The Tax-Efficient Inheritance
How smart retirement withdrawals could leave more to your heirs
A retirement and wealth-transfer guide | AGL Financial
Could a $100,000 retirement account ultimately leave a family nearly $50,000 more? Under one hypothetical set of tax rates and investment assumptions, yes. The difference comes not from owning a different stock, but from choosing when income taxes are paid, and by whom.
For many families, the most important inheritance figure is not the account balance on a statement. It is how much a spouse, child or other beneficiary can actually keep after taxes. Traditional IRAs, Roth IRAs and taxable investments can produce very different outcomes, even when they hold similar investments.
Why inherited IRAs deserve a new look
The SECURE Act changed a popular inheritance approach. For most non-spouse adult children inheriting IRAs from owners who died after 2019, the account must be emptied by the end of the tenth calendar year after death. If the owner died after the required beginning date, annual distributions may also apply during that period. Different rules apply to spouses and certain eligible designated beneficiaries. [1]
Those withdrawals can arrive when beneficiaries are earning salaries, receiving bonuses or already in higher tax brackets. A substantial traditional IRA inheritance may therefore become an income-tax problem for the next generation, not simply an investment windfall.
Three assets, three tax outcomes
| Asset inherited | Typical federal income-tax outcome |
| Traditional IRA | Pretax withdrawals are usually taxed as ordinary income; most adult children face a 10-year emptying deadline. |
| Roth IRA | Qualified withdrawals, including account growth, are generally tax-free; most adult children still face a 10-year deadline. |
| Taxable investments | Eligible appreciated shares generally receive a new basis at death; gains that arise after death may be taxable. |
Consider a parent who paid $40,000 for shares now worth $150,000. If the shares qualify for a date-of-death basis adjustment, an heir may inherit a new $150,000 basis and sell near that amount with little or no federal capital gains tax on the $110,000 of pre-death appreciation. By contrast, pretax dollars in a traditional IRA do not receive this capital-gains basis step-up. [2]
Gifting appreciated shares during life can still be useful, but a gift generally carries over the donor’s basis. Selling appreciated shares before death may also realize capital gains. Roth distributions require their own qualifying rules, including the original Roth five-tax-year period and gains earned after money leaves the Roth for a regular brokerage account are then no longer Roth-sheltered. [2, 3, 4]
Recognizing opportunities in lower-income years
Retirement is one common tax-planning window, but not the only one. Lower-income opportunities can also arise while working part time, reducing work hours, changing careers, building a business or experiencing a temporary interruption in earnings. Retirees may have years after wages stop but before Social Security, pensions or required minimum distributions raise their taxable income.
During these windows, families can compare two different actions: converting part of a traditional IRA into a Roth IRA, or taking a taxable traditional IRA withdrawal and investing the after-tax proceeds in a brokerage account. A Roth conversion is generally federally taxable but keeps the converted assets within a tax-advantaged account; the brokerage strategy does not. Neither approach is automatically best. [3]
What might that mean for an inheritance?
Start with a $100,000 traditional IRA and $12,000 of outside cash. Our illustrative family pays an average 12% incremental federal tax on a conversion or IRA withdrawal, while an adult child would pay 32% on inherited traditional IRA distributions. We assume 15 years of growth: 6% annually inside traditional and Roth IRAs, versus 5.5% after ongoing tax drag in a taxable brokerage account. The taxable brokerage investments are assumed to qualify for a basis adjustment at death.
The illustration counts the outside cash under every scenario. If a Roth conversion uses $12,000 to pay taxes, the other strategies get to keep and invest that money. This makes the comparison more meaningful than looking only at the retirement account itself.
FIGURE 1 | Equal starting resources; the chart shows hypothetical after-tax family wealth if inheritance occurs at the stated year. Federal taxes only.
| Strategy | After-tax family wealth at year 15 |
| Convert traditional IRA to Roth | $239,656 |
| Withdraw and invest in brokerage | $223,248 |
| Retain traditional IRA + invest outside cash | $189,756 |
In this scenario, the conversion produces about $49,900 more than keeping the traditional IRA. That is a modeled result, not a prediction. Real conversion timing, actual graduated tax brackets, market returns, taxes on investments and beneficiaries’ distribution choices could materially change the outcome. [Model notes, below]
What if the heir will pay a lower rate?
Now change only the assumed tax rates. If the parent must pay 22% to convert and the heir would owe just 12% on future traditional IRA withdrawals, keeping the traditional IRA plus investing the unused outside cash produces approximately $260,012 after 15 years, compared with $239,656 from conversion under the same simplified assumptions. A strategy that looked compelling at a 12% parent/32% heir rate can reverse when those rates flip.
The following sensitivity chart shows the potential family-wealth difference from conversion across several parent-and-heir rate combinations. Positive values favor converting; negative values favor retaining the traditional IRA. It assumes a flat incremental rate on the full amount, not an actual tax return.
FIGURE 2 | Advantage of converting (or disadvantage, if negative) after 15 years, expressed in thousands of dollars. Model assumptions match Figure 1.
The practical technique: Fill tax brackets gradually
A partial conversion need not push every dollar into a higher bracket. The federal tax system is progressive: dollars above a threshold are taxed at the next marginal rate, but earlier dollars are not retroactively re-taxed. In 2026, married taxpayers filing jointly remain in the 12% federal bracket through $100,800 of taxable income; the 22% bracket then extends through $211,400. [5]
Suppose a couple expects $70,000 in taxable income before converting. They have a simplified $30,800 of remaining 12% bracket space. Converting $25,000 in each of four similar years would incur $12,000 of nominal conversion tax (four times $3,000). A single $100,000 conversion against that same one-year income would incur $18,920 of additional federal tax. That is a $6,920 difference before considering when the tax is paid and how those assets invest over time.
FIGURE 3 | $100,000 total converted; constant $70,000 taxable-income starting point and fixed 2026 married-filing-jointly brackets across illustrative years.
Not every household should stop at 12%. A deliberate partial conversion into the 22% bracket may still make sense if beneficiaries will face higher rates, future RMDs are expected to be large, or a surviving spouse could later face narrower single-filer brackets. The relevant comparison is the family’s future after-tax outcome, not a rule to fill every bracket automatically.
Four tax traps worth checking before moving money
Before age 59½. Early traditional IRA distributions generally face a 10% additional federal tax unless an exception applies. Proper conversions generally avoid that extra tax on the converted amount, but early distributions of converted Roth funds can have separate five-year consequences. [3]
Medicare premiums (IRMAA). For 2026 Medicare premiums, the first income-related premium tier begins above $109,000 of modified adjusted gross income for an individual or $218,000 for married filing jointly. Medicare generally uses tax data from two years before the premium year; a 2026 conversion typically affects premiums in 2028 under thresholds then in effect. [6]
Social Security taxation. The first combined-income thresholds are $25,000 for individuals and $32,000 for joint filers; above $34,000 and $44,000, respectively, up to 85% of benefits may be taxable. That means 85% of benefits may be included in taxable income, not that they face an 85% tax rate. [7]
Other tax interactions. State income taxes, capital gains, Medicare surcharges, deductions and investment-income surtaxes can change the true incremental tax rate. Some retirees may also qualify for a 0% federal long-term capital gains rate in lower-income years, creating a competing use of available tax-bracket space.
State tax considerations: Pennsylvania and South Carolina
The federal income tax owed on inherited IRA withdrawals is separate from federal estate taxes and state inheritance taxes. For 2026, the federal estate-tax basic exclusion is $15 million per person, subject to applicable rules and prior taxable gifts. A family may owe no federal estate tax while beneficiaries still owe ordinary income tax on inherited traditional IRA withdrawals. [8]
Because AGL Financial serves families in Pennsylvania and South Carolina, understanding the differences between these states is particularly relevant.
Pennsylvania
Pennsylvania imposes an inheritance tax based on the relationship between the deceased and the beneficiary. Transfers to adult children and other lineal heirs are generally taxed at 4.5%, transfers to siblings at 12%, and transfers to many other beneficiaries at 15%. Spouses are generally exempt, and special rules apply to certain transfers involving children age 21 or younger.
Both traditional and Roth IRAs may be subject to Pennsylvania inheritance tax, even when qualified Roth distributions are exempt from federal income tax. Traditional IRAs are generally subject to inheritance tax when the owner dies after age 59½, with different rules applying to younger owners. [9, 10]
An additional consideration is that Pennsylvania generally excludes properly completed traditional-to-Roth IRA conversions from state personal income tax when the full amount is transferred into the Roth, even though the conversion remains federally taxable. Amounts withheld or otherwise not converted may be treated differently. [11]
South Carolina
South Carolina does not impose a state estate or inheritance tax. However, traditional IRA withdrawals and Roth conversions may still generate state income tax, subject to applicable retirement-related deductions and other adjustments. [12]
These differences reinforce why retirement withdrawals, Roth conversions, and inheritance strategies should be evaluated under both federal and applicable state tax rules.
When doing less may leave more
Conversions can be counterproductive if parents pay more in tax than heirs would, taxes must be funded by selling highly appreciated holdings, or the transaction reduces money needed for living expenses, emergency reserves or future care. Leaving traditional IRA assets directly to qualified charities may also be efficient. Beneficiary designations, ownership and estate documents should be coordinated with the tax analysis.
Plan for the after-tax legacy, not just the account balance
The central question is not simply “How large will my IRA become?” It is “How much will my family keep?” Comparing retirement income projections, bracket availability, Roth conversion timing, taxable-account holdings and beneficiary circumstances can help families make thoughtful choices while options remain open.
At AGL Financial, we encourage families to evaluate their retirement income and legacy goals together with appropriate tax and estate professionals, rather than treating the withdrawal decision as a one-year tax calculation.
Want to see how this could apply to your own accounts? Schedule a conversation with our team in Myrtle Beach or Jeannette.
Model notes and sources
The graphs are hypothetical educational illustrations, not individualized tax projections or investment forecasts. They assume a $100,000 pretax IRA, outside liquid cash equal to the parent’s conversion tax cost, 6% annual traditional/Roth returns, 5.5% annual after-tax brokerage growth, and a year-end inheritance/distribution measurement. Figure 1 assumes parent rate 12% and heir rate 32%; Figure 2 varies those rates. The assumed Roth conversion tax is paid at time zero in the model to isolate asset/tax effects, even though real-life bracket management usually occurs across several years. Figure 3 isolates nominal taxes; it ignores investment growth, the time value of money and future tax-bracket inflation. Figures omit state taxes, PA inheritance tax, estate taxes, RMD timing, changes in tax law, investment losses and personal Medicare/Social Security interactions.
[1] IRS Inherited IRA distribution requirements • [2] IRS Basis of inherited property and gifts
[3] IRS Publication 590-B: IRA distributions • [4] IRS Gifted-property basis rules
[5] IRS 2026 income-tax brackets, Rev. Proc. 2025-32 • [6] CMS 2026 Medicare Part B premiums and IRMAA
[7] SSA Social Security benefit taxation thresholds • [8] IRS 2026 federal estate-tax exclusion / Form 706
[9] PA Revenue State inheritance tax rates • [10] PA Revenue Taxation of inherited IRAs (March 2026)
[11] PA Revenue IRA comparison: state treatment of conversions • [12] SCDOR South Carolina moving and tax guide
Publication note: Tax and estate law is fact-dependent and subject to change. Illustrations are simplified; review with qualified tax/legal professionals and the firm’s required compliance process before public distribution.
Important Disclosures
Cambridge disclosures: Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and AGL Financial are not affiliated.
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