When Your Kids Inherit Your IRA: The New 10-Year Rule and How to Plan Around It

What Is the Inherited IRA 10-Year Rule?

The 10-year rule requires most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years of the original owner's death. Before the SECURE Act of 2019, a non-spouse beneficiary who inherited a traditional IRA could "stretch" required minimum distributions over their own life expectancy. A 40-year-old inheriting a $1 million IRA could take distributions over 40+ years, keeping the annual taxable amount small and letting the bulk of the account continue growing tax-deferred.

The SECURE Act eliminated this for most non-spouse beneficiaries. Starting in 2020, most beneficiaries who inherit an IRA must withdraw the entire balance within 10 years of the original owner's death. There is no annual RMD requirement during those 10 years (with one important exception, covered below), but the account must be fully distributed by December 31 of the 10th year.

For a family passing a $2 million IRA to adult children in their 40s or 50s, this condenses what used to be a multi-decade tax deferral into a 10-year window, often during the beneficiary's highest-earning years.

Who Is Exempt From the 10-Year Rule

The SECURE Act carved out five categories of "eligible designated beneficiaries" who can still stretch distributions over their life expectancy:

• Surviving spouses. A surviving spouse can roll the inherited IRA into their own IRA and take distributions based on their own life expectancy, or even delay distributions until their own required beginning date.
• Minor children of the account owner. A minor child can stretch distributions until they reach the age of majority (21 in most states). At that point, the 10-year clock starts. Note: this applies only to children of the deceased, not grandchildren or other minors.
• Disabled individuals. A beneficiary who meets the IRS definition of disability (unable to engage in substantial gainful activity) can stretch distributions over their life expectancy.
• Chronically ill individuals. Similar to the disability exception, a chronically ill beneficiary can stretch distributions.
• Beneficiaries not more than 10 years younger than the deceased. A sibling or partner close in age to the account owner can still use life expectancy distributions.

Everyone else, including your adult children, your grandchildren, and most non-spouse beneficiaries, falls under the 10-year rule.

Are Annual RMDs Required During the 10-Year Inherited IRA Window?

The original SECURE Act was unclear about whether annual distributions were required within the 10-year window, or whether the beneficiary could wait until year 10 and take one lump sum. After years of confusion and proposed regulations, the IRS finalized the rules in 2024.

The final rule: if the original account owner had already reached their required beginning date (generally age 73) before dying, the beneficiary must take annual RMDs in years 1 through 9, based on the beneficiary's life expectancy. The remaining balance must be distributed by the end of year 10.

If the original owner died before reaching their required beginning date, no annual RMDs are required during the 10-year window. The beneficiary has full flexibility to distribute the funds however they choose within those 10 years.

This distinction matters for planning. If annual RMDs are required, the beneficiary loses the flexibility to time distributions for optimal tax years. I model both scenarios with clients, estimating the tax impact of different distribution strategies for your age, health, and tax situation.

How Much Tax Will Your Heirs Owe on an Inherited IRA?

A $1.5 million traditional IRA inherited by a 45-year-old earning $300,000 per year illustrates the problem. Under the old stretch rules, that beneficiary might have taken $35,000 per year in distributions, keeping the income in the 24% or 32% bracket. Over 40 years, the total tax paid on those distributions would have been spread across decades.

Under the 10-year rule, the same beneficiary must distribute $1.5 million over 10 years. If they take $150,000 per year, that income stacks on top of their $300,000 salary, pushing total income to $450,000. At that level, a significant portion of the IRA distributions is taxed at the 35% federal rate. In a state like California, the combined federal and state rate can exceed 48%.

The tax difference between the stretch and the 10-year rule can exceed $200,000 on a $1.5 million IRA. For larger accounts, the gap is proportionally bigger.

How Do Roth Conversions Reduce the Inherited IRA Tax Burden?

The most effective strategy I use to reduce the inherited IRA tax bomb is Roth conversion during the original owner's lifetime. Here is the logic: you pay the income tax on the conversion now, at your current tax rate. The money then grows tax-free in the Roth IRA. When your children inherit the Roth IRA, they still must distribute it within 10 years, but the distributions are tax-free.

The math favors conversion in several common situations:

• You are retired but not yet taking Social Security or RMDs. Your income may be temporarily lower, putting you in a lower tax bracket than your heirs will be in when they inherit.
• Your heirs earn more than you do. If your child is a dual-income household earning $400,000, they will pay a higher marginal rate on IRA distributions than you would pay on the Roth conversion today.
• You have a long time horizon. The earlier you convert, the more years of tax-free growth the Roth generates before your heirs must distribute it.
• You have cash to pay the conversion tax from non-IRA funds. If you pay the tax from the IRA itself, you reduce the amount that gets converted. Paying from a brokerage account preserves the full Roth balance.

I build multi-year Roth conversion ladders for clients, spreading conversions across 5 to 10 years to stay within favorable tax brackets. I model the conversion scenarios with you so you can see how the numbers work in your situation.

How Should You Time Inherited IRA Distributions Over 10 Years?

If Roth conversion is not an option (or does not fully solve the problem), the next best approach is strategic distribution timing. The 10-year rule offers flexibility in when the beneficiary takes distributions, as long as the account is empty by year 10.

I work with beneficiaries to identify low-income years within the 10-year window: a sabbatical, a career change, a year between jobs, early retirement. Concentrating distributions in those years can save tens of thousands in taxes compared to equal annual distributions.

Another consideration: if the beneficiary expects their income to decline in later years (approaching retirement), back-loading distributions may be better. If they expect income to rise (mid-career professional), front-loading captures lower brackets now.

The worst approach is waiting until year 10 and taking a single lump-sum distribution. That stacks the entire balance into one tax year, guaranteeing the highest possible effective rate.

What Other Strategies Help With the Inherited IRA Tax Problem?

Life Insurance as a Tax-Free Alternative

Some families choose to spend down their traditional IRA during retirement (or convert it to Roth) and replace the legacy with a life insurance policy. Life insurance death benefits are income-tax-free to the beneficiary. If the IRA would have been taxed at 35% or higher when inherited, a life insurance policy delivering the same after-tax amount to heirs can be more efficient. This works especially well when the IRA owner is healthy and insurable, and the premium is funded by RMDs or Roth conversion tax savings.

Charitable Remainder Trusts

For families with charitable intent, naming a charitable remainder trust as the IRA beneficiary can spread distributions over a longer period. The CRT receives the IRA, takes distributions over its term, and pays the non-charitable beneficiary an annuity. The charity receives the remainder. This is more complex and only appropriate when charitable giving is already part of the plan.

Coordinating With Your Full Estate Plan

The inherited IRA strategy does not exist in isolation. I look at the full picture: which assets go to which heirs, what each heir's tax situation looks like, and how the IRA fits alongside brokerage accounts, real estate, and trust assets. Sometimes the best move is leaving the IRA to a lower-earning child and the brokerage account to the higher earner, since the brokerage account gets a step-up in basis at death and the IRA does not.

This kind of asset-specific beneficiary planning is part of the trust and estate planning work I do with families. It requires knowing each heir's income, tax bracket, and time horizon, which is why the conversation starts early and gets revisited regularly.