The SECURE Act of 2019 and its follow-on legislation, SECURE 2.0 enacted in 2022, fundamentally changed the rules governing inherited IRAs for most non-spouse beneficiaries. The stretch IRA, which allowed beneficiaries to take small required minimum distributions over their own life expectancy, sometimes spanning decades, is gone for most heirs. In its place is the ten-year rule: most non-spouse beneficiaries must deplete the inherited account within ten years of the original owner's death.
This change has significant and often underappreciated tax implications. A beneficiary who inherits a $500,000 traditional IRA must distribute $500,000 of ordinary income within ten years. If that beneficiary is in their peak earning years, earning $200,000 annually, the distributions stack on top of their earned income and push them into the highest marginal brackets. The total tax cost on an inherited traditional IRA under the ten-year rule can be dramatically higher than under the old stretch rules.
The rules have exceptions, and the exceptions matter. Surviving spouses retain special options unavailable to other beneficiaries. Minor children have different rules until they reach the age of majority. Disabled and chronically ill beneficiaries qualify for the old stretch rules. And Roth IRAs, while also subject to the ten-year rule for non-spouse beneficiaries, produce no taxable income when distributed, making the ten-year requirement far less costly.
The ten-year rule applies to non-spouse beneficiaries who do not qualify as eligible designated beneficiaries. Eligible designated beneficiaries, who can still use the old stretch rules based on their own life expectancy, include: surviving spouses, disabled individuals, chronically ill individuals, individuals not more than ten years younger than the deceased, and minor children of the deceased (until they reach the age of majority, after which the ten-year rule applies).
Adult children, siblings, nieces, nephews, friends, and most trusts named as beneficiaries are subject to the ten-year rule. For the vast majority of IRA inheritances that go to adult children, the ten-year rule applies.
The ten-year rule's requirement that the account be depleted within ten years was initially interpreted by many practitioners as requiring only that the account be empty by the end of year ten, with no required annual distributions. IRS proposed regulations issued in 2022, subsequently finalized in 2024, clarified this significantly.
If the original account owner had already begun taking required minimum distributions before death, the beneficiary must also take annual required minimum distributions throughout the ten-year period, in addition to fully depleting the account by year ten. If the original owner died before the required beginning date and had not yet taken RMDs, the beneficiary has flexibility to distribute the account in any pattern, including taking nothing for nine years and distributing everything in year ten.
This distinction, based on whether the original owner had begun RMDs, creates materially different planning flexibility for beneficiaries depending on when the original owner died relative to age 73.
Surviving spouses have options unavailable to other beneficiaries. A surviving spouse can treat the inherited IRA as their own by rolling it into their own IRA, delaying RMDs until they reach age 73 under their own schedule. This is almost always the most advantageous option for surviving spouses who don't need immediate access to the funds, because it preserves tax-deferred growth and delays the forced income stream.
Alternatively, a surviving spouse can maintain the account as an inherited IRA. This may be advantageous if the surviving spouse is under 59.5 and needs access to the funds before that age, since inherited IRA distributions are not subject to the 10% early withdrawal penalty regardless of the beneficiary's age.
Inherited Roth IRAs are also subject to the ten-year rule for non-spouse beneficiaries, but the tax consequence is dramatically different. Qualified distributions from an inherited Roth IRA are completely tax-free. A beneficiary who inherits a $500,000 Roth IRA must distribute $500,000 within ten years, but those distributions produce no taxable income regardless of the beneficiary's income level or tax bracket.
This tax-free treatment makes Roth IRAs the most efficient legacy vehicle for IRA account owners who want to minimize the tax burden on their heirs. Converting pre-tax balances to Roth during the account owner's lifetime, paying tax at the owner's rate, delivers a tax-free inheritance that avoids the ten-year-rule tax problem entirely for the beneficiary.
For beneficiaries who inherit a traditional IRA and are not subject to mandatory annual distributions (because the original owner died before the required beginning date), the ten-year period offers significant planning flexibility. Rather than taking equal distributions each year, the beneficiary can take distributions in years when their income is lower and minimize distributions in high-income years.
A beneficiary who receives an inheritance at age 45, while working, might defer most distributions until they retire in their mid-fifties, when income is lower and the bracket space for ordinary income is more available. This requires careful planning to avoid a massive taxable distribution in year ten if the prior years are deferred too aggressively.
The most powerful planning tool for IRA account owners who want to minimize the inherited IRA tax burden on heirs is Roth conversion during the owner's lifetime. Converting pre-tax balances to Roth while the owner is in a moderate tax bracket, perhaps during the early retirement low-income window, pays tax at the owner's current rate and delivers a tax-free Roth inheritance.
The comparison: paying 22% on a $500,000 Roth conversion costs $110,000. Leaving the same $500,000 as a traditional IRA for an adult child earning $200,000 who distributes $50,000 per year for ten years could cost the child $175,000 or more in income taxes at the 32% or 35% marginal rate. The Roth conversion paid by the parent often costs less in total taxes than the inherited distribution taxes paid by the child.
The American College of Trust and Estate Counsel Foundation produced analysis showing that the SECURE Act's elimination of the stretch IRA represents one of the largest changes to the inherited IRA landscape since IRA accounts became widely used for retirement savings. Their analysis quantifies the tax cost imposed on non-spouse beneficiaries under the ten-year rule compared to the stretch rules and argues for account owners to revisit estate planning and Roth conversion strategies in light of the changed rules.
Ed Slott, whose expertise in IRA distribution planning is widely recognized in the financial planning community, has written and spoken extensively on the planning implications of the SECURE Act changes. His guidance emphasizes the importance of Roth conversion as the primary response for account owners, and careful tax planning for beneficiaries who have inherited traditional IRAs under the new rules.
The IRS issued final regulations in 2024 addressing the ten-year rule's annual distribution requirement for beneficiaries who inherit from owners who had already begun RMDs. The regulations clarified the ambiguity that had existed since the SECURE Act's passage and provided specific calculation rules for the annual minimum distributions required within the ten-year period. These regulations are the definitive guidance for practitioners administering inherited IRA distributions.
A beneficiary who defers all distributions and then must distribute the entire inherited account in year ten faces a massive ordinary income event. For a $1,000,000 inherited traditional IRA distributed entirely in year ten, the entire amount is taxable income in that year, potentially at very high marginal rates. Strategic distribution throughout the ten-year period, in lower-income years when possible, produces a better tax outcome than all-at-once depletion.
Beneficiaries who inherit from owners who had already begun RMDs must take annual minimum distributions in addition to fully depleting the account by year ten. Missing a required annual distribution triggers the excess accumulation penalty, now 25% of the amount that should have been distributed, reduced to 10% if corrected promptly. Beneficiaries should be aware of whether the original owner had begun RMDs and what the annual requirements are.
The inherited IRA distributions add to the beneficiary's other income. A beneficiary with high earned income who also receives large inherited IRA distributions may find themselves in the highest tax brackets. Planning the distribution schedule around the beneficiary's projected income, taking more in lower-income years and less in higher-income years, produces better after-tax outcomes.
Trusts named as IRA beneficiaries before the SECURE Act may no longer function as intended. Some trust structures were specifically designed to maximize the stretch distribution period, which no longer exists for most beneficiaries. These trusts should be reviewed by an estate attorney to determine whether they still accomplish the intended goal under the new rules.
Question 1: Given the ten-year rule, how much will my adult children owe in taxes on the pre-tax IRA they inherit, and would a Roth conversion strategy during my lifetime reduce that burden? This question forces the comparison between the owner's conversion cost and the beneficiary's inheritance tax cost.
Question 2: Should I convert more aggressively to Roth specifically to improve the after-tax inheritance for my heirs? This makes Roth conversion an estate planning tool, not just a personal tax planning tool.
Question 3: Did the original owner die before or after their required beginning date, and does that change my annual distribution obligations? This establishes which version of the ten-year rule applies.
Question 4: What is the optimal distribution schedule from the inherited IRA given my projected income over the next ten years? This asks for a specific distribution plan based on the beneficiary's tax situation.
Question 5: Should I roll the inherited IRA into my own IRA if I am a surviving spouse? For surviving spouses, this is almost always the right choice unless early access is needed.
The retirement planning calculator at plan.johnkoyle.com was built to model exactly the dynamics discussed in this paper. For beneficiaries who have inherited a traditional IRA, the retirement calculator at plan.johnkoyle.com can model the tax impact of different distribution schedules within the ten-year window. Enter your current portfolio balance, your income from other sources, and model the inherited IRA distributions as additional income in specific years. Comparing the tax burden of a level annual distribution over ten years versus a back-loaded distribution shows the benefit of strategic timing. For IRA account owners considering Roth conversion as an inheritance planning tool, the calculator's Withdrawal Strategy tab shows how building Roth balances now reduces the future inherited account burden on heirs.
John Koyle, AIF®, is the Co-Founder of Red Cedar Wealth Advisors, headquartered in Pocatello, Idaho. He holds the Accredited Investment Fiduciary (AIF®) designation, awarded by the Center for Fiduciary Studies (Fi360), which signifies completed coursework, a rigorous examination, and ongoing continuing education in fiduciary responsibility and prudent investment practices.
John serves individuals and families in or approaching retirement throughout eastern Idaho, the Pacific Northwest, and across the country via Zoom. Clients work directly with John, not a junior team. Red Cedar Wealth Advisors operates under Osaic Wealth, Inc. (Member FINRA/SIPC) and Osaic Advisory Services, LLC for investment advisory services.
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Retirement planning is a discipline that barely existed a generation ago. For most of modern history, people worked until they physically couldn't and then they died, usually fairly close together. The idea that an individual should spend decades saving, then spend decades drawing down those savings, with a plan that accounts for inflation, taxation, sequence risk, healthcare, longevity, and estate transfer, that's maybe forty years old.
Which means almost nobody your age grew up watching their parents do it properly. There's no cultural muscle memory. The advice industry backfilled that gap with rules of thumb that work sometimes and fail catastrophically the rest of the time. The 4% rule. 'You can take Social Security at 62.' 'Target-date funds will handle it.' These are not bad starting points. They are terrible ending points. Real planning is specific, personal, and built on principles that hold up across the full range of outcomes, not just the average one.
The tax code is a set of instructions Congress wrote to shape behavior. Aligning your financial life with those instructions is not aggressive planning. It is the planning. Roth conversion sequencing, capital gains compression on concentrated positions, charitable remainder trusts, Social Security timing, beneficiary coordination. None of these are obscure. They're all legitimate, all written into the code intentionally, and all under-used. Most CPAs handle compliance. The strategy work is a different discipline entirely.
Seventy percent of family wealth doesn't survive two generations. The reason isn't bad markets. The cause is failure to communicate, outdated documents, and no plan for preparing heirs. Beneficiary designations regularly override well-crafted wills. Trust structures created a decade ago no longer match current law or current family. The portfolio that built the wealth isn't the structure that transfers it. The work here is coordinating with your attorney to align documents, beneficiaries, gifting strategies, and trust funding with what you actually want to happen.
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The protection gap quietly kills more plans than markets do. A significant net worth paired with inadequate liability coverage is a lawsuit away from a serious problem. Long-term care is more acute: a multi-year care event for one spouse can consume what was meant for the survivor. Most advisors relegate risk to a footnote because insurance conversations are uncomfortable. The math doesn't care. Coverage adequacy, umbrella sizing, long-term care planning, and life insurance structure sit alongside the portfolio in any complete plan.
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