When your children inherit your IRA, they may inherit a tax bill too.
For many families, retirement accounts are among the largest assets they'll leave behind. Yet many people don't realize that traditional IRAs and pre-tax retirement accounts can create taxable income for beneficiaries.
Under current rules, many non-spouse beneficiaries are required to fully distribute inherited retirement accounts within 10 years of the original owner's death. Depending on their circumstances, that can result in significant taxable income during what may be their peak earning years.
For example, if an individual inherits a traditional IRA worth $1,000,000 and withdraws the funds evenly over 10 years, that's roughly $100,000 of additional taxable income each year. Depending on their financial situation, those distributions could push them into higher tax brackets and result in a larger share of the inheritance being paid in taxes.
Many people focus on the amount they'll leave behind. Just as important is understanding how much of those assets may ultimately be available to their heirs after taxes.
Taxes can never be eliminated entirely, but thoughtful planning today may help reduce the tax burden beneficiaries face in the future.
The question isn't just how much you'll leave behind. It's how much your heirs may get to keep.
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