Many families are surprised by how traditional 401(k)s are taxed when passed to heirs. Unlike taxable brokerage assets, which benefit from a step-up in basis at death, inherited 401(k) balances come with no such advantage. Heirs must withdraw the entire account within 10 years, and every dollar is taxed as ordinary income—often hitting adult children during their peak earning years. For example, parents with taxable income near $150K might have faced tax rates in the low-20% range, while their heirs, sitting closer to $350K, could see those same withdrawals bumped into the low-30% bracket. On top of that, required minimum distributions (RMDs) begin at age 73 (or 75 for younger generations), further stacking onto Social Security and potentially triggering Medicare premium surcharges.
In my work guiding Orlando’s entrepreneurs and multigenerational families, I see the value in thinking ahead. Strategies like timing Roth conversions during lower-income years, naming charities as beneficiaries, or housing bonds in traditional accounts can help manage this tax burden—for both account owners and their heirs. A coordinated, family-office approach ensures these decisions aren’t made in a vacuum, but as part of an integrated plan to protect and grow your legacy.
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