You want to leave your kids money. But you don’t want the government taking half of it in taxes.
Here’s what most people don’t know: A simple $7,000 yearly deposit into a Roth IRA at age 25 grows into $2.3 million by retirement. Your heirs get every penny tax-free.
But 2025 changed the rules. New laws create bigger opportunities—and new traps that could cost your family hundreds of thousands.
This guide shows you exactly how to use these changes to build tax-free wealth for your heirs. You’ll learn strategies that turn modest contributions into life-changing inheritances.
Why 2025 Changed Everything for Roth IRA Inheritances
New rules started this year. They affect how your heirs get money from your Roth IRA.
The 10-Year Rule Hit Most Heirs
If you die after 2019, most non-spouse heirs must empty your Roth IRA within 10 years. Starting in 2025, they also must take required minimum distributions each year during those 10 years.
Your spouse gets better treatment. They can add your Roth IRA to their own account and keep it growing tax-free.
The 5-Year Rule Still Matters
For earnings to come out tax-free, your Roth IRA must be open for 5 years before you die. Contributions always come out tax-free.
Who Gets Special Treatment
Some heirs can still stretch payments over their lifetime:
- Your spouse
- Your minor children (until they turn 21)
- Disabled or chronically ill people
- Anyone less than 10 years younger than you
Why This Matters Now
The new rules make starting early even more powerful. Your heirs get less time to stretch the money, so you need to put more in up front.
How $7,000 Becomes $2.3 Million Tax-Free
The math is simple. Time makes small money big.
Start at 25, Get Rich
Put $7,000 per year into a Roth IRA starting at 25. With 6% returns, you’ll have $2.3 million by age 70. Your heirs get it all tax-free.
Start at 15, Get Richer
Even $1,000 per year starting at 15 becomes $417,000 by age 70. Bump it to the max allowed and hit $2.3 million.
The Magic of No Taxes
Regular retirement accounts get taxed when your heirs take money out. Your $2.3 million might become $1.6 million after taxes.
Roth IRAs? Your heirs keep every penny.
Real Numbers for Real People
Here’s what happens with different starting ages:
- Age 25: $7,000/year = $2.3 million by 70
- Age 35: $7,000/year = $1.2 million by 70
- Age 45: $7,000/year = $615,000 by 70
Starting 10 years earlier doubles your money. That’s why time beats everything.
The Catch-Up Advantage
At age 50, you can put in $8,000 per year instead of $7,000. That extra $1,000 adds up fast.
How High Earners Break the Income Rules
Make too much money? The government says you can’t use a Roth IRA directly.
In 2025, you’re locked out if you make over $165,000 (single) or $246,000 (married filing jointly).
But there’s a legal workaround called the backdoor Roth.
How the Backdoor Roth Works
- Step 1: Put money in a regular IRA (no income limits here).
- Step 2: Convert it to a Roth IRA right away.
- Step 3: Pay taxes on the conversion (usually zero if you do it fast)
This lets high earners put $7,000 into a Roth IRA every year, despite income limits.
The Pro-Rata Trap
Watch out for this mistake. If you have money in other traditional IRAs, the pro-rata rule makes part of your conversion taxable.
Example: You have $50,000 in a traditional IRA and want to convert $7,000. The IRS treats this as taking money from both accounts. You’ll owe taxes on part of that $7,000.
The Mega Backdoor Roth
Got a 401(k)? You might be able to put way more than $7,000 into a Roth.
Some 401(k) plans let you make after-tax contributions up to $43,500 per year, then convert them to Roth.
This turns your $7,000 yearly limit into $50,000 or more.
When to Use These Strategies
- You make too much for regular Roth contributions
- You want to put more than $7,000 per year into Roth accounts
- You expect to be in a higher tax bracket later
- You want to leave tax-free money to your heirs
How to Turn Your 401(k) Into Tax-Free Gold
You probably have money sitting in a traditional 401(k) or IRA. Every dollar you convert to a Roth saves your heirs taxes later.
The Perfect Time to Convert
Early retirement creates a golden window. Your income drops, but you don’t need retirement money yet.
Example: Bill and Jen retired at 55. They convert just enough each year to fill their 10% tax bracket. After 6 years, this adds $260,000 to their net wealth.
How Much to Convert Each Year
Don’t convert everything at once. You’ll pay huge taxes.
Instead, convert enough to “fill up” your current tax bracket:
- 10% bracket: Convert up to $23,200 (married) or $11,600 (single)
- 12% bracket: Convert up to $94,300 (married) or $47,150 (single)
- 22% bracket: Convert up to $201,050 (married) or $100,525 (single)
This keeps you from jumping into higher tax brackets.
Pay Taxes with Outside Money
Never use IRA money to pay conversion taxes. This kills the point of converting.
Save cash outside your retirement accounts to pay the tax bill.
Watch Out for These Gotchas
Converting too much can:
- Make more of your Social Security taxable
- Increase your Medicare premiums
- Push you into higher tax brackets
The 5-Year Rule for Conversions
Each conversion starts its own 5-year clock. You can’t touch the converted money for 5 years without penalties.
Plan accordingly if you might need the money soon.
Why Your Estate Plan Needs Roth IRAs Now
Regular retirement accounts create tax bombs for your heirs. Roth IRAs create tax-free windfalls.
No Required Withdrawals During Your Life
Traditional IRAs force you to take money out starting at age 73. Roth IRAs don’t.
This means more money stays invested longer. More growth for your heirs.
Your Heirs Get Tax-Free Money
When heirs inherit a Roth IRA, required distributions won’t be taxed. Every dollar you put in comes out tax-free for them.
Smart Beneficiary Moves
Name your spouse first. They can treat your Roth IRA as their own and avoid required distributions.
For other heirs, name them directly. Don’t leave Roth IRAs to your estate, or they lose special tax treatment.
Multiple Roth IRAs for Multiple Kids
Open separate Roth IRAs for each child you want to benefit. This gives them more control and flexibility.
Trust Considerations
You can leave Roth IRAs to trusts, but this gets complicated fast. The trust might have to pay higher taxes on distributions.
Work with an estate planning lawyer if you want to use trusts.
Advanced Moves That Multiply Your Results
Ready to go beyond basic strategies? These moves can supercharge your Roth IRA growth.
Self-Directed Roth IRAs
Most people invest Roth IRAs in stocks and bonds. But you can use them for real estate, private businesses, and other investments.
This is how Peter Thiel grew his Roth IRA from under $2,000 to $5 billion—by putting startup shares into the account.
Using Roth Money for First Homes
Your heirs can take up to $10,000 in earnings tax-free for a first home purchase. Contributions come out anytime without penalties.
This makes Roth IRAs double as family wealth and housing funds.
Education Funding Strategy
Roth IRAs can fund education expenses. Your kids get money for college, and anything left over stays tax-free for retirement.
State Tax Planning
Moving from a high-tax state to a low-tax state? Convert your traditional IRAs to Roths before you move. You’ll pay the high state taxes once, then your heirs get tax-free money forever.
7 Mistakes That Cost Families Millions
Don’t let these errors destroy your tax-free wealth plan.
Mistake 1: Waiting Too Long to Start
Every year you wait costs thousands in growth. A 35-year-old who waits until 45 to start loses over $500,000 in final account value.
Mistake 2: Not Maximizing Contributions
The 2025 limit is $7,000 ($8,000 if you’re 50+). Contributing $5,000 instead of $7,000 costs you over $300,000 by retirement.
Mistake 3: Converting Too Much at Once
Big conversions create big tax bills. Spread them over multiple years to stay in lower tax brackets.
Mistake 4: Bad Beneficiary Designations
Naming your estate instead of people kills the tax benefits. Always name specific people as beneficiaries.
Mistake 5: Not Understanding the 5-Year Rule
Each Roth IRA needs to be open for 5 years for earnings to come out tax-free. Start the clock early.
Mistake 6: Using IRA Money to Pay Conversion Taxes
This turns your conversion into a withdrawal. You lose money to taxes and penalties.
Mistake 7: Forgetting About State Taxes
Some states tax Roth conversions even if the federal government doesn’t. Know your state rules before converting.
Your 2025 Action Plan: What to Do Right Now
Don’t wait. Every month you delay costs your heirs money.
This Month
- Check your current contributions. Are you putting in the full $7,000 this year?
- Review your income. If you make too much for direct Roth contributions, set up a backdoor Roth strategy.
- Look at your beneficiaries. Make sure you have real people named, not your estate.
Before December 31, 2025
- Max out this year’s contribution. You have until April 15, 2026, but don’t wait.
- Consider a Roth conversion. If you had a low-income year, convert some traditional IRA money.
- Clean up old IRAs. If you have multiple traditional IRAs, consider consolidating them.
Next Year Planning
- Set up automatic contributions. Have money go directly from your paycheck to your Roth IRA.
- Plan your conversion strategy. Figure out how much to convert each year without jumping tax brackets.
- Review annually. Tax laws change. Your income changes. Adjust your strategy accordingly.
Working with Professionals
You might need help with:
- Complex conversion strategies
- Estate planning documents
- Tax planning across multiple years
- Self-directed IRA investments
Find a fee-only financial planner who understands Roth strategies.
