Worked example: a $1 million IRA, two kids, and the tax nobody mentioned

Part of our planning area: Retirement tax diversification →

Illustrative scenario. This is a hypothetical example built to show our analytical process. It does not describe an actual client. All figures are illustrative, not quotes or projections. Nothing here is legal or tax advice; the tax analysis, and the decision to act on it, is your CPA's and your own. What we do is the funding.

Who this reaches There are two taxes in this story, and they reach very different numbers of people. The income-tax problem below reaches almost anyone leaving a large traditional IRA to adult children. The estate-tax layer reaches only estates above the $15 million per person, $30 million per couple exemption. This page leads with the income-tax problem because it is the one that reaches you. One important exception sits underneath all of it: a surviving spouse can roll the account into their own IRA and defer everything — no ten-year rule, no tax until they withdraw. The scenario below is the more common one that follows: the account eventually passing to the children, usually at the second death.

Who inherits the account decides everything. A surviving spouse can roll it over and defer the tax entirely; non-spouse heirs cannot. This page follows the second path.

The situation

The R family (hypothetical). A married couple in their early seventies, comfortable, Florida residents. They live on a pension, Social Security, and a taxable brokerage account. There is one large asset they have quietly earmarked for the kids and never touch: a traditional IRA of about $1,000,000. Two adult children, both mid-career, both married and earning well.

In their minds, the IRA is the clean part of the plan. It has a beneficiary form, it names the two children, and it passes without probate. What no one had walked through is what the children actually keep after the tax that comes with it.

Start with the answer, then the reason for it.

Illustrative. Assumes a $1,000,000 traditional IRA left to adult children and a blended federal income-tax rate of about 35% as they draw it down; the ordinary asset receives a step-up in basis at death. Actual results depend on the heirs' brackets and state, and are not a projection.

Both assets are worth the same $1,000,000 today. Handed to the children, they are not worth the same at all. The reason is two features of retirement accounts that almost nobody has explained to them.

Reason one: the IRA is the one asset with no step-up

When most assets pass at death, the heirs get a step-up in basis: the asset is treated as if bought at its date-of-death value, and the built-in gain simply disappears. Sell the inherited home or stock the next day and there is little or no taxable gain. It is one of the most generous features in the tax code.

A traditional IRA does not get it. The money was never taxed going in, so the income tax is still owed, and the heirs pay it as they withdraw. The account passes with its tax bill fully intact.

Almost everything resets to current value at death and the built-in gain disappears. The retirement account is the exception: it keeps the income tax that was deferred all along.

Reason two: the ten-year rule stacks it onto their peak years

It used to be that a child could stretch withdrawals from an inherited IRA across their whole life, keeping each year's tax small. The SECURE Act ended that for most non-spouse heirs. Now the account generally has to be emptied within ten years. For two mid-career children already earning well, that means roughly a decade of extra income piled on top of their salaries, taxed at their highest bracket, in their highest-earning years.

What the children actually keep	Illustrative
Traditional IRA left to the two children	$1,000,000
Emptied within ten years, taxed as income at a blended 35%	($350,000)
Net the children keep	$650,000
The same $1,000,000 in an ordinary asset (step-up)	$1,000,000

The exact rate depends on the children's brackets and their state, which is theirs to know, not their parents'. But the shape does not change: a traditional IRA left to high-earning children is the most heavily taxed dollar in the estate, and the one the parents were most sure was simple.

A second layer, for larger estates

For the smaller group whose estate is also above the exemption, it compounds. The same IRA is counted in the taxable estate and hit by estate tax, and then the heirs still owe income tax as they withdraw. The two do not simply add — the heirs get an income-tax deduction for the estate tax paid on the account, which softens it — but the combined drag is real and larger than the income tax alone. For an estate over the line, the retirement account is the worst asset to leave untouched.

The fix: reposition the dollars while you are living

Here is the move, and it only makes sense for a client who genuinely does not need the account for their own lifestyle. Rather than leave the IRA to be drawn down and taxed at the children's unknown, likely higher rate, the parents take control of the tax themselves: they draw it down deliberately during life, at their own known rate, and reposition the after-tax dollars into a wrapper that passes clean.

Left as-is Taxed on the way down

The default, if nothing is done

The children inherit the IRA and must empty it within ten years
Every dollar is taxed as income, at their brackets, in their peak years
Roughly a third can go to federal income tax alone
More still if the estate is also above the exemption

Repositioned while living Passes tax-free

The parents convert an account they never needed

They draw it down on their own schedule, at their own bracket
The after-tax dollars fund life insurance owned by an irrevocable trust
The children receive the death benefit income-tax-free, and outside the estate
No ten-year drawdown, no bracket stacking, and often more than the account held

The same logic without insurance is the Roth conversion: the parents pay the income tax now so the children inherit an account that comes out tax-free. It belongs in the same conversation. Both start from the identical move — pay the tax deliberately now, at a known rate, instead of leaving it to the children at an unknown one. Which fits, and whether the life-insurance version adds enough leverage to be worth it, depends entirely on the client's age, health, and brackets.

Where the lines are Whether to reposition, how much, and the tax math behind it are your CPA's and your own decision, not ours — and for some clients the honest answer is to leave the account alone. Our part is the piece that cannot be produced inside a tax return: what the coverage would cost, whether the client is insurable to do it at all, and structuring the ownership so the benefit lands outside the estate. We put that in writing, and we are comfortable saying nothing is needed when that is the truth.

What the client receives

Every engagement produces a written analysis memo: the after-tax comparison above run on the client's real numbers, carrier-agnostic design specifications for any coverage, and an explicit line between what belongs to the CPA versus what we handle. The memo is the deliverable; a policy, if any, is its implementation.

Why we publish worked examples instead of testimonials

You can't evaluate an advisor by adjectives. You can evaluate one by reasoning. This page shows the reasoning — the same process, run on your facts and coordinated with your existing CPA, is what an engagement looks like.

This scenario is hypothetical and for educational purposes only. All figures are illustrative and will differ with the heirs' tax brackets, state of residence, the applicable exemption, and individual circumstances. Tax rules including the SECURE Act ten-year rule and the estate-tax exemption are set by federal law and change over time; confirm current figures with your CPA. Insurance products are subject to underwriting approval, and a repositioning strategy depends on insurability. Tax determinations and the decision to act are the work of your CPA and yourself; LogicPoint Advisors does not provide legal or tax advice. Cosmin Mandachescu · FL 2-15 License #G335891.

A large IRA you do not need for your own lifestyle, pointed at your kids? Start with a second opinion.

A first conversation is exploratory and at no cost. We will run the after-tax comparison on your real numbers, alongside your CPA, not in place of them.

A $1 million IRA, two kids, and the tax nobody mentioned