Many families are surprised to learn that inheriting an IRA is not nearly as simple as it used to be. Americans hold enormous amounts in IRAs and defined contribution plans, and much of that wealth will eventually pass to spouses, children, and other beneficiaries. At the same time, inherited retirement accounts can create major tax consequences if distributions are handled poorly. The Journal of Accountancy recently highlighted this issue, noting that the old “stretch IRA” approach is largely gone for most non-spouse beneficiaries.
As a Naperville estate planning attorney, I think this is one of the most important planning issues for families with retirement assets. It is also the kind of issue that often leads people to search for an estate planning attorney near me after a death has already occurred. The better approach is to plan ahead, both for the account owner and for the people who may eventually inherit the account.
The old stretch IRA is mostly gone
For many non-spouse beneficiaries, inherited IRAs are now subject to the SECURE Act’s 10-year payout rule. In general, the account must be emptied by the end of the tenth year after the original owner’s death. IRS Publication 590-B confirms that all distributions generally must be completed by the end of that tenth year unless the beneficiary falls into a protected category of eligible designated beneficiaries.
Those eligible designated beneficiaries generally include a surviving spouse, a disabled or chronically ill beneficiary, a minor child of the account owner while still a minor, or an individual who is not more than ten years younger than the original owner. For many adult children, though, the 10-year rule is the reality.
Why inherited IRAs can create a tax problem
The problem is not just that the account has to come out within ten years. The problem is how that income lands on the beneficiary’s tax return.
For inherited traditional IRAs and similar tax-deferred accounts, distributions are generally taxable income to the beneficiary. If too much is withdrawn in one year, the beneficiary may be pushed into a higher tax bracket. That is why many advisors favor spreading withdrawals over multiple years rather than waiting until year ten and triggering one large tax event. The Journal of Accountancy specifically notes that beneficiaries are often better off spreading withdrawals over the ten-year period to avoid a large tax hit at the end.
Why “wait until year ten” is usually a bad idea
Some heirs assume that if annual withdrawals are not immediately required, the best move is to do nothing until the end of the ten-year period. That can be a very expensive mistake.
The Journal of Accountancy article notes that a more measured approach, such as taking a portion in year one, then recalculating in later years, often makes more sense, though the right strategy depends on the beneficiary’s tax picture. That flexibility matters because income, filing status, employment, and other financial circumstances can change over the ten-year window.
In other words, inherited IRA planning should usually be tax-bracket aware, not passive.
Annual RMD issues can still matter
Inherited IRA rules have been confusing because the SECURE Act changed the payout structure, and the IRS has had to issue guidance on how required minimum distributions fit within the 10-year rule. The IRS explains that beneficiaries of inherited retirement accounts remain subject to RMD rules, and Publication 590-B lays out the post-SECURE framework for designated beneficiaries and eligible designated beneficiaries.
That is one reason inherited IRA planning is not something beneficiaries should guess at. The rules are technical, and the best approach depends on who inherited the account, when the original owner died, and what type of account is involved.
Owners can help beneficiaries before death
This planning is not only for heirs. Account owners can take steps during life that may make things easier later.
One option to consider is a Roth conversion. The ten-year rule can still apply to inherited Roth accounts, but qualified Roth withdrawals are generally not taxable to the beneficiary, and inherited Roth IRAs are not subject to the same lifetime income-tax burden that inherited traditional IRAs create. IRS Publication 590-B confirms that the 10-year framework applies broadly, while the Journal of Accountancy notes that Roth conversion planning can shift the tax burden to the owner’s lifetime and give beneficiaries more flexibility later.
That does not make Roth conversion automatically wise in every case. It does mean it should be part of the conversation when a family has large tax-deferred retirement assets.
Charitable planning may also help
If someone is already charitably inclined, naming a charity as beneficiary of retirement account assets can be very efficient. Retirement assets are often among the least attractive assets to leave to individual beneficiaries because of the built-in income tax burden. A charity, by contrast, generally does not pay income tax on the inherited retirement account in the same way an individual beneficiary would. The Journal of Accountancy article also notes that charitable remainder trusts may be worth discussing in appropriate cases.
That is not the right solution for everyone. However, when a client already plans to leave part of an estate to charity, retirement-account beneficiary designations deserve careful attention.
Why this matters in a complete estate plan
Inherited IRA tax planning should not be treated as a one-off tax question. It needs to fit into the broader estate plan.
Beneficiary designations, trusts, charitable intentions, spousal planning, and overall family goals all need to work together. A tax strategy that looks smart in isolation can still cause problems if it conflicts with the rest of the estate plan. As an estate planning attorney near me is often what people search after a beneficiary-designation mistake or tax surprise, I think it is far better to address these issues before a crisis. For local families, that usually means sitting down with a Naperville estate planning attorney and coordinating retirement-account planning with the larger estate plan.
Final thoughts
Inherited IRAs can create real tax problems, especially for adult children and other non-spouse beneficiaries who fall under the 10-year distribution rule. The answer is usually not panic, and it is usually not doing nothing. The answer is thoughtful planning.
If you have substantial retirement assets, or if you expect to inherit them, this is an area where advance planning can make a meaningful difference. A coordinated estate plan can help reduce surprises, improve flexibility, and put beneficiaries in a better position when the time comes.
FAQ
Do adult children have to empty an inherited IRA within 10 years?
Usually yes. For many adult children and other non-spouse beneficiaries, the inherited account must be emptied by the end of the tenth year after the owner’s death.
Are inherited IRA withdrawals taxable?
Inherited traditional IRA withdrawals are generally taxable income to the beneficiary. That is why timing matters.
Is it better to take inherited IRA money all at once or over time?
Often over time, because spreading distributions may reduce the risk of a large tax hit in a single year. The best answer depends on the beneficiary’s tax situation.
Can Roth conversions help beneficiaries?
Sometimes. A Roth conversion may shift taxes to the owner’s lifetime, while giving beneficiaries more flexibility and potentially tax-free qualified withdrawals later.