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Regarding income tax on an inherited traditional IRA:
- If the spouse inherits, s/he can roll it into his/her own IRA,

They can also choose to leave it as a beneficiary IRA.

and have no tax due at the time of rollover,


but will still have to pay income tax on distributions later on, when the money is withdrawn.

Correct. When those withdrawals must happen is the main difference between leaving it as a beneficiary IRA and rolling it into the spouse's own IRA.

- If the children inherit, they have to pay income tax when they inherit.

No. They also pay tax when the money is withdrawn. They just have fewer options about the timing of the withdrawals.

So this looks to me like a pay now vs. pay later scenario, as opposed to pay more vs. pay less.

Well, yes and no. It is definitely a pay now vs. pay later situation. And under the current laws, it's all ordinary income no matter who withdraws the money or when they withdraw it. But the taxes could be higher or lower depending on who is withdrawing the money and what their personal tax situation looks like when they make the withdrawal.

Sometimes it makes sense for elderly parents to withdraw more than the RMD from their IRAs because they will pay less tax than their children. Or maybe they will pay the same tax, but that gets the assets into investments which will get a step up in basis at their death.

Sometimes it makes sense for elderly parents to take only the RMDs because their children are the ones expected to pay the lower taxes. That might also be a reason to name the children as beneficiaries rather than a spouse, but only if they are really sure the surviving spouse will never need the money.

You've really got to look at the whole family to manage the taxes on IRAs which are going to be passed from generation to generation.

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