Most people spend their working years trying to save enough for retirement.

You contribute to your 401(k). You build up savings. Maybe you buy a house, invest in a brokerage account, or open a Roth IRA along the way.

Then, somewhere around your 50s, 60s, or early retirement years, the question starts to change.

It is no longer just, “Will I have enough?”

It becomes, “What happens to all of this someday?”

And for many hard-working Midwesterners, that question is not just about taxes. It is about family. It is about making sure the money you worked for actually helps the people and causes you care about.

The problem is that not all accounts pass to the next generation the same way.

A traditional IRA, Roth IRA, brokerage account, and house can all create very different tax results for your heirs.

That is why intergenerational tax planning matters.

The Problem: Most People Think All Inherited Money Is Taxed the Same

A lot of people assume that when their kids inherit money, it all works roughly the same way.

It does not.

Some assets may receive very favorable tax treatment when passed to heirs. Others may create taxable income for your beneficiaries. Some assets may be better left to children. Others may be better left to charity. And some accounts may be worth repositioning during your lifetime.

This is where retirement tax planning gets more complicated than simply asking, “How do I pay the least amount of tax this year?”

That may be the wrong question.

A better question is:

How do I keep the most after-tax wealth in the family over my lifetime and my children’s lifetime?

That is a very different way to think.

Sometimes, voluntarily paying tax today through a Roth conversion, for example, may create a better long-term result.

The goal is not always to avoid tax.

The goal is to be thoughtful about when, where, and by whom the tax is eventually paid.

The Reframe: The “Best” Account Is Not Always the One With the Lowest Tax Bill Today

When people compare accounts, they often want a simple ranking.

They want to know:

“Is Roth better than traditional?”

“Is a brokerage account better than an IRA?”

“Should I convert everything?”

“Should I leave my IRA to my kids?”

The honest answer is: it depends.

That may sound frustrating, but it is true.

A Roth IRA may be wonderful for heirs because qualified Roth distributions can generally be tax-free. A brokerage account may be powerful because many inherited assets receive a step-up in basis. A traditional IRA may be less tax efficient for children, but it may still be useful during your own retirement or for charitable planning.

The planning mistake is looking at each account in isolation.

The better approach is to look at your full family picture:

• Your tax bracket today

• Your future required minimum distributions

• Your children’s likely tax brackets

• Your charitable goals

• Your spending needs

• Your estate plan

• The flexibility you want to keep

That is where good intergenerational tax planning begins.

The 3 Tax Buckets Every Retiree Should Understand

1. After-Tax Money: The Power of the Step-Up in Basis

After-tax money is money that has already been taxed.

This could include:

• A taxable brokerage account

• Bank accounts

• Real estate

• Certain non-qualified investments

The major tax benefit of many after-tax assets is the step-up in basis at death.

Here is a simple example.

Let’s say you bought a house years ago for $50,000. By the time you pass away, it is worth $500,000.

If you sold the home while alive, there could potentially be a large capital gain. For the sake of simplicity, we will ignore the primary residence exclusion and other possible adjustments.

But if your children inherit the home, the tax basis is generally adjusted to the fair market value on the date of death. The IRS explains that inherited property basis is generally the fair market value of the property on the decedent’s date of death. (irs.gov)

So instead of your children inheriting your original $50,000 basis, they may receive a new basis of $500,000.

If they sell the home shortly after inheriting it for $500,000, there may be little or no capital gain.

If they wait and sell it later for $600,000, then the taxable gain would generally be based on the growth after they inherited it, not the growth that occurred during your lifetime.

This is why brokerage accounts and real estate can be very tax-efficient assets to leave to heirs.

That does not mean you should never sell appreciated assets while alive. It simply means the step-up in basis is an important part of the planning conversation.

2. Pre-Tax Money: Great While Saving, But Potentially Taxable for Heirs

Pre-tax accounts include traditional IRAs, traditional 401(k)s, 403(b)s, and similar retirement accounts.

These accounts are often great during your working years because you may receive a tax deduction when you contribute.

For example, if you earn $100,000 and contribute $10,000 to a pre-tax 401(k), you will only pay income tax on $90,000.

That feels good.

The money then grows tax-deferred.

But eventually, someone has to pay income tax when the money comes out.

That someone could be you during retirement.

Or it could be your children after they inherit the account.

And that is where things can get tricky.

Traditional IRA and 401(k) distributions are generally taxed as ordinary income. The IRS also says beneficiaries must include taxable distributions they receive in gross income.

For many non-spouse beneficiaries, inherited IRA rules now require the account to be fully distributed within 10 years, with certain exceptions for eligible designated beneficiaries. IRS Publication 590-B says that, under the post-2019 rules, all distributions generally must be made by the end of the 10th year after death unless an exception applies. (irs.gov)

That can be a problem if your children are already in their peak earning years.

Imagine your child is a doctor, attorney, engineer, executive, or business owner. They may already be in a high tax bracket. If they inherit a large traditional IRA, those required distributions may stack on top of their wages or business income.

That may push more money into higher tax brackets and leave less wealth in the family after taxes.

This is why pre-tax accounts are often one of the biggest opportunities, and challenges, in intergenerational tax planning.

3. Roth Money: Pay Tax Now, Potentially Create Tax-Free Wealth Later

Roth accounts work differently.

With a Roth IRA or Roth 401(k), you do not receive a tax deduction when the money goes in.

You pay tax today.

But if the rules are met, future qualified withdrawals will be tax-free.

That can make Roth accounts very powerful for retirement income planning and legacy planning.

A Roth IRA inherited by children may still be subject to distribution rules, but the tax treatment can be much more favorable than a traditional IRA if the distributions are qualified. Fidelity notes that inherited Roth IRAs are still subject to withdrawal requirements, and the original Roth IRA’s 5-year aging requirement matters for tax-free treatment. (Fidelity)

This is why Roth conversions are often discussed with retirees.

A Roth conversion means moving money from a pre-tax IRA into a Roth IRA. You pay tax on the conversion today, but future growth may be tax-free if the Roth rules are satisfied.

That may make sense if:

• You are in a lower tax bracket now than you expect later

• You want to reduce future required minimum distributions

• Your children may be in higher tax brackets

• You want to create more tax flexibility in retirement

• You want to leave more tax-efficient assets to heirs

But Roth conversions are not automatically good.

They can increase taxable income, potentially affect Medicare premiums, trigger higher taxes, or create other planning issues. They need to be modeled carefully.

Why This Matters for Midwest Retirees

For many people in Ohio and across the Midwest, wealth was not built overnight.

It came from decades of work.

Factory work. Teaching. Nursing. Small business ownership. Farming. Sales. Management. Union jobs. Saving into a retirement plan one paycheck at a time.

That kind of money means something.

It is not just numbers on a statement.

It may represent the house you paid off, the overtime you worked, the business you built, or the retirement plan you contributed to even when money was tight.

So when it comes time to think about passing wealth to the next generation, the goal is usually not to create the fanciest tax strategy.

The goal is simpler:

Make sure the money you worked hard for goes as far as possible for the people you love.

That might mean helping children avoid unnecessary taxes. It might mean using Roth conversions before required minimum distributions begin. It might mean leaving pre-tax assets to charity and after-tax assets to children. It might mean doing nothing aggressive because flexibility is more important.

The right answer depends on the family.

What You Actually Do About It

Intergenerational tax planning starts with organizing your accounts into tax buckets.

Ask:

• What do I own in pre-tax accounts?

• What do I own in Roth accounts?

• What do I own in after-tax accounts?

• What assets may receive a step-up in basis?

• What tax bracket am I in now?

• What tax bracket might my children be in later?

• Do I have charitable goals?

• When do required minimum distributions begin?

• Am I leaving flexibility for future law changes?

From there, you can begin evaluating strategies like Roth conversions, charitable beneficiary planning, tax-efficient withdrawals, and estate coordination.

This does not need to be overly complicated.

But it does need to be intentional.

The Bottom Line

The best tax plan is not always the one that pays the least tax this year.

A good plan looks across generations.

Traditional IRAs, Roth IRAs, brokerage accounts, and real estate all pass to heirs differently. Some assets may be very tax-efficient. Others may create a tax bill for your kids. The key is understanding the tradeoffs before decisions are made for you by default.

You do not need to predict the next 30 years perfectly.

You just need to point yourself in the right direction and keep enough flexibility to adjust when life, tax laws, and family circumstances change.