What Your Adult Kids Need to Know About Inheriting Your IRA

You love your children, have never played favorites, and want to leave them equal parts of your estate after you're gone. It’s one of the most common wishes I hear… and one that could easily go wrong. 

Here’s an example: you have two children and roughly $1 million to leave them (a $500,000 traditional IRA and a $500,000 taxable brokerage account). You name one child on the IRA and the other on the brokerage account. One form, one child, one account. Looks good on paper, but…

It won’t finish that way.

The child who inherits the IRA has 10 years to withdraw the entire account. If they take it evenly, it adds about $50,000 a year to an income, and at a combined federal and Ohio rate near 35%, roughly $175,000 goes to taxes over the decade. That child keeps about $325,000.

The child who inherits the brokerage account receives a step-up in basis at your death. A step-up in basis means that when your heirs inherit an investment, its cost basis resets to what it's worth on the day you pass, so all the growth that happened while you owned it is never taxed as a capital gain. If the child sells soon after, there may be little or no capital gain to report. That child keeps close to the full $500,000.

Same $500,000 but a gap of roughly $175,000 by the end. And the sibling on the short end never saw it coming, and neither do most parents.

This example is for illustration purposes only. Actual tax consequences will vary based on factors such as account values, investment performance, tax laws, the beneficiary's income, state of residence, and withdrawal decisions. Before making beneficiary designations or estate planning decisions, consult with qualified tax, legal, and financial professionals regarding your specific situation.

While the example above is simplified, the underlying issue is very real. The actual tax impact will depend on many factors, including future tax rates, investment returns, and each beneficiary's personal tax situation. Consider working with your financial, tax, and legal advisors to ensure your estate plan reflects both your wishes and the potential tax consequences for your heirs.

Not Every Heir Is Treated the Same

Your spouse has the most flexibility. A surviving spouse can generally roll the account into their own IRA or remain a beneficiary, depending on their age and income needs.

A narrow group of eligible designated beneficiaries can still stretch distributions: your minor child (until age 21), a beneficiary who is disabled or chronically ill, and anyone not more than 10 years younger than you.

For everyone else, like adult children, the 10-year clock is running.

The Timing Problem

Ten years sounds like a long time. The difficulty is when those years arrive.

Adult children typically inherit in their 40s or 50s, during their highest-earning years. Every dollar withdrawn from an inherited traditional IRA is treated as ordinary income, added to a salary that may be substantial. Spread evenly, even a moderate IRA can add tens of thousands of dollars of income a year, enough to push them into a higher bracket and keep them there for a decade.

Planned over 10 years, it’s manageable; withdrawing the IRA in one lump because nobody explained the rules will cause a tax bill that nobody wants. 

Four Mistakes to Prevent

1. Moving the money into their own IRA. A non-spouse beneficiary can’t do this. The account must move by trustee-to-trustee transfer into a properly titled inherited IRA. Getting it wrong can make the entire balance taxable at once.

2. Cashing out in year one. Understandable if you need the funds, but often the most expensive choice available.

3. Missing an annual RMD. Easy to overlook, and penalized.

4. Assuming a Roth has no rules. An inherited Roth IRA is also subject to the 10-year deadline, though distributions are generally tax-free and no annual withdrawals are required along the way.

What You Can Do Now

Start with your beneficiary designations, because they override your will. Confirm that primary and contingent beneficiaries are named, spelled correctly, and still reflect your intentions after any marriage, divorce, or birth in the family.

Then have the conversation. An heir who understands the 10-year window has options. One who learns about it from a custodian's letter usually doesn't.

At Spain & Smith, we help families turn hard conversations into clear plans. Driven by our Golden Rule+ philosophy, we look beyond the numbers to navigate your financial future with honesty, empathy, and clear communication. By pairing a comprehensive, data-driven approach with a client-centric partnership, we focus entirely on the goals and values that matter most to your family.

Schedule a no-obligation conversation by calling 216-539-0079, emailing info@spainsmith.com, or getting in touch online, and let's shape a legacy your family will respect for generations to come.

Frequently Asked Questions

Should I leave my IRA to my children or to a trust?

It depends on what you're trying to protect. Most trusts are still subject to the 10-year rule, and some are taxed less favorably than an individual beneficiary would be. If a trust makes sense for other reasons, the language matters enormously. The Spain & Smith team in Pepper Pike, OH, can review your beneficiary structure alongside your attorney.

Is it better to leave my children a Roth IRA instead?

Often, yes, from their perspective. Inherited Roth distributions are generally tax-free, and the ten-year window can be used for continued growth. The question is what a conversion costs you today. Spain & Smith, serving the Greater Cleveland, OH, area, can model both sides before you decide.

My kids don't want to talk about this. Where do I start?

Start with logistics rather than dollars: where the accounts are, who the beneficiaries are, and who to call. That conversation is easier, and it opens the door to the rest. It's one we help families in Pepper Pike, OH, have every week.

About Dayna

Dayna Smith is a financial advisor and Investment Advisor Representative with Stratos Wealth Advisors at Spain & Smith Wealth Advisors in Pepper Pike, Ohio. She specializes in empowering individuals, families, and pre-retirees by crafting personalized, collaborative financial solutions aligned with their unique values and dreams. Based in the Cleveland area, Dayna holds a degree from Bowling Green State University and enjoys staying active, traveling, and spending time with her husband, Darrin, and their two young sons.

Investment advice offered through Stratos Wealth Advisors, LLC, a Registered Investment Advisor.Stratos Wealth Advisors, LLC, and Spain & Smith Wealth Advisors are separate entities.

The information in this material is not intended as tax or legal advice. Neither Stratos nor Spain & Smith Wealth Advisors provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation.