3 Traditional IRA Tax Problems You May Not See Coming
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Key Takeaways
- Traditional IRAs can create distinct tax problems that affect the original account owner, a surviving spouse, and beneficiaries who inherit the account.
- The SECURE Act changed inherited IRA rules, requiring many beneficiaries to empty inherited accounts within 10 years. For heirs in their peak earning years, those distributions may increase taxable income when their tax rates are already high.
- Proactive, multigenerational traditional IRA tax planning may help families significantly reduce lifetime tax exposure, especially when large pre-tax retirement balances are involved.
One Decision Could Change Everything
Let’s say in the 1990s, a father converts a substantial portion of his traditional IRA to a Roth in his early 60s. By the time he passes away, that account has grown to several million dollars. His adult son inherits it completely tax-free.
That one conversion decision, made almost 30 years ago, saved his family significantly in taxes across two generations.
What if that money had stayed in a traditional IRA instead?
His son would face mandatory withdrawals over 10 years, adding every inherited dollar on top of his own salary to be taxed all together at whatever rate applied to his total income each year.
Now, the example I shared above is a hypothetical one, but in my experience working with high-net-worth families, a well-timed conversion decision can mean the difference between passing on wealth and passing on a tax obligation.
What Makes Traditional IRAs a Tax Risk for Families?
IRAs are commonly seen as straightforward retirement assets. Many people don’t realize they can create a multi-decade tax problem, not just for themselves, but for their spouse and children.
A traditional IRA carries a deferred tax obligation that never disappears. Every dollar contributed pre-tax is money the IRS is still owed, and that obligation doesn’t end with the account owner. It transfers at death to their surviving spouse and eventually to their children, often at the worst possible time in their tax lives, when earned income is highest. High-net-worth families with substantial traditional IRA balances are often the most exposed to this tax risk, because that deferred obligation doesn’t just transfer to the next generation. It compounds.
For high-net-worth retirees and pre-retirees, these three common tax problems implicit in traditional IRAs are worth understanding before it’s too late to act.
1. Required Minimum Distributions (RMDs) May Drive Up Your Tax Bill in Retirement
Many retirees are surprised to find that their tax bills in retirement are higher than they anticipated. The larger your IRA, the more pronounced this effect can be.
Starting at age 73, or 75 depending on your birth year, the IRS requires you to take distributions from your traditional IRA, regardless of whether you need the money. These withdrawals are taxed as ordinary income, which means they can push you into a higher bracket, increase the portion of your Social Security that is subject to tax, and trigger surcharges on Medicare premiums.
The planning opportunity here is to take advantage of lower tax brackets before RMDs begin. The years between retirement and the start of required minimum distributions can be among the most financially flexible of your life. Strategic distributions or Roth conversions—moving money from a pre-tax account to a tax-free one—during that window may help you reduce future RMDs and manage your tax bracket over time.
At Prosperity Capital Advisors, this is one of the core opportunities we work through with clients as part of The Tax Management Journey®, a structured framework designed to help families manage tax exposure across the span of retirement rather than year to year.
2. The Surviving Spouse’s Unexpected Tax Burden, or the ‘Widow’s Penalty’
When one spouse passes away, the survivor may eventually lose access to the wider married filing jointly tax brackets and larger standard deduction. While household income often decreases, it may not fall by enough to offset the shift to single-filer tax treatment. As a result, the surviving spouse may face a higher tax rate on similar levels of retirement income. This phenomenon is known as the ‘widow’s penalty’ because it can create a sudden and lasting tax increase at a time when the surviving spouse is already navigating a major personal and financial transition.
Planning ahead of this possible event can make a meaningful difference. Strategies like Roth conversions during joint filing years can reduce taxable income for the surviving spouse later, helping to cushion the bracket shift before it happens.
3.The 10-Year Rule That May Push Your Beneficiaries into Higher Tax Brackets
The SECURE Act fundamentally changed inherited IRA rules by eliminating the stretch IRA, which previously allowed beneficiaries to spread distributions over their own lifetime. Under current inherited IRA distribution rules, most beneficiaries other than surviving spouses must empty the inherited account within 10 years of the original owner’s death.
For adult children still in their peak earning years, this can mean stacking large inherited IRA withdrawals, which are taxed as ordinary income, on top of existing salaries, which can result in a tax burden on every inherited dollar.
In addition, RMD rules for inherited IRAs can also increase complexity within that 10-year window, depending on whether the original owner had already begun taking distributions.
How to Reduce Traditional IRA Taxes Across Generations
Many people with large IRA balances did not intentionally set out to create future tax problems. A 401(k) through an employer is often the default retirement savings vehicle, and over time, that pre-tax balance can grow substantially. However, leaving a large pre-tax balance unconverted comes with the risk of a heavy tax burden for your heirs later.
The good news is, there may still be time to address it by planning ahead.
Multigenerational IRA tax planning involves looking at all three stages together—your retirement, your spouse’s future tax picture, and your children’s inheritance—and creating a strategy to help manage the total tax impact over time.
This can include:
- Roth conversions during lower-bracket windows before RMDs begin
- Distribution strategies to help reduce the surviving spouse’s future tax exposure
- Beneficiary planning that accounts for the 10-year rule and your children’s likely income
The goal is to shift more of the tax obligation into years when rates may be lower, rather than allowing it to build and land at the least favorable times. For high-net-worth families, that can mean more control during retirement, more flexibility for a surviving spouse, and a more tax-aware inheritance strategy for the next generation.
Frequently Asked Questions About IRA Tax Planning for High-Net-Worth Families
What is the ‘widow’s penalty’?
While not an official tax designation, the ‘widow’s penalty’ refers to the tax increase that often follows the death of a spouse, caused by the loss of married filing jointly tax brackets and the higher standard deduction. When a spouse passes away, the survivor typically faces higher tax rates on a similar level of income, often with little warning or time to plan.
What is the 10-year rule for inherited IRAs?
The 10-year rule is a provision of the SECURE Act, passed in 2019, that requires most beneficiaries other than surviving spouses to fully distribute an inherited IRA within 10 years of the original owner’s death. For beneficiaries in their peak earning years, the compressed timeline can result in a significant tax burden on every inherited dollar.
Do these IRA tax problems apply to traditional 401(k) accounts and other pre-tax retirement accounts?
The same general principles apply to traditional 401(k) accounts and other pre-tax retirement accounts. The specific rules around RMDs and inherited accounts may vary, which is why proactive planning with a qualified financial advisor can make a significant difference.
When is the right time to convert a traditional IRA to a Roth IRA?
The right time is generally when your current tax rates are lower than you expect them to be in the future. For many high-net-worth individuals, that window falls between retirement and age 73 or 75 depending on your birth year, before RMDs begin and while you still have flexibility in how much income you recognize each year. Other common opportunities include years with lower income, business transitions, or the final joint filing year after a spouse’s death. A qualified financial advisor who specializes in IRA tax planning can help you identify the most strategic timing for your situation.
Is it too late to consider multigenerational IRA tax planning if I am already in retirement?
For many families, the window to act remains open well into retirement. Even after RMDs begin, there may be strategies worth considering depending on your account balances, income, family situation, and goals. A conversation with a financial advisor who specializes in comprehensive retirement planning can help clarify what options may still be available.
Ready to Review Your IRA Strategy?
If you have significant assets in a traditional IRA, multigenerational tax planning may be one of the most important financial conversations you have this year.
At Prosperity Capital Advisors, our team is trained in advanced IRA and tax strategies, including The Tax Management Journey®, a structured framework designed to help families manage tax exposure across the account owner’s lifetime, a surviving spouse’s lifetime, and the inheritance timeline for beneficiaries. Rather than plan around one tax year at a time, we model the full picture, helping you make decisions today designed to protect what you’ve built for those you care about.
The sooner you evaluate these opportunities, the more flexibility you may have. Find a Prosperity advisor near you to start the conversation.
Disclosure: Prosperity Capital Advisors delivers holistic wealth management through our Five Pillars framework: Financial Planning, Asset Management, Tax Management, Protection Planning, and Legacy Planning. See our full list of advisors by clicking here.
Financial Planning and Advisory Services are offered through Prosperity Capital Advisors (“Prosperity”), an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Prosperity does not provide tax or legal advice.