By Chuck Roulet, Estate and Elder Law Attorney | Licensed in Florida and Minnesota
If you have a traditional IRA, a 401(k), or any other pre-tax retirement account, a law passed in 2019 fundamentally changed what happens to that account when you die. Most people — and a surprising number of financial advisors — have not fully accounted for the impact. Here is a plain-English explanation of what the SECURE Act changed, who it affects, and what your family can do about it.
What the SECURE Act Changed
Before January 1, 2020, most non-spouse beneficiaries who inherited an IRA could use what was called the stretch IRA strategy. Rather than withdrawing the entire account immediately and paying taxes on the full balance, beneficiaries could take small required minimum distributions each year calculated over their own life expectancy — sometimes over decades — and allow the remaining balance to continue growing tax-deferred.
For a 45-year-old beneficiary with a normal life expectancy, this meant spreading distributions — and their tax impact — over 35 or more years. A $500,000 inherited IRA, managed this way, could generate modest annual income while the remaining balance continued growing. It was one of the most effective wealth transfer tools available to families with retirement savings.
The SECURE Act of 2019, effective January 1, 2020, eliminated the stretch IRA for most non-spouse beneficiaries. Under the new 10-year rule, most adult children, grandchildren, and other non-spouse beneficiaries who inherit an IRA must withdraw the entire account balance within ten years of the original owner's death. There are no required annual distributions during years one through nine — but the account must be fully depleted by the end of year ten.
What This Costs in Real Dollars
Every dollar withdrawn from an inherited traditional IRA is taxable as ordinary income in the year it is withdrawn. The beneficiary adds those distributions to their existing income and pays tax at their marginal rate.
Consider a working 52-year-old in the 24% federal tax bracket who inherits a $500,000 traditional IRA. If they take equal distributions over ten years, that is $50,000 per year added to their income — on top of whatever they are already earning. Depending on their total income, this could push them into the 32% bracket or higher for those years. Combining federal and state taxes, they could easily pay $150,000 to $200,000 in taxes on a $500,000 inheritance.
The tax impact is not uniform across families. A retired beneficiary with modest income may pay significantly less. A beneficiary at peak earnings in a high-income career may pay considerably more. But for most working-age adult children, the inherited IRA tax bite under the 10-year rule is one of the largest and least anticipated reductions in the inheritance they receive.
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What This Means for Families With Large IRAs |
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The SECURE Act transformed the IRA from a wealth-transfer tool into a compressed income-tax event for most heirs. A $1,000,000 traditional IRA that might have been stretched over a lifetime — generating modest annual income at low rates — now becomes $1,000,000 of ordinary income compressed into a decade, taxed at the beneficiary's marginal rate. Planning for this is not optional. It is the central question in IRA estate planning today. |
Who Is Still Exempt — The Eligible Designated Beneficiary Rules
The 10-year rule applies to what the IRS calls non-eligible designated beneficiaries — which, for most families, means adult children, grandchildren, siblings, and other individuals who do not fall into an exempt category.
Beneficiaries who are exempt from the 10-year rule — and may still use the lifetime stretch distribution method — include:
- The surviving spouse of the IRA owner
- A minor child of the IRA owner (until they reach the age of majority in their state, at which point the 10-year rule applies to the remaining balance)
- A disabled individual as defined under federal tax law
- A chronically ill individual
- A beneficiary who is not more than 10 years younger than the IRA owner
For the vast majority of adult children inheriting from a parent, none of these exceptions apply. The 10-year rule governs.
SECURE Act 2.0 — Additional Changes in 2022
Congress passed a follow-on law called SECURE Act 2.0 at the end of 2022. The most significant change for IRA owners was an increase in the required minimum distribution age — from 72 to 73 for those who reach age 72 after December 31, 2022, and eventually to 75 for those born after 1960. SECURE Act 2.0 also added new Roth options in employer plans and created additional exceptions in specific circumstances. The 10-year rule for most non-spouse beneficiaries remained intact.
What Families Can Do to Reduce the Impact
There are legitimate strategies that can reduce — though not eliminate — the tax burden on inherited retirement accounts. All of them require advance planning while the account owner is still alive.
- Roth conversions during the IRA owner's lifetime: Converting a traditional IRA to a Roth IRA now means paying taxes at the owner's current rate. Beneficiaries who inherit a Roth IRA still face the 10-year withdrawal rule — but every distribution they take is income-tax-free. If the owner converts at their tax rates in retirement, rather than passing it along to their kids who may be at higher rates during their peak earning years, the savings could be substantial.
- Trust structures that create distribution flexibility: A Standalone Retirement Protection Trust with a power of appointment can allow distributions to be redirected to family members in lower tax brackets, reducing the overall tax burden across the 10-year window.
- Charitable strategies: For families with charitable intent, directing the IRA to a Charitable Remainder Trust while using life insurance proceeds to replace the wealth for heirs can produce a better outcome than a direct inheritance.
These strategies require coordination between an estate planning attorney, a financial advisor, and a CPA. None of them can be put in place after the IRA owner has passed away. For a full breakdown of every strategy available under the SECURE Act, read our complete IRA estate planning guide here: Click here to read it.
Ready to Protect Your Family's Inheritance? Call Us Today.
Whether you are a parent who wants to protect what you have built, or an adult child who wants to make sure your family's plan actually works — a conversation with an experienced estate planning attorney is the most important step you can take.
Call us today at either (941) 909-4644 for our Florida office, or at (763) 420-5087 for our Minnetonka, MN office. Or you can fill out the contact form on this page and a member of our team will reach out to you to schedule your consultation.
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Chuck Roulet is an estate and elder law planning attorney at Roulet Law Firm, P.A., with offices in Minnetonka, Minnesota and Venice, Florida. He is licensed in both states and has nearly 30 years of experience helping families protect their homes, life savings, and legacies.
This page is for informational purposes only and does not constitute legal advice. Please consult a licensed attorney about your specific situation.
