Your Big IRA Could Become a Big Tax Problem for You, Your Spouse and Your Heirs
If you start optimizing your tax strategy now, you can head off the inevitable stress-inducing tax consequences waiting for you when RMDs kick in — and when your family inherits.
Every financial plan you'll ever see puts heavy emphasis on getting money into retirement accounts.
Contribute early, get the match, max out the IRA and let it compound. That part of the advice is sound, and most disciplined savers follow it well.
What gets far less attention is what happens after the money is in there. For some retirees who did everything right and accumulated a large IRA balance, that account can quietly turn into a complicated tax problem for themselves, a surviving spouse and, eventually, their kids.
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The culprit is required minimum distributions (RMDs). Once RMDs start, at age 73 or 75 depending on your birth year, that money adds to taxable income whether you need it or not, on top of whatever else you're already reporting. That's the part most retirees eventually hear about, usually from an accountant and usually a year or two too late.
What almost nobody discusses is where that balance goes after the RMD math is finished for the year.
A large IRA won't create a tax bill only for the original owner. It can create a bigger one for the spouse who is left filing alone and a different one for the kids who inherit what's left when they're in their peak earning years.
One account, three tax bills, three different taxpayers.
John and Jane did everything right
John and Jane are 64. They maxed out their 401(k)s for three decades, didn't touch the money early and rolled everything into IRAs at retirement. Between them, they're sitting on $2.3 million in traditional IRA balances, a paid-off house and modest investment income each year.
Fast-forward to age 75, when their RMDs begin. Assuming reasonable growth and no withdrawals, that $2.3 million could be $3 million or more, generating an RMD of roughly $122,000 in the first year.
Add combined Social Security of about $65,000 and an additional $45,000 of investment income, and they're looking at $232,000 to report on their tax return. It's far more than they need, and none of it is optional.
That $232,000 lands on John and Jane's return, and it's the most straightforward of the three tax bills this balance is about to generate.
The widow's penalty
The problem doesn't stop with John and Jane filing jointly. Assume John passes first, which is statistically likely. Jane's income marginally changes. She still collects the survivor Social Security benefit, still owns the investment account and still has to take RMDs on essentially the same IRA balance.
What changes is her filing status. She moves from joint brackets to single brackets, which are roughly half as wide through most of the income range. Her standard deduction shrinks by close to half as well, pushing more income into taxable territory.
Income that used to be taxed at 12% or 22% when John was alive is now landing at 24% or 32%, even though her income hasn't moved.
Many couples model their household income. Very few model what that same income looks like once one spouse is filing alone. For a couple with John and Jane's numbers, the bracket and deduction squeeze alone can mean $10,000 to $15,000 more in tax every year, for the rest of her life.
This is what is referred to as the widow's penalty and could cost the taxpayer additional tax for decades.
The beneficiary problem
Push the timeline out further. Jane eventually leaves the remaining IRA to their two children, and by then, it's worth roughly $3 million combined, about $1.5 million to each child.
Under rules in place since the SECURE Act, most nonspouse individuals must empty an inherited IRA within 10 years of the original owner's death. Withdrawals don't have to be even, but if the original owner was already taking RMDs, annual withdrawals are typically required throughout that window, too.
For a child who's in their peak earning years, that inherited IRA doesn't always arrive as a windfall. It arrives as $150,000 or more of additional taxable income, stacked directly on top of a salary, a bonus and whatever else they've already got going on. A meaningful chunk of that inheritance can go straight to the IRS.
John and Jane spent 30 years deferring tax on that money, and their children may pay more on it than John and Jane ever would have.
Why this matters now
Two recent changes make this the right moment to make the projection.
First, RMD ages have moved. The SECURE 2.0 Act pushed the starting age to 73, moving again to 75 in 2033. That gives people born after 1959 a longer runway before distributions are forced and more years to plan around it.
Second, the One Big Beautiful Bill Act made the current tax brackets permanent instead of letting them expire at the end of 2025. For years, planners hedged Roth conversion advice with "rates might go up, might go down." That uncertainty has diminished.
Neither change fixes the underlying problem: A large traditional IRA is still going to generate a large RMD. But both make it easier to plan while there is still room to act.
The planning runway
John and Jane have an advantage most people overlook: They're 64, retired, and neither Social Security nor RMDs have started. That runway is valuable, but it won't last.
They could consider a Roth conversion. Every dollar converted gets taxed at today's rate, while their income is relatively low, instead of at a future rate stacked on top of Social Security, RMDs and investment income. A smaller traditional IRA can mean smaller future RMDs, less pressure on a surviving spouse's tax return and less taxable income passed to children.
Another move is a qualified charitable distribution, or QCD, once they turn 70½. IRA owners can send money directly from the IRA to a qualified charity — up to $111,000 per person in 2026 — and that amount counts toward the RMD without showing up as taxable income.
For the charitably inclined, it's one of the few ways to satisfy an RMD and lower a tax bill at once.
Neither move is automatically right for everyone, not even for John and Jane. The goal isn't converting for its own sake, it's optimizing the tax bill across a lifetime, and Roth conversions and QCDs are tools for that, not the whole strategy.
What matters more than picking a tactic is running the numbers every few years, since today's right answer may not be right in five years.
The real problem isn't the balance
There's nothing wrong with having a large IRA. It means the saving worked. The problem is assuming that planning is finished once the account is funded.
Left alone, a large traditional IRA sets off a chain reaction:
- Bigger RMDs than you need
- A tax increase left for the surviving spouse
- A tax bill handed to your kids on money you spent 30 years deferring
None of it is inevitable, but all of it takes years of lead time to fix.
The best time to deal with a large IRA is before the RMDs force the issue, not after.
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- Why a Down Market is the Best Time for a Roth IRA Conversion
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