Could Your IRA Become Your Family’s Most Taxed Asset?

Written by Thomas DiCesare - Partner, Wealth Advisor at Waverly Advisors, LLC on June 11, 2026

Understanding the Potential “Double Taxation” of Traditional IRAs and the Planning Strategies Families May Consider to Help Reduce Its Impact.

For many investors, a traditional IRA represents years of disciplined saving, tax-deferred growth, and careful retirement planning. In many cases, these accounts become one of the largest assets on a family’s balance sheet.

While considerable attention is often given to accumulating retirement assets, less attention is paid to how those assets may ultimately be transferred to future generations. Yet for some families, traditional IRAs can create unique planning challenges that differ significantly from other assets.

Unlike many taxable investment accounts, traditional IRAs generally do not receive a step-up in cost basis at death. Instead, beneficiaries who inherit these accounts may be required to pay ordinary income taxes on future distributions. In certain circumstances, those same assets may also be included in a taxable estate, creating what is commonly referred to as “double taxation.”

Understanding how traditional IRAs fit within a broader wealth transfer strategy may help families make more informed decisions about retirement, tax, and estate planning.

Why Traditional IRAs Receive Special Attention in Estate Planning

Traditional IRAs are designed to provide tax advantages during an investor’s lifetime. Contributions may provide tax benefits, investments grow on a tax-deferred basis, and account owners generally maintain flexibility in determining how assets are invested and distributed.

However, tax-deferred does not mean tax-free.

Eventually, distributions from traditional IRAs generally become taxable as ordinary income. For many retirees, this is simply part of the retirement income planning process.

The planning conversation often changes when retirement assets become legacy assets.

Following the passage of the SECURE Act, many non-spouse beneficiaries are generally required to distribute inherited retirement accounts within a relatively short timeframe. As a result, inherited IRA distributions may create meaningful taxable income for beneficiaries, often during their peak earning years.

For some families, this reality has prompted a closer examination of how retirement assets fit within an overall estate plan.

Understanding the Potential for Double Taxation

One reason traditional IRAs often receive special attention during estate planning discussions is that they may be exposed to more than one layer of taxation.

When an IRA owner passes away, the value of the IRA is generally included in the owner’s taxable estate. If the estate exceeds applicable estate tax exemption amounts, a portion of the estate may be subject to estate taxes.

At the same time, beneficiaries who inherit a traditional IRA generally pay ordinary income taxes on future distributions they receive from the account.

As a result, the same retirement assets may potentially be exposed to:

Estate taxes at death
Income taxes when inherited IRA assets are distributed

This is the concept commonly referred to as “double taxation.”

While estate tax exposure does not affect every family, those who do face it are often surprised to learn that retirement accounts may be treated differently than other inherited assets.

A Larger Example Illustrates the Concept

A larger example helps demonstrate why traditional IRAs often receive special attention during estate planning discussions.

Consider an individual who passes away with:

A $20 million estate
A $5 million traditional IRA
A federal estate tax exemption of $15 million

In this example, the estate exceeds the exemption amount by $5 million.

First Layer: Estate Tax

Because the traditional IRA is included in the owner’s gross estate at its fair market value, the retirement account contributes to the estate tax calculation.

Assuming a 40% federal estate tax rate, the $5 million excess could result in approximately $2 million of estate tax attributable to the excess estate value.

Second Layer: Income Tax

Now assume the IRA is inherited by non-spouse beneficiaries.

As distributions are taken from the inherited IRA, those withdrawals are generally taxed as ordinary income.

If the beneficiaries are subject to a 37% federal income tax rate, the $5 million IRA could generate as much as $1.85 million of federal income tax over time.

As a result, the same retirement assets may potentially be exposed to:

Estate taxes at death
Income taxes when inherited assets are distributed

This is why traditional IRAs are often discussed as potentially creating a form of “double taxation.”

Is It Truly Double Taxation?

Congress recognized this issue and created the Income in Respect of a Decedent (IRD) deduction under Internal Revenue Code Section 691(c).

Beneficiaries who receive taxable inherited IRA distributions may be eligible to claim a deduction for the portion of estate tax attributable to those retirement assets.

However, the IRD deduction:

Does not eliminate the estate tax
Does not eliminate the income tax
May help reduce the overall tax burden

To illustrate the potential impact, consider the earlier example:

$5,000,000 traditional IRA
Approximately $2,000,000 of estate tax
Approximately $1,110,000 of additional income tax on inherited distributions

Combined taxes: approximately $3.11 million

Effective tax burden: approximately 62%

While the IRD deduction may reduce the overall impact, the combined tax burden can still remain significant. This is one reason retirement accounts often receive special attention when families evaluate wealth transfer strategies.

Planning Strategies Worth Discussing

There is no universal solution to the potential tax challenges associated with traditional IRAs. Every family’s circumstance, goals, and tax situation are different.

However, for estates that may exceed applicable exemption amounts, planners often evaluate a variety of strategies, including:

Roth conversions
Qualified Charitable Distributions (QCDs)
Strategic spending of IRA assets during retirement
Naming charitable organizations as IRA beneficiaries
Charitable trust strategies, where appropriate
Using taxable assets rather than IRA assets for certain charitable bequests
Life insurance strategies, often through an Irrevocable Life Insurance Trust (ILIT)
Coordination among financial, legal, and tax professionals

The appropriate strategy, if any, depends on an individual’s circumstances, objectives, and overall estate plan.

Final Thoughts

Traditional IRAs remain valuable retirement planning tools and continue to play an important role in many investors’ financial lives. However, the way retirement assets are taxed during life may differ significantly from the way they are taxed after death.

For families with substantial retirement assets and potential estate tax exposure, understanding how inherited IRAs, estate taxes, and income taxes may interact is an important component of long-term wealth transfer planning.

The objective is not necessarily to eliminate taxes. Rather, it is to understand how different assets may be treated when transferred and to evaluate whether existing strategies continue to align with family, charitable, tax, and legacy planning objectives.

By taking a proactive approach, families may be better positioned to make informed decisions about how wealth is ultimately transferred to the people and causes that matter most.

If you would like more information about the terms and strategies discussed in this guide, or if you’re ready to explore how they apply to your specific situation, contact Waverly Advisors. With experience working with individuals, families, and executives managing significant wealth, we specialize in creating tailored strategies with the goal to help you grow, protect, and transfer your assets effectively.

MEET THE AUTHOR

Thomas DiCesare

Partner, Wealth Advisor

Thomas is a Partner and Wealth Advisor at Waverly Advisors. He has been with the firm since December 2022, when Wall Advisors, LLC merged with Waverly. Thomas was born and raised in Lakeland where he graduated from Lakeland Christian School. He went on to attend Georgia Southern University where he obtained a bachelor’s degree in accounting. While other students enjoyed summers off, Thomas interned with Wall Titus to get real-world accounting experience…Learn More

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