The stretch IRA was a cornerstone of estate planning. Parents could pass down traditional IRAs, knowing their adult children could slowly draw down the account over their own life expectancies. That rule provided decades of tax-deferred growth and kept annual required minimum distributions (RMDs) manageable.
The SECURE Act changed this. In place of the stretch IRA, the IRS introduced a mandate that forces most non-spouse beneficiaries to fully deplete inherited IRAs within a strict 10-year deadline. Many financial advisors refer to this as the “10-year tax trap.”
How the 10-year trap works
Before the SECURE Act of 2019, non-spouse beneficiaries could “stretch” distributions from an inherited IRA over their own lifetime. This allowed your heirs to take small, manageable annual withdrawals, keeping tax bills minimal while benefiting from decades of tax-deferred growth.
The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries (such as adult children and grandchildren). Under Internal Revenue Code Section 401(a)(9) and the IRS final RMD regulations, non-eligible designated beneficiaries must completely drain an inherited account by December 31 of the 10th year following the original owner’s death.
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A Roth conversion can be a solid estate planning step to benefit your heirs.
Why this timing might be a problem for your heirs
The timing of this forced distribution creates a significant tax challenge:
Peak Earning Years: Many parents pass away in their late 70s or 80s, meaning their adult children inherit in their late 40s or 50s. These are typically an individual’s peak earning years.
Compounded Tax Brackets: Adding tens or hundreds of thousands of dollars in mandatory traditional IRA distributions on top of a high salary can push your heirs into the top federal and state income tax brackets.
Annual RMD Pressure: Under the latest IRS rules, if you die on or after your Required Beginning Date (age 73 under SECURE 2.0), your heirs cannot simply wait until Year 10 to withdraw the funds. They are required to take mandatory annual RMDs in years 1 through 9, creating an unavoidable tax hit every year.
A Roth conversion allows you to shift pre-tax IRA funds into a Roth IRA during your lifetime. You pay income taxes on the converted amount today—ideally at a lower rate than your heirs would pay later. Paying their potential taxes can also be another form of gifting to them.
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Some key conversion issues to consider
Converting your entire IRA in a single year can inadvertently push you into a higher tax bracket. A more effective approach spreads the conversions across multiple tax years:
1. Target the “Gap Years”: The ideal window for Roth conversions is often between early retirement and the start of Social Security or mandatory RMDs at age 73. During these years, your reported taxable income may drop into lower tax brackets (e.g., 12% or 22%).
2. Convert Up to Bracket Caps: Fill up your current tax bracket without stepping into the next tier. For example, if you are $40,000 away from the top of the 22% federal bracket, convert $40,000 that year.
3. Monitor Medicare Surcharges (IRMAA): Because Medicare Part B and D premiums use a two-year lookback period, ensure your conversion doesn’t unintentionally trigger higher Medicare premiums.
4. Pay Taxes from Out-of-Pocket Funds: Always pay the conversion tax from a taxable brokerage or checking account—never from the IRA itself. Using IRA funds to pay conversion taxes incurs penalties (if under 59½) and reduces the tax-free compounding pool.
When a conversion might not make sense
Roth conversions require upfront tax payments and are irreversible. A conversion may not be beneficial if:
Your adult children are currently in a significantly lower tax bracket than you.
You must withdraw funds from the IRA itself to pay the upfront conversion tax bill.
The conversion tax would push you into a significantly higher bracket today than your heirs will face in the future.
Moving forward with the plan
By taking on the tax liability at today’s known rates during your low-income gap years, you can protect your heirs from compressed, high-bracket tax liabilities down the road. Consult with a financial or tax professional to model a strategy tailored to your family’s financial situation.
Related: Roth IRA conversions in your 60s and beyond: what to know