Why a $900,000 Traditional 401(k) May Leave Your Heirs About $680,000, While a $900,000 Roth Can Pass On the Full Amount

Leaving a traditional 401(k) to your children may seem simple, but taxes, a 10-year withdrawal deadline, and IRS rules can sharply reduce what they ultimately receive. The difference can be larger than many families expect.

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Consider a 66-year-old with $900,000 in a traditional 401(k) who already intends to pass the account to adult children. The main decision is whether to leave it as is or convert it to a Roth first. That choice can alter the inheritance by a six-figure amount.

The issue comes up often in retirement discussions. One Reddit user in r/RothIRA offered the common rule of thumb: “Roth conversions make sense if you anticipate being in a higher tax bracket in the future versus what you’re in today.” When the money is intended for heirs, that future tax bracket may belong to your children.

The Same $900,000 Can Produce Very Different Results for Heirs

Money inherited from a traditional 401(k) that was funded entirely with pretax dollars is taxed as ordinary income when the beneficiary withdraws it. If the heir faces an effective 24% tax rate, about $216,000 would go to taxes, leaving roughly $684,000.

A Roth account works differently. Beneficiaries generally owe no federal income tax on qualified withdrawals, so the full $900,000 can pass through free of income tax. These examples do not include investment gains, which would only widen the gap because qualified Roth growth is also tax-free.

The 10-Year Rule Can Force Heirs Into Higher Tax Brackets

Most adult beneficiaries must empty an inherited account by Dec. 31 of the 10th year after the original owner dies. Failing to take the required distributions can trigger a 25% excise tax on the amount missed, reduced to 10% if the problem is corrected in time.

Imagine a single heir earning $150,000 at her peak. If she spreads the inheritance evenly over 10 years, the account adds $90,000 a year to her income. After the $16,100 standard deduction, her taxable income would be around $223,900.

That would place her above the 2026 single-filer threshold of $201,775, where the 32% bracket begins.

Taking the entire amount in the final year is even more costly. Her taxable income would rise to about $1,033,900, far beyond the 37% bracket threshold.

A Full Conversion Can Become Expensive Quickly

Taxes on a Roth conversion are due in the year the conversion is made. For a married couple, converting the full balance at once can push a large portion of income into the 35% and 37% brackets. For joint filers in 2026, those brackets begin above $512,450 and $768,700 of taxable income.

Medicare can add another cost. The income-related monthly adjustment amount, or IRMAA, generally uses income from two years earlier, so a conversion made in 2026 can affect premiums in 2028. Under 2026 Medicare rules, joint income of $750,000 or more triggers the highest surcharge levels: $487 per month for Part B and $91 for Part D, per person.

For a couple, that equals $13,872 a year in surcharges at 2026 rates. The 2028 thresholds and rates have not yet been announced. A conversion can also increase the share of Social Security benefits that becomes taxable.

Spreading Conversions Across Lower-Tax Years Can Help

Breaking a conversion into several years can keep more income out of the top brackets. Under 2026 rules, the first Medicare surcharge begins above $218,000 in joint income, though those thresholds may change in the future. The 22% and 24% federal brackets for joint filers extend up to $403,550 of taxable income in 2026.

Keeping the traditional account may be the better move if your heirs will face a lower tax rate than you would on a conversion, such as when a child is early in a career or in a lower-paying job. Conversions can make more sense if the tax bill is paid from a taxable brokerage account. That money would leave the estate either way, while the Roth balance continues to grow. The years after your final paycheck and before required minimum distributions begin are often the least expensive window for this strategy.

The five-year rule matters as well. For a Roth 401(k), the clock starts with your first Roth contribution to that plan. For a Roth IRA, it starts with the first tax year in which you funded any Roth IRA. If death occurs before the relevant five years have passed, heirs may owe income tax on the earnings, though not on contributions or converted amounts.

Three Steps to Consider Before Year-End

1. Estimate your income and compare it with the current Medicare surcharge thresholds of $218,000 for joint filers and $109,000 for single filers. Your current-year income generally affects premiums two years later, using thresholds announced closer to that time. Any planned conversion should be completed by year-end.
2. Ask each child what tax bracket they are likely to face. If they are in the 32% bracket or higher, every dollar converted at 22% to 24% leaves them with more after tax.
3. If you do not already have a Roth IRA, even a small conversion can start the five-year clock. A conversion made during the year begins that clock on Jan. 1 of that same year.

What your children ultimately keep depends on their tax brackets, the timing of withdrawals, and the conversions you complete while you are still alive.