You spent 40 years building your IRA. You deferred, you contributed, you watched it grow. The plan was always the same: one day, what’s left goes to the family.
Here’s the honest question most retirees never ask: how much of it actually gets there?
For most people in your situation, the answer is a lot less than they expect. Not because the market misbehaved or the investments failed — but because of how the tax rules work on the other end. The money you were so proud of accumulating can quietly get carved up three different ways before it ever reaches your kids.
Let me walk you through it in plain English. No jargon. No sales pitch. Just what’s actually happening, so you can decide what to do about it.
The short answer
Most retirees are surprised to learn that a traditional IRA or 401(k) is often the single most tax-inefficient asset in their entire estate. It gets hit by income tax, potentially by estate tax, and unlike a brokerage account it gets no step-up in basis when you pass away. For families with larger estates, the same dollars can be taxed twice, and the combined bite can exceed 60% [1].
The good news: there is a strategy designed to address all three problems at once. It’s called PATH Passing Assets Tax-free to Heirs and it’s built to turn that tax-eroded IRA into a tax-free legacy for the people you love.
But first, let’s understand why the problem exists.
The three hits your IRA takes on the way to your heirs
1. Income tax the bill was deferred, not forgiven
Your IRA was tax-deferred, not tax-free. You never actually eliminated the tax you just pushed it forward. And it gets pushed to the worst possible moment: onto your heirs, who inherit it right in their peak earning years, when they’re in their highest tax brackets.
That’s hard enough. But Congress made it harder.
2. The SECURE Act killed the “stretch IRA”
Before 2020, your kids could inherit your IRA and take distributions slowly over their own lifetimes a strategy called the “stretch IRA.” It spread the tax bill out and kept each year’s hit manageable.
That’s gone. The SECURE Act of 2019 replaced the lifetime stretch with a hard 10-year rule: most non-spouse beneficiaries must drain the entire inherited IRA by December 31 of the 10th year after your death [2][3]. If you passed away on or after your required beginning date for distributions, your heirs may also owe annual required minimum distributions in each of years 1 through 9 with the full account emptied by year 10 [3].
So instead of spreading the tax over a lifetime, your kids are now forced to pull out a large balance over a short window right when they’re earning the most. The result is bracket compression: large distributions piled on top of their existing income, taxed at their highest marginal rates. On a $500,000 inherited balance, a middle-income heir can forfeit roughly 8.6% of the balance to bracket compression alone, and on a $1,000,000 balance, about 10.5% [4].
And starting in 2025, the IRS is no longer waiving the penalty for missed RMDs during this window a missed distribution can trigger a 25% excise tax [5].
3. No step-up in basis and possible estate tax on top
Here’s something most people get wrong: they assume their IRA gets a “step-up” at death, the way a brokerage account does. It does not.
Traditional IRAs, 401(k)s, and other tax-deferred accounts are classified as “income in respect of a decedent” (IRD) under the tax code. The step-up rules explicitly exclude them [6][7]. Your heirs inherit the full deferred-tax liability the entire balance is still taxable as ordinary income when distributed.
And if your estate is large enough to owe federal estate tax, the same IRA dollars can be taxed twice: once at the 40% estate tax rate, and again at ordinary income tax rates up to 37% (plus state tax) when your heirs take distributions [1][8]. The combined effective rate on those dollars can exceed 60% [1].
There is a partial relief — the Section 691(c) IRD deduction — but it’s frequently missed by heirs and their preparers, and for estates below the exemption threshold, there’s no estate tax to deduct against in the first place [1].
So who’s the real beneficiary of your IRA?
Add it up: income tax at your heirs’ highest brackets, a forced 10-year drain that compresses those brackets further, no step-up in basis, and for larger estates a second 40% hit from estate tax on the same dollars.
Without a plan, the government ends up as one of the largest “beneficiaries” of a lifetime of your work. You can be wealthy on paper while a huge chunk of that IRA is effectively owed to Uncle Sam.
You did exactly what you were supposed to do. You deferred, you saved, you built. But the rules on the other end changed, and most people haven’t caught up.
Why the usual fixes don’t solve the whole problem
You might be thinking: Can’t I just convert to a Roth, or put it in a trust?
Good instincts and each one helps. But none of them solves the whole problem:
- Roth conversions address some of the income tax, but not the estate tax. And the conversion itself is a taxable event that can push you into a higher bracket and past IRMAA Medicare surcharge thresholds.
- Trusts and beneficiary designations handle distribution and avoid probate, but they do not pull the IRA out of the taxable estate. A beneficiary form skips probate; it does not skip estate tax.
- The stretch IRA is gone. There’s no bringing it back
Each tool solves part of the puzzle. None of them solves all of it. That gap the piece still missing is where most families lose money they didn’t have to lose.
There is a way to pass it on tax-free
Here’s the part I want you to hear clearly: this is solvable.
PATH — Passing Assets Tax-free to Heirs — is a strategy designed to address all three problems at once: the income tax, the estate tax, and the forced 10-year drain. It repositions your qualified money into a plan built to reach your family tax-free instead of to the IRS.
What I like about it, and why I bring it to my clients:
- It’s tailored to your actual numbers — not a one-size-fits-all template. We look at your real account, your real tax situation, your real family.
- Every case is reviewed by leading attorneys before anything is put in place — so you’re not trusting a sales pitch, you’re trusting a vetted plan. You can hand the documentation to your CPA or estate attorney.
- You see the math on your actual account — exactly how much is on track to erode to taxes now, and exactly what this could keep in your family instead. Real numbers, not projections on a generic illustration.
No magic. No gimmicks. Just structure, done right, with real numbers on your actual situation.
Frequently asked questions
Does an IRA get a step-up in basis at death?
No. Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts do not receive a step-up in basis. They are classified as income in respect of a decedent (IRD), and the full balance remains taxable as ordinary income to your beneficiaries [6][7].
How long do my heirs have to drain an inherited IRA?
For most non-spouse beneficiaries who inherit an IRA from someone who died in 2020 or later, the entire account must be emptied by December 31 of the 10th year after the original owner’s death. If the owner died on or after their required beginning date for distributions, annual RMDs are also required in years 1 through 9 [2][3].
Can an IRA be taxed twice — by estate tax and income tax?
Yes. For estates large enough to owe federal estate tax, the IRA is included in the taxable estate at its full value and can be subject to the 40% estate tax. When your heirs later withdraw the same dollars, they owe ordinary income tax on them as well. The combined effective rate can exceed 60% [1][8].
Does a Roth conversion solve the problem?
A Roth conversion addresses the income tax component (since Roth distributions are tax-free), but the conversion itself is a taxable event and doesn’t, by itself, address estate tax exposure for larger estates. It’s one tool, not a complete solution.
Does naming a trust as beneficiary avoid estate tax on my IRA?
No. A beneficiary designation whether to a person or a trust avoids probate, but it does not remove the IRA from your taxable estate. If your estate is above the exemption, the IRA is still subject to estate tax [8].
What is PATH?
PATH stands for Passing Assets Tax-free to Heirs. It’s a strategy designed to reposition qualified, tax-deferred assets into a plan built to pass to your heirs tax-free addressing the income tax, estate tax, and 10-year distribution problems together. Every case is attorney-reviewed and built on the client’s actual account numbers.
Let’s run the numbers on your IRA
Reading about this is one thing. Seeing it on your own account is another.
I’d like to do something more useful than talk: let’s run the actual numbers on your IRA. In a short meeting, I’ll show you exactly how much is on track to erode to taxes and exactly what a tax-free legacy strategy could keep in your family instead.
Real numbers. Your account. No pressure. You’ll walk away knowing, whether or not you decide to do anything.
Bring your CPA or your estate attorney if you’d like. This is built to stand up to that conversation and I’d rather you have them look at it.
You spent a lifetime building this. You deserve to know where it’s really going and to have a say in it.
This article is for informational purposes only and does not constitute tax, legal, or investment advice. Consult your tax advisor and estate attorney regarding your specific situation.
Sources
[1] The Section 691(c) Deduction: How IRA Beneficiaries Recover Estate Tax | B… (beancount.io)
[2] SECURE Act | Taxes and inherited IRA rules (fidelity.com)
[3] Inherited IRA 10-Year Rule 2026: SECURE Act + Final Regs Explained | USTax… (ustax.tools)
[4] Inherited IRA 10-Year Rule Tax: Timing Penalty Index 2026 | Q3 Advisors (q3adv.com)
[5] How the 10-Year Rule Works for Inherited IRAs (smartasset.com)
[6] Does an IRA Get a Step-Up in Basis? | No (clearmoneyguide.com)
[7] IRD Assets: What They Are and How They’re Taxed – LegalClarity (legalclarity.org)
[8] IRA Estate Planning: Roth Conversions, Beneficiary Designations & the 10-Y… (financial-advisors-for-estate-planning.com)