By Michael Iskra · Founder, POM Unlimited · Beverly Hills, CA
The owners and executives we work with spent thirty years doing exactly what they were told: defer, defer, defer. The result is a multimillion-dollar IRA or qualified balance they will never spend in their lifetime — and that unspent balance is not an asset sitting safely in reserve. It is a deferred-tax liability that compounds against the family on three fronts at once. The deferral that built the balance never eliminated the tax; it only moved it forward, to the worst possible moment, onto the worst possible payer. For a high-net-worth household, the large qualified balance is the single most tax-inefficient asset in the estate.
The Three Charges in the Time Bomb
These do not happen in sequence. They stack on the same dollars and compound.
- Income tax on every dollar that comes out. A qualified balance has never been taxed. Every distribution — to the owner, to a spouse, or to heirs — is ordinary income, taxed at the recipient’s top marginal rate. There is no capital-gains treatment and no step-up in basis at death. A $7 million IRA is not $7 million; it is $7 million minus whatever ordinary-income rate applies when it comes out.
- Estate tax on what’s left. The same balance sits in the taxable estate at full value. Above the exemption, it is exposed to the 40% federal estate tax — on top of the income tax still owed on it. The same dollars are hit twice.
- The 10-year rule landing it on the heirs. Under the SECURE Act, most non-spouse beneficiaries can no longer stretch distributions over their lifetimes. The entire inherited balance must come out within ten years — stacked on top of the heirs’ own peak earning years, at their top rates, in a compressed window. The “stretch” that used to soften the blow is gone.
A Worked Example: $8,000,000 IRA, Stacking the Charges
A married couple holds an $8,000,000 traditional IRA they do not need for living expenses. Illustrative combined income-tax rate ~50.3% (37% federal + 13.3% California); 40% federal estate tax on amounts above the exemption.
Path A — Do Nothing
- RMDs force taxable income the couple doesn’t need, taxed at top rates while they’re alive
- At the second death, the remaining balance — say $8,000,000 — sits in the taxable estate
- Estate tax exposure on that balance (above exemption) at 40%: up to ~$3,200,000
- Heirs inherit what remains and must withdraw it all within 10 years — every dollar ordinary income at their rates, illustratively another ~$2,400,000+ in income tax
- The same $8,000,000 is reduced by income tax and estate tax — the combined erosion can exceed half the balance before the family nets a dollar
Path B — Defuse It While There’s Time
- The balance is repositioned deliberately during the owner’s lifetime, before RMDs and the second death force the timing
- The double-tax stacking is broken — the dollars are moved out of the worst-taxed asset class and out of the taxable estate, on the owner’s schedule rather than the IRS’s
- Heirs receive value that isn’t compressed into a 10-year ordinary-income window
The point: doing nothing is a decision — it just defers the decision to a moment when the owner no longer controls the timing, the rate, or the payer. The balance that felt like a win every year it grew is the most exposed asset in the estate.
When This Is a Problem Worth Solving
- A qualified or IRA balance large enough that the owner will not spend it down in their lifetime — meaningful at $5 million and up.
- An estate above the exemption, so the estate-tax charge actually fires on the balance.
- Heirs who would inherit into their own high-earning years and be forced through the 10-year window.
- Time to act — the most effective repositioning happens before RMDs and before the second death compress the options.
When It Isn’t
- The balance will genuinely be spent in retirement — if it’s funding the lifestyle, it’s doing its job.
- The estate is below the exemption, so the estate-tax charge never fires and the problem is income tax alone.
- The owner is already past the points where the most effective tools work, and the remaining moves are narrow.
- Heirs are charitable beneficiaries — a qualified balance left to charity sidesteps both taxes and may be the cleanest answer.
What to Do Before the Timing Decides for You
- Quantify the real, after-tax value of the balance — not the statement number; the number net of income tax and estate tax. That figure is the planning case.
- Map the RMD and second-death timeline — the options narrow as those dates approach; knowing the runway determines what’s still available.
- Identify who actually inherits — spouse, heirs, or charity changes the entire analysis and which charge dominates.
- Act while you control the variables — timing, rate, and payer are all still yours to choose before they aren’t.
How POM Unlimited Helps
We start with the number that matters — what the balance is actually worth after income tax and estate tax, not what the statement says. From there we reposition it deliberately, on your timeline, before RMDs and the second death take the choice away.
Learn how we defuse the large-IRA problem within a full strategy at our Qualified Plans services page.
This article is for general informational purposes and does not constitute tax, legal, or investment advice. Qualified plan and IRA rules, contribution limits, and estate tax exemptions are subject to legislative change. Consult a qualified tax professional and review your specific situation before making any changes.