Craig Wear, CFP®Craig Wear, CFP® | Expert in Roth Conversions & Tax-Efficient Retirement Strategies for IRA Millionaires

What is the Inheritance Tax Trap

1 May 2026 · 1 min

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In this segment Craig Wear, CFP®, explains that when a traditional IRA is passed to heirs, the tax liability embedded in the account transfers with it. The inherited IRA’s balance is treated as ordinary income to the beneficiaries, and under current law the entire account must be fully distributed within ten years. Large IRA balances can therefore force heirs to take sizable withdrawals that push them into higher tax brackets, creating a significant, often overlooked tax burden despite the estate plan having technically succeeded.

Chapters

Tell us more details about this inheritance tax burden. Well, look, when your kids inherit your IRA, they're also inheriting the tax bill that's still inside of it. And when the IRA is 7 figures, it really exaggerates the tax hit. And this is where a lot of people miss what's really going on. They assume the inheritance itself is the event, and that once the money passes to the kids, the plan has done its job. But with a traditional IRA, the real problem doesn't show up at the moment of transfer. It shows up when that money has to come back out, and every dollar your kids pull from that inherited IRA is treated as ordinary income for the kids. So even though the account passed through the estate plan exactly the way it was supposed to, the taxes passed right along with it. And under current law, those taxes don't just wait to be paid indefinitely. Your kids have to empty the large inherited IRA within 10 years. So if you've left them with a big chunk of money, the forced withdrawals will push their income tax into much higher brackets.