Beware of Kiddie Taxes When You Leave Heirs Your IRA
Children and grandchildren inheriting traditional IRAs could quickly find themselves in the top 37% tax bracket thanks to changes ushered in by the Tax Cuts and Jobs Act.


The Tax Cuts and Jobs Act has imposed a major change on how children are taxed on unearned income, which includes required minimum distributions from inherited IRAs. The result? Tax rates on these required distributions now could be a lot higher.
A kiddie tax, as it is better known, is imposed on a child's investment income above an exemption amount, which was $2,100 in 2018 and is $2,200 in 2019.
Prior to 2018 the tax rate used for a child’s unearned income was the same as the parents' income tax rate.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
However, under the TCJA, the parental tax rates no longer apply. Instead, the tax imposed on unearned income for children is the same as the rates that are applied to trusts and estates, and this will continue through 2025.
Top Tax Rate Triggered at $12,751 Now vs. $612,351 Before
Just like the trust and estate tax rate, the kiddie tax rate now vaults to the highest tax bracket of 37%, with just $12,751 in unearned income in 2019.
Whereas the 37% tax rate doesn’t kick in, for example, for a married couple filing a joint return, until their taxable income gets to $612,351.
To get the full picture of how significant a difference this is, take a look at this comparison of the different tax rate schedules:
2019 Tax Brackets for Single/Married Filing Jointly
Tax Rate | Taxable Income(Single) | Taxable Income(Married Filing Jointly) |
---|---|---|
10% | Up to $9,700 | Up to $19,400 |
12% | $9,701 to $39,475 | $19,401 to $78,950 |
22% | $39,476 to $84,200 | $78,951 to $168,400 |
24% | $84,201 to $160,725 | $168,401 to $321,450 |
32% | $160,726 to $204,100 | $321,451 to $408,200 |
35% | $204,101 to $510,300 | $408,201 to $612,350 |
37% | Over $510,300 | Over $612,350 |
Compare those income levels and tax brackets to the ones used for children inheriting traditional IRAs:
2019 Tax Brackets for Trusts & Estates
Tax Rate | Taxable Income |
---|---|
10% | $0 to $2,550 |
24% | $2,551 to $9,150 |
35% | $9,151 to $12,500 |
37% | $12,501 + |
Keep in mind, there will be no change in the tax impact, if the parents are already at the top tax rate, but if the parents are in a lower bracket, the child's unearned income can quickly become taxable at higher rates than what their parents face.
Unearned income subject to the kiddie tax includes things like interest and dividends from investment accounts, capital gains, Social Security survivor benefits, rents, royalties, pension income and income from inherited traditional IRAs.
Who Is Subject to the Kiddie Tax?
The kiddie tax applies to unearned income of children under age 19 or, if full-time students, under age 24.
IRA distributions are unearned income for kiddie tax rules, so required distributions to children, especially from larger inherited traditional IRAs, can become subject to very high tax rates very quickly, even if parents pay lower rates.
The negative effects of the kiddie tax will apply primarily to large IRAs, if there are no other sources of unearned income, since RMDs will be under 1.67% annually in the early years of distributions.
For example, in 2019 a child would need a total of $14,951 of total unearned income from a required minimum distribution before reaching the top 37% trust tax rate, if there were no other sources of unearned income.
This total would include the first $2,200 of exempt income, and then another $12,751 of taxable income, before the 37% tax rate will apply.
How Big Does an IRA Need to Be to Trigger the Top Tax Rate?
To illustrate, if a 17-year-old granddaughter inherits a large IRA from her grandfather, the girl would have a 66-year life expectancy, so only 1.52% of the inherited IRA would have to be withdrawn in the first year.
This means the inherited IRA would have to be $983,618 to produce a required minimum distribution of $14,951, putting the granddaughter in a 37% tax bracket.
However, if this child had another $10,000 of unearned income from other sources, such as interest and dividends from investments or Social Security survivor benefits, the IRA would only have to be $325,724, producing a required minimum distribution of $4,951. When combined with the $10,000, this would put the total unearned income at $14,951, and that would put the child in a 37% tax bracket.
Time to Consider Converting to a Roth IRA?
These kiddie tax changes give a whole new reason for parents and grandparents to consider converting to a Roth IRA when the beneficiary is a young child or grandchild who will likely be subject to the so-called kiddie tax.
It will become more important to consider the potential high kiddie tax cost to a family of leaving a traditional IRA to child beneficiaries when a Roth IRA, with its tax-free distributions, could be used for the same purpose with zero kiddie tax cost.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
The $33,000 Retirement: One Man's Surprising Path to Financial Freedom at 61
Forget what society tells you, even with less than $1 million, you can be happy in retirement.
-
The Best Aerospace and Defense ETFs to Buy
The best aerospace and defense ETFs can help investors capitalize on higher government defense spending or hedge against the potential of a large-scale conflict.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet Spot
Converting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
-
Investing Professionals Agree: Discipline Beats Drama Right Now
Big portfolio adjustments can do more harm than good. Financial experts suggest making thoughtful, strategic moves that fit your long-term goals.
-
'Doing Something' Because of Volatility Can Hurt You: Portfolio Manager Recommends Doing This Instead
Yes, it's hard, but if you tune out the siren song of high-flying sectors, resist acting on impulse and focus on your goals, you and your portfolio could be much better off.
-
Social Security's First Beneficiary Lived to Be 100: Will You?
Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
-
An Investment Strategist Demystifies Direct Indexing: Is It for You?
You've heard of mutual funds and ETFs, but direct indexing may be a new concept ... one that could offer greater flexibility and possible tax savings.
-
Q2 2025 Post-Mortem: Rebound, Risks and Generational Shifts
As the third quarter gets underway, here are some takeaways from the market's second-quarter performance to consider as you make investment decisions.
-
Elon Musk and Most Taxpayers Don't Like What's in Trump's 'Big Beautiful Bill'
Tax Policy President Trump is betting big on his newest tax cuts being passed by July 4. But not everyone is on board.
-
Why Homeowners Should Beware of Tangled Titles
If you're planning to pass down property to your heirs, a 'tangled title' can complicate things. The good news is it can be avoided. Here's how.