better to inherit a Roth or a traditional IRA? And I think the bigger question that we need to be having more often with parents and our clients is this idea of lifetime giving. We can sit around and engineer death benefit optimization. That actually sounds like no fun. I'm one that believes in being prudent and stewards of your finances, and if you have good relationships with your kids, money isn't a cure, but it is a tool that you can use to accomplish family values and goals. I would say if you have more than you need, maybe instead of waiting until the end of your life and trying to net equalize out this money for kids, it's a conversation about maybe you just pay the taxes at the 32% rate. You pull out 100,000 dollars of your multimillion-dollar IRA, you pay the taxes, and each kid gets a check for 50,000 dollars. There's another video we did on annual lifetime gift tax exclusions. Go look for that, and it's actually not that big a deal to do that. In that sense, one, you get to be a part of that process of giving money. You're alive, you get to see it. Second, you're actually controlling an equal amount to both kids, and maybe it's not tax optimization, but it keeps the family unified and you get to enjoy the experience of your giving. And then I will say on the backside of all this that if you inherit a Roth, and we've done a video on this, the experience of inheriting a Roth is just so much simpler. When somebody dies whose parents had a 200,000 dollar Roth IRA, it goes to two kids. They ultimately come in, open up an account, get that 100,000 dollars into their name, and I tell them, "This just has to be distributed within 10 years. You can take out all of it right now. You can take all of it out in 10 years. You don't have to pay taxes for the next 10 years." It's just super simple versus a traditional IRA, which is like, because Mom and Dad were taking an RMD, you have to take an RMD, but just take the minimum RMD, because if you wait until year 10, that's going to get huge. It just adds complexity to their life. So I think the Roth experience of inheriting that is simpler. I wrote this down, and I'm going to read it. It probably says it better than I can. Even if parents pay 32% today to convert, if the forced 10-year distributions would push children into a 32 or 35% marginal rate, especially when factoring in other taxes like state income tax and net investment income tax for kids, converting at the parent's current rate might be, at worst, tax neutral, and at best, a significant tax win for the family. Taxes are historically low. I think there's an argument to convert more to Roth. There could be a higher ceiling there rather than leaving it in the IRA. But everybody's situation is unique.
Adam: Last thought I have on this. We talk a lot about Roth conversions and maxing out the tax bracket you're in. Maybe lifetime giving is really important to you. You want to see your kids enjoy the money. You want to see them get their house paid off. You want to see them go on vacations. Maybe instead of doing Roth conversions, every year you cap out the 22% bracket. You've got 20,000 left in the 22% bracket. Every year, we're just going to cap out that 22% bracket and give it to the kids, or give it towards the grandkids.
Garrett: Yeah, you can do a Roth conversion, or you just top out that bracket with a withdrawal and then...
Adam: And just gift it instead of trying to get it into a Roth to then give it to them down the road. Either way, it's accomplishing similar goals. There are so many different ways to do this, to set it up, and that's probably why we'll never be famous. We don't say super polarizing things like, "You must do this now." But there is a lot of nuance. And I think that's the cool thing about financial planning is every person is like a Rubik's cube, with a different algorithm to solve and a different way to get it to a place where they're like, "Hey, this is great. I enjoy my financial plan. It gives me peace of mind. It helps me accomplish my goals." But that's why we love it. It's problem-solving, it's people, and it's a whole lot of fun. So we appreciate you guys joining in with us. Again, one last time, you've already clicked off because you know I'm about to say, like, subscribe, follow. Check out the link down below, the year-end tax planning checklist. Incredible value. It's free. I think it's the best free thing you can get. There is no such thing as a free lunch, but there is such a thing as a free year-end tax planning checklist. So go check that out down below. We appreciate you guys following along. I'm Adam Reed. This is Garrett Crawford, CFP® professional. We're Retirement Tax Matters.
Garrett: See you next time.