Roth vs. Traditional IRA: Which Leaves Your Heirs a Bigger, Tax-Free Inheritance?

When you inherit a Roth IRA, your withdrawals are generally tax-free. When you inherit a Traditional IRA, the withdrawals are generally taxed as ordinary income. That single difference shapes your heir’s financial life for a decade—and it starts with the choice you make today. The question isn’t just about your retirement bracket; it’s a legacy decision that sits at Step 5 of the Money Roadmap, where you decide which bucket to fill.

The core fork: Roth vs. Traditional in your heir’s hands

Your heirs face the same 10-year withdrawal rule whether they inherit a Roth or Traditional IRA. What changes is the tax bill.

Inherited Roth IRA withdrawals are generally tax-free (assuming the 5-year aging rule was met—the clock starts January 1 of the tax year of the owner’s first Roth IRA contribution). Your heir empties the account over 10 years, takes no money out in years 1–9 if they choose, and every dollar that comes out is theirs to keep. No federal tax, no state tax (except for NY residents’ estate-level considerations, noted below). Note that a designated Roth 401(k) has its own 5-year clock, and rolling one into a Roth IRA can affect timing—worth confirming plan specifics.

Inherited Traditional IRA withdrawals are generally taxable as ordinary income (any nondeductible basis the owner tracked on Form 8606 is the exception). If your heir receives a $50,000 distribution from a fully pre-tax account, they report that $50,000 on their tax return in the year received, at their own marginal rate. Someone in the 22% bracket pays roughly $11,000 in federal tax alone. Compress 10 years of withdrawals into tight brackets, and the bill grows fast.

Who should own which: your bracket vs. their bracket

The decision between Roth and Traditional is a long bet on tax brackets—your current rate, the rate you expect in retirement, and your heirs’ likely income. The general principle: a Roth is favored when your rate today is lower than the rate that will apply when the money comes out (yours or your heirs’); Traditional is favored when today’s rate is higher.

A Roth generally fits when:

• You are in a lower tax bracket now than you expect in retirement (often early career). It can then grow tax-free for decades, and your heir pays zero tax on the growth.
• You expect your heirs to be in a higher tax bracket than your current rate (high-earning adult children, for example). Prepaying the tax now at your lower rate means they withdraw tax-free later.
• You can contribute without needing a deduction. The IRA limit is $7,500 for 2026 ($8,600 if age 50+).
• You value simplicity: tax-free Roth withdrawals, no annual RMDs on inherited Roth accounts in years 1–9, and no income-tax surprises for your children.

A Traditional IRA generally fits when:

• You are in a high tax bracket today and expect a lower rate when the money is withdrawn. The deduction saves tax now, and withdrawals are taxed later at potentially lower rates.
• Your income exceeds Roth IRA contribution limits (single filers phase out above $168,000 MAGI; married filing jointly above $252,000, both 2026). Above those, Traditional is the direct IRA option (a backdoor Roth is a more complex alternative).
• You want a deduction today: contributing $7,500 to a Traditional IRA can reduce your taxable income by $7,500 (subject to deduction rules).

None of this is personalized advice—your own bracket math and your heirs’ future income are what determine the answer.

What your heirs actually face: the SECURE Act 10-year fork

The SECURE Act, passed in 2019 and refined through 2024, changed the game for inherited IRAs. Most non-spouse beneficiaries can no longer “stretch” distributions over their lifetime. Instead, they have a 10-year window.

Inherited Roth IRA (the easy path for heirs)

Your heir inherits your Roth and must empty the account by December 31 of the 10th year after your death. Here’s the magic: if you didn’t take RMDs in life (because Roth has no lifetime RMDs), your heir takes no annual distributions in years 1–9. They can leave the money untouched and growing, tax-free, for nearly a decade. Then, in year 10, they withdraw whatever remains.

This flexibility is huge. Your heir can time withdrawals to low-income years, bunch them with life changes, or leave the money invested and compounding. The account is a small wealth engine for 10 years.

Tax to your heir: generally zero, assuming the 5-year rule was met before your death.

Inherited Traditional IRA (annual RMDs + compressed tax bills)

Here’s where it gets pinched. If you had already reached your required beginning date and started taking required minimum distributions (RMDs) before you died—the RMD age is 73 for those born 1951–1959, and 75 for those born in 1960 or later—your heir must take annual distributions starting in the year after your death, following an IRS table. Miss a required distribution, and the penalty is 25% of the amount not withdrawn (10% if corrected promptly). The IRS waived these penalties through 2024, but that grace period has ended.

After fulfilling the annual RMD requirement, your heir still must empty the full account by year 10. So if your $500,000 Traditional IRA was already in RMDs, your heir might face:

• Year 1–3: $40,000–$50,000 annual RMDs, plus $50,000 extra withdrawal = $90,000–$100,000 per year taxed to the heir.
• Years 4–10: Remaining balance swept out on a schedule.

A $500,000 account compressed into 10 years pushes the heir into higher brackets, stacking distributions on top of their own wages. Many heirs find themselves in the 22% or 24% bracket suddenly, paying $110,000–$120,000 in federal tax alone.

Tax to your heir: heavily compressed, depending on the heir’s income and the account size.

The step-up basis wildcard: why Traditional can still win

One wrinkle: inherited investments outside retirement accounts get a “step-up in basis.” If you bought Apple stock for $10,000 and it’s worth $100,000 when you die, your heir inherits it at $100,000 and owes zero tax on the $90,000 gain.

This does NOT apply to IRAs. Inherited traditional IRAs get no step-up. Withdrawals are generally taxed as ordinary income—the only exception is any nondeductible contributions the owner tracked on IRS Form 8606, which come back out tax-free (most traditional IRAs have little or no such basis). This is why a traditional IRA inherited by an adult child is often less valuable than a taxable brokerage account holding the same stocks.

If you have the choice—say, $100,000 to invest—and your heirs are well-earning adults:

• $100,000 in a Traditional IRA → your heir gets distributions taxed as ordinary income, no step-up.
• $100,000 in a taxable brokerage → your heir gets a step-up to $100,000; they sell and owe zero tax on the gains you earned.

This is a key insight for high-net-worth savers: maximize your taxable account and step-up basis for heirs, and use Roth to pass retirement account wealth tax-free.

The New York estate tax angle: retirement accounts count

New York residents face an additional layer. The NY state estate tax exemption is $7,350,000 for 2026. Unlike the federal exemption, NY offers no spousal portability: if you’re married and you die first, your unused exemption does not pass to your surviving spouse. Each of you gets one $7.35M shield.

Crucially, your IRAs—both Roth and Traditional—count toward the $7.35M limit. A $500,000 Roth IRA eats into your exemption. An estate over $7.35M begins to owe NY tax at 3.06–16%, and the state has a brutal “cliff”: estates over 105% of the exemption (about $7.7M) lose the entire exemption. This means the marginal tax rate on estates just above the threshold can exceed 50%.

For NY residents with estates over $5M, the combination of federal ($15 million per person, made permanent by the OBBBA in 2025, no longer sunsetting) and state exemptions, plus the state cliff, demands planning. Naming beneficiaries correctly is Step 1. See which assets pass to beneficiaries and which go through probate to understand the full picture. And update your beneficiaries after major life changes—divorce, remarriage, new children—to keep your intent in sync with law.

From roadmap to will: make the decision stick

Your choice between Roth and Traditional is a stepping stone. It sits at Step 5 of the Money Roadmap—the decision about which bucket to fill once you’ve paid off debt and captured your employer match. But it ripples forward into your will and beneficiary designations.

IRAs don’t go through your will. They go straight to whoever you named as beneficiary on the account. This is why beneficiary designations often matter more than your will itself. A Roth or Traditional IRA you leave to your adult child bypasses probate, avoids the court, and arrives exactly as you intended—tax-free for Roth, taxable for Traditional.

The decision you make today shapes your heir’s tax bill for the next 10 years. As a rule of thumb, a Roth leans favorable when your current rate is lower than the rate that will apply at withdrawal—for instance, if your heirs will be in a higher bracket than you are now, or you want to lock in tax-free growth for the next quarter-century. A Traditional IRA leans favorable when you need a deduction now and expect the withdrawals to be taxed at a lower rate. Either way, name your beneficiaries, update them after life changes, and revisit the choice every few years. The law changes, brackets shift, and your life evolves. Your retirement plan should too.

Start with the Money Roadmap to see where IRAs fit into your full financial life and estate plan.