Before the SECURE Act took effect in January 2020, inherited IRA rules were different. Children could spread withdrawals over their own lifetime. That plan, called a "stretch IRA," let the account keep growing tax-deferred for decades. The SECURE Act changed the rules. Most families now need a new plan.
The 10-Year Rule for Inherited IRAs
Under the SECURE Act, most non-spouse beneficiaries must empty an inherited IRA within 10 years. The clock starts at the original owner's death. This rule applies to deaths on or after January 1, 2020.
Every dollar pulled from a standard IRA counts as ordinary income. A large account drained over a short time can push your children into higher tax brackets. This creates a bigger tax bill than anyone expected.
RMD Rules During the 10-Year Window
The IRS finalized rules in 2024 that clarified the RMD rules for inherited accounts. The rules depend on whether the original IRA owner had reached their required beginning date for taking required minimum payouts:
- If the original owner died before their required beginning date: Your children can withdraw on any schedule they choose. The account just needs to be fully emptied by the end of year 10. No yearly RMDs are required during the window.
- If the original owner died after their required beginning date: Your children must take yearly RMDs during the 10-year window based on their own life expectancy. The account must still be fully emptied by the end of year 10.
The required beginning date is generally April 1 of the year after the IRA owner turns 73. SECURE 2.0 updated this age. Missing a yearly RMD can trigger a 25% penalty on the amount that should have been taken.
Who Is Exempt from the 10-Year Rule
Certain beneficiaries can still stretch payouts over their life expectancy. These are called "eligible designated beneficiaries." They include:
- A surviving spouse
- A minor child of the IRA owner (until they reach adult age, then the 10-year clock starts)
- Disabled or long-term ill persons
- A beneficiary who is not more than 10 years younger than the deceased IRA owner
Everyone else, including adult children, falls under the 10-year rule. This is the group most affected by the SECURE Act changes.
The Tax Impact on Your Children
The real cost of the 10-year rule is the tight tax timeline. Say your IRA is worth $500,000 and your child is in the 24% federal bracket. They could owe roughly $120,000 in federal income tax over the 10-year period. State taxes add to that. If they pull out large amounts in years when their other income is high, the tax bill climbs even more.
Smart withdrawal planning helps. Taking larger payouts in low-income years or spreading them evenly across all 10 years can soften the blow.
Planning Ideas Worth Thinking About
Knowing these rules early gives families time to plan. Several moves can help cut the tax burden on your children:
- Roth conversions: Converting standard IRA funds to a Roth IRA during your lifetime means you pay the income tax now, at your rate. Your children then inherit tax-free. The 10-year rule still applies to inherited Roth IRAs, but Roth withdrawals are tax-free.
- Charitable beneficiary: Naming a charity as beneficiary for part of your IRA removes that portion from your children's tax burden entirely. Charities pay no income tax on payouts.
- Tax-friendly assets for kids: Leave your IRA to charity and pass other assets (like a home, brokerage accounts, or life insurance) to your children instead. These assets often get a step-up in basis or arrive tax-free.
The goal is to set up accounts so your family keeps as much as possible. An estate planning attorney working with your financial advisor can model different paths and find the best approach for your case.