The Hidden Tax Trap Waiting for You When a Wealthy Parent Dies
Let's say your mom has been a great saver her whole life. She's got $1.2 million sitting in a traditional IRA. When she passes, that account transfers to you.
What many people don't realize in that moment, usually while they're still grieving, is that every dollar in that IRA is taxable income. Waiting. At whatever tax rate applies when you take it out.
And if you're a physician, attorney, or executive already pulling in $400,000 or more a year, those distributions are going to land at one of the worst possible rates.
We often hear this from clients in their 40s and 50s. They know their parents have money. They've never really thought through what inheriting it would actually look like until suddenly they're dealing with it.
What Changed in 2019 (and Why It Matters Now)
Before 2019, there was something called the "stretch IRA." It let you inherit a parent's IRA and take distributions slowly, spread out over your entire lifetime. A 50-year-old could stretch those withdrawals over 30-plus years, taking just a little each year to keep the tax hit manageable.
That's gone now.
The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries. In its place? The 10-year rule. If you inherit a traditional IRA from a parent, you have to empty the entire account within 10 years of their death. No exceptions for being a high earner. No exceptions for not needing the money. The account has to be drained by the end of year 10.
Let's say your parents pass when you're 52. You inherit a $1.2 million IRA. You're already making $450,000 a year in your career. You're now drawing down that IRA on top of your existing income, averaging roughly $120,000 per year for 10 years.
That money gets taxed as ordinary income at your marginal rate. We're talking 35% federal, plus your state rate. In California, that's another 9.3%.
Do the rough math, and you're looking at over $500,000 going to taxes on a $1.2 million inheritance.
That's not a typo.
The Phantom Benefit of Step-Up in Basis
Here's what makes this especially frustrating: Not all inherited money works this way.
If your mom had put that same money in a regular brokerage account instead of an IRA — buying stocks, mutual funds, whatever — the tax treatment would be almost the opposite.
There's a rule called step-up in basis. When you inherit a taxable investment account, your cost basis resets to the value on the day your parent dies. Meaning: If Mom bought Apple stock 20 years ago for $10,000 and it's worth $200,000 when she dies, your basis becomes $200,000. You can sell it immediately and owe zero capital gains tax on that $190,000 of growth.
The IRA? No step-up in basis. Every dollar comes out as ordinary income.
This is why the type of account matters as much as the balance.
One More Thing the IRS Added
The IRS finalized rules in 2024 that made the 10-year rule even less flexible than people thought.
Here's the wrinkle: If your parent was already past their required beginning date — basically, if they had started taking required minimum distributions (RMDs) — then you don't just have to empty the account by year 10. You also have to take annual distributions along the way during those 10 years, based on your own life expectancy.
If your parent died before they were required to take distributions, you have more flexibility in how you spread the withdrawals across the decade. But if they died after, you're locked into a schedule.
Why does this matter? Because if you're not paying attention and you skip distributions during the 10-year window — thinking you can just take it all in year 10 — you could be on the hook for significant penalties on top of the taxes.
What Can Actually Be Done About This
The good news: There's a window to plan here. The biggest potential move on the table is Roth conversion. If your parents have a large traditional IRA and are in a lower tax bracket than you'll be when you inherit, it may make sense for them to convert some or all of that IRA to a Roth.
They pay taxes now at their rate. You inherit it later and take distributions tax-free. You still have to empty it within 10 years — the SECURE Act didn't change that for Roth accounts — but tax-free is a lot better than paying nearly half to the IRS and the state.
Even partial conversions help. Converting $100,000 to $200,000 per year over several years can significantly reduce the taxable balance that passes to you.
A second option: strategic distribution planning. If you've already inherited a traditional IRA, you have 10 years to manage how the income flows. You don't have to take equal amounts every year. If you're expecting a lower-income year — taking a sabbatical, selling a practice, transitioning out of a partnership — that could be the year to pull more out. If you're at peak earning, pull less. Thoughtful timing can shave real money off the tax bill.
And for parents with charitable intentions, naming a charity as a partial IRA beneficiary is worth knowing about. Charities don't pay income tax, so the money passes clean. Meanwhile, other assets, such as the ones with a step-up in basis, can go to the family more efficiently.
The Playbook Move
If your parents have substantial assets, and you haven't had a family conversation about how those assets are going to transfer, this could be the right time to have that conversation.
Not because it's comfortable. It's usually not. But because the planning options are genuinely different when you have time to act versus when you're in the middle of grief, managing an estate, and suddenly learning about tax rules you've never heard of before.
We’re happy to sit in that conversation alongside your parent. If this is on your mind, schedule a call to discuss your concerns with us at evermont.com. Let’s look at the full picture together.
Keep building your future.
This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.