Inheriting an IRA? The 10-Year Rule That Can Quietly Cost Your Kids Six Figures

You just inherited an IRA. Somewhere in the grief and the paperwork, a clock started, and almost no one tells you it's running.

Since the SECURE Act, most people who inherit an IRA from someone other than a spouse have just 10 years to empty the entire account, and every dollar that comes out is taxable income. The old "stretch IRA," where you could spread withdrawals over your lifetime, is mostly gone. Handle it on autopilot and you can stack a six-figure tax bill on top of your highest-earning years. Handle it with a plan, and you keep far more of what was left to you.

In this episode, CFP® Hazel Secco breaks down what to actually do when you inherit an IRA:

• The 10-year rule, in plain English, and who is (and isn't) subject to it
• Why spouses have options no one else gets, and the costly default many fall into
• The RMD twist: when you also owe annual withdrawals along the way, depending on the age of the person you inherited from
• How to spread the tax hit on purpose instead of letting the clock decide
• The proactive moves your accountant probably isn't bringing to you


#inheritedIRA #SECUREAct #retirementplanning #estateplanning #CFP

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About Hazel Secco, CFP®, CDFA® 

Hazel is the founder of Align Financial Solutions. As a fee-only, fiduciary advisor, she specializes in helping independent women navigate career transitions, equity compensation, and building toward a Work Optional life.

Disclaimer: All content in this podcast is for educational and informational purposes only and does not constitute individual investment, legal, or tax advice. Investing involves risk. Always consult with a qualified professional regarding your specific situation.

Transcript

Secure Act Tax Bomb

SPEAKER_00 0:00

Hey, welcome back to Align Your Retirement. I'm Hazel Secko, CFP and CDFA, founder of Aligned Financial Solutions, a fee-only fiduciary firm for women in their 40s and 50s who are serious about getting retirement right. Today's episode is about a law passed in 2019 that quietly changed inheritance planning for millions of families, and most people still haven't caught up to what it actually means for their money. Let's get into it. There's a tax bill coming for your children. It was signed into law in December 2019, and most women in their 50s haven't caught up. It's already been written, it started in December 2019 in a law almost nobody read. If you have a million dollars or more in pre-tax retirement accounts, your 401k, traditional IRAs, your 403Bs, and you have children who will inherit them. Every dollar in those accounts has a 10-year fuse on it the day you pass. Your kids will pull it all out within 10 years, and the IRS will tax every single dollar at their peak earning bracket.

Stretch IRA Ends

SPEAKER_00 1:05

Before that law, the Secure Act of 2019, your kids could have stretched those distributions over their own lifetime. A 50-year-old daughter inheriting a $1.5 million IRA could have pulled small amounts out over 35 years, letting the rest keep compounding tax deferred. That's gone. They have 10 years now, period. If you have a million dollars or more in pre-tax retirement accounts, every dollar has a 10-year fuse. And the IRS lights it the day you die. Here's a twist. This rule hits you twice. You inherit and you leave. Same rule both directions. Today I'm fixing it. Three things. One, what the Secure Act actually changed. Two, four strategies if you're leaving an IRA to heirs. Three, the 10-year playbook if you just inherited one. Let's go. Quick note on who this episode is built for. If you're in your 40s or 50s, you have $1 million or more in pretext retirement accounts, and you have children who might inherit them. This is your episode. If your parents have retirement accounts that might eventually come to you, this is also your episode. The principles go both ways. If you've already inherited an IRA and you're inside that 10-year window right now, stay with me through the whole thing. Pillar three is built for you specifically. Here's the short version. Before 2020, a non-spouse beneficiary, typically an adult child inheriting an IRA, could elect to take distributions over their own life expectancy. This was called stretch IRA. For a 50-year-old that was roughly around 35 years' stretch, the account kept compounding tax deferred, small annual distributions, minimum tax impact. After January 1st, 2020, when the Secure Act took effect, most non-Spouse beneficiaries must empty the inherited IRA within 10 years of the original owner's death. All of it. Every single dollar taken out is taxed as ordinary income in the year of distribution. That's the headline change.

2024 Rules And Exceptions

SPEAKER_00 3:19

Here's what the 2024 final regulations added. For many years after the Secure Act passed, there was ambiguity about whether inheritors also had to take their annual required minimum distributions during the 10-year window, or whether they could just wait and take it all in year 10. In July 2024, the Treasury and IRS issued final regulations. The answer for most cases where the original owner had already started RMDs before death is yes. Annual RMDs are required during the 10-year window, and the account must be fully emptied by year 10. This means you can't just wait until year 10 and take the tax hit all at once. You have to bracket smooth across all 10 years, and you still have to empty it by year 10. There are important exceptions, a category called eligible designated beneficiaries or EDBs. This group can still use lifetime stretch. The categories are uh surviving spouse, different rules entirely. I'll touch on that later. A disabled or chronically ill person, a minor child of the original account owner, only until they reach age 21, then the 10-year clock starts, and an individual who is not more than 10 years younger than the deceased, usually a sibling. If you are a 50-year-old adult daughter inheriting from your 78-year-old mother, you're not an EDB. You have 10 years, period, and every distribution falls in your peak earning years. RMDs currently kick in at 73. If original owner died before RDB, annual RMDs during years of 1 to 9 do not apply. A surviving spouse has different options, including the option to roll the inherited IRA into her own IRA and treat it as her own, which avoids the 10-year rule entirely. If you're married and your spouse has an IRA, the spousal rollover is a key option to understand. But outside of that, the 10-year rule applies. One more wrinkle, if the original owner died before their required beginning date for RMDs, currently age 73, the 10-year rule still applies, but the annual RMD requirement during years one through nine does not. You can wait and take it all by end of year 10 if you want. This flexibility matters for tax planning. We'll come back to it in pillar

Four Heir Strategies

SPEAKER_00 5:56

three. This is the half that matters if you're in your 50s with a $1.5 million or more IRA you expect to leave to your kids. Here's the math problem. Your kids inherit your IRA when you pass. Let's say they're in their late 40s or early 50s, their peak earning years. Their bracket is probably 32 or 35% federal. They have 10 years to empty the account, a $2 million inherited IRA emptied over 10 years at a 32 to 35% blended rate delivers roughly $1.3 million

Roth Conversions First

SPEAKER_00 6:32

after tax. When your kids inherit the Roth, the 10-year rule still applies. They still have to empty it within 10 years. But most cases, every dollar they pull is tax-free. Modeling often shows a multi-year Roth conversion strategy can transfer more after tax wealth than leaving the IRA traditional, depending on the specific numbers. In my opinion, this is the single highest impact move on the table. Roth conversion isn't only for you, it's also the cleanest estate planning move you have for your kids.

Qcds Insurance And Crts

SPEAKER_00 7:06

Strategy two, qualified charitable distributions. If you're 70 and a half or older, you can spend up to $111,000 per year in 2026 index for inflation, directly from your IRA to a qualified charity. The distribution counts towards your RMD, comes out of the IRA, and is excluded from your taxable income entirely. If charitable giving is already part of your life, routing it through a QCD is more tax efficient than writing checks from your checking account, and it reduces the balance your kids eventually inherit under the 10-year rule, which means a smaller tax bill for them. There's a catch. The check has to go directly from the IRA custodian to the charity. If it passes through your hands, it loses its QCD status. Most custodians handle this with a direct transfer or a check made out to the charity. Talk to your custodian before December 31st. You cannot make the selection after year end. Strategy three, life insurance as a tax-free replacement. Here's the concept. You use a portion of your IRA distributions to fund the life insurance policy held in an irrevocable trust. The death benefit passes to your kids income tax-free effectively, replacing the IRA they would have they would have inherited, minus the tax haircut. Here's the concept. You use a portion of your IRA distributions to fund the life insurance policy held in an irrevocable trust. The death benefit passes to your kids income tax-free, effectively replacing the IRA they would have inherited, minus the tax haircut. This strategy requires real math. So work with a Fiona fiduciary who doesn't sell insurance, but when structured correctly, it can dramatically change the after tax outcome. The version I see working well is the irrevocable life insurance trust or ILIT. The trust owns the policy and the death benefit flows outside your taxable estate. If this is something you want to explore, it has to be built years in advance. You cannot do it retroactively once the account is already large and your health has changed. Strategy four, charitable remainder trust. This is the most complex option. You name a charitable remainder trust as the beneficiary of your IRA. The trust pays income to your children over their lifetime, and whatever remains goes to charity. It's not DIY, but for the right family, high net worth, already charitably inclined, it can reduce the tax burden significantly while still providing for heirs. The bottom line on all four strategies: doing nothing is the most expensive choice, so pick one.

Inherited Ira Playbook

SPEAKER_00 10:05

Pillar three, if you just inherited one, the 10-year playbook. Now, here's what almost nobody covers. You've inherited an IRA. The clock is running. Here's your playbook. Step one, understand your clock. The 10-year countdown starts the year after the original owner died, not when you found out. Not when the account was transferred, the IRS clock starts at death. If the original owner had already started RMDs, you must take annual RMDs in year one through nine based on your own life expectancy and empty the entire account by December 31st of year 10. If the original owner had not yet started RMDs, meaning they died before their required beginning date, you have more flexibility. You can choose when within the 10 years to take distributions. That flexibility is

Bracket Smoothing Moves

SPEAKER_00 10:58

valuable. A lot of people don't realize they have it. Step two, bracket smooth. Don't wait until year 10 and take it all at once. Distribute withdrawals across all 10 years. A $1.5 million IRAs, roughly $150,000 per year. Add that to your salary. You may lend in a lower blended rate than $1.5 million all at once in year 10. This is the single most common mistake I see with inherited IRAs. People ignore the account for years, it just sits there, and then year 10 arrives and they're starting at a massive distribution, they have no flexibility around. You want to be controlling the timing, not the IRS. Step three, exploit low income years. If you have a gap year between jobs, a sabbatical, a planned early retirement, pull more in that year. Fill the 12, 22, 24% brackets while they're available to you. This is the single most underused inherited IRA strategy I see. Think of it this way: every dollar you pull in a low income year is a dollar that doesn't get stacked on top of a full salary in a higher income year. You have 10 years. If you can engineer even two or three lower income years in that window, the bracket savings compound significantly.

Rules Allocation Spouses

SPEAKER_00 12:23

Step four, know what you cannot do. You cannot roll this inherited IRA into your own IRA unless you're a surviving spouse. You cannot Roth convert the inherited IRA. The tax code explicitly prohibits this for non-Spouse beneficiaries. You can take a distribution, pay the tax, and separately fund your own Roth conversion. Two independent transactions, but you cannot convert the inherited account itself. Step five, investment allocation. Many planners treat the inherited IRA as a short to medium-term account. 40 to 60% equities with the bond side allocated to the nearer-term distributions. Don't let it sit in cash because you're unsure what to do. That's a decision too, and it's usually the wrong one. The reason this matters, a year eight market drop with your entire inherited IRA in equities puts you in a very uncomfortable position. You have a mandatory distribution schedule. You may be forced to sell at the worst time. A moderate allocation isn't conservative thinking. It's sequencing risk management for a fixed window account. Step six, if you're a surviving spouse, the rules are different. You can roll your spouse's IRA into your own and treat it as yours, no 10-year clock, your own RD schedule, your own beneficiaries. If you're a surviving spouse, pause before you take a single distribution. The spousal rollover is one of the most valuable options in the tax code, and I've seen people miss it. This is one of those decisions that cannot be undone. Once you begin taking distributions as an inherited IRA instead of rolling it onto your own, your options change. Get in front of a fiduciary before year end in the year of your spouse's death. That window matters.

Plan Share Next Steps

SPEAKER_00 14:17

The Secure Act changed the math on inheritance, but it didn't change the most important variable, whether you plan for it. If you're leaving an IRA, pick a strategy. If you've inherited one, start the playbook. Either way, the clock is running. If this episode gave you clarity, the best thing you can do is share it with someone who needs it. A sister, a friend, a colleague who has a parent with retirement accounts. The secure act doesn't announce itself. We have to. Next episode, we're going into Roth conversion strategy in detail. Specifically, the gold decade, the years between retirement and RD age when your tax bracket is lowest and your conversion window is widest. I'm Hazel Secko, founder of Aligned Financial Solutions, a fee only fiduciary firm for high earning women who want retirement to be a launch, not a landing. See you in the next one.