A Smarter Way to Leave Your Retirement Account to Your Kids

generational wealth

Eddie always thought he was doing the right thing by saving into his 401(k). It was consistent, automatic, and had grown over the years. Now in his early 60s, he figured whatever he didn’t use in retirement would just go to his kids.

But here’s the thing: Retirement plans are one of the worst ways to pass on wealth.

They’re not designed for inheritance. They’re built for your retirement—and your kids pay the price when you’re gone.

Why Retirement Accounts Are a Terrible Inheritance Plan

Let’s say you have $500,000 in a traditional IRA or 401(k). That entire amount is taxable income to your kids when they inherit it.

Under current IRS rules (thanks to the SECURE Act), they have to empty that account within 10 years. That means:

  • Forced withdrawals
  • Accelerated taxes
  • No step-up in basis
  • No way to stretch the benefit

 

If your kids are working and earning good money, those withdrawals could push them into higher tax brackets—fast.

Let’s do the math:

$500,000 IRA inheritance

If your children average a 32% tax rate (federal + state), they only keep:

$340,000

That’s $160,000 lost to taxes.

There’s a Better Way: Use the IRA to Buy a Lifetime Income Annuity → Fund Life Insurance

Instead of passing down the IRA directly, there’s a smarter, more strategic move:

  • Use the IRA to buy a lifetime income annuity
  • Then use the annuity payments to fund a permanent life insurance policy
  • Leave a tax-free death benefit to your children


This approach lets you convert a tax-heavy asset into a tax-free one. And depending on your health, it can even increase what your heirs receive.

Let’s Compare Two Scenarios

Scenario A: Pass Down the IRA

  • Eddie dies with $500,000 in his IRA
  • His two adult kids inherit it and withdraw equal parts over 10 years
  • They pay a combined 32% in taxes
  • Each receives: $170,000 net after taxes
  • Total legacy = $340,000


Scenario B: Use the IRA to Buy a Life-Only Annuity → Fund Life Insurance

  • Eddie uses $500,000 to buy a life-only annuity paying $30,000/year for life
  • He qualifies for a life insurance policy with a $600,000 death benefit using that income
  • When he passes, his kids receive the entire $600,000 tax-free
  • Total legacy = $600,000
  • Even if Eddie lives 20 years, he’s converted a taxable, shrinking asset into a stable, tax-free one

 

Why This Strategy Works

✔️ Tax Efficiency

Life insurance is one of the only financial tools that pays out tax-free. You’ve already paid taxes on the annuity income—now your kids don’t have to.

✔️ Leverage

Life insurance allows you to pass on more than you paid in, especially if you pass earlier than expected. Even if you live a long life, you’ve still gained—because the asset was converted from taxable to tax-free.

✔️ Simplicity

No need for complex trusts. No guessing about tax brackets. Just a clean, well-designed legacy.

You don’t need a trust. You don’t need a new retirement plan. You just need to rethink what that retirement money is really for.

If your goal is to help your kids, don’t pass them a tax problem.

Pass them something solid. Something protected. Something built to last.

Want to see what this could look like for you?

Book a free session with a financial professional through The World Changers Network.

We’ll help you review your retirement account and design a wealth transfer plan that actually works for your family—not the IRS.

You worked hard to build it.

Now let’s make sure it actually helps the people you love.

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