The SECURE Act and inherited IRAs: How rules changed for heirs
How did the SECURE Act change inherited IRA rules, and why does it matter for your heirs?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019 and effective beginning in 2020, fundamentally changed how non-spouse beneficiaries inherit and distribute retirement accounts. Before the SECURE Act, a non-spouse beneficiary could inherit an IRA and "stretch" it—taking only required minimum distributions (RMDs) over their own lifetime, potentially 40+ years. This stretch IRA allowed heirs to defer taxes and let inherited funds grow. The SECURE Act eliminated the stretch for most heirs, requiring them instead to withdraw and pay income tax on the entire inherited IRA within 10 years.
This change has enormous implications. An heir inheriting a $500,000 IRA no longer has decades to spread distributions and taxes; they must consume the account within 10 years, potentially paying $50,000+ per year in taxable income. This can push an heir into a higher tax bracket, disrupt their financial plan, and force them to sell investments at inopportune times. As a retiree, you must understand these rules when planning your legacy—and consider strategies to ease the burden on your heirs.
Quick definition: The SECURE Act requires most non-spouse beneficiaries to withdraw all funds from inherited IRAs within 10 years, eliminating the "stretch IRA" strategy and concentrating tax payments into a shorter timeframe.
Key takeaways
- The SECURE Act (2020) eliminated the stretch IRA for most non-spouse beneficiaries, requiring full distribution within 10 years instead of over their lifetime.
- Spouse beneficiaries retain the most flexibility: they can treat an inherited IRA as their own, delay distributions until age 73, and spread taxes over decades.
- Non-spouse beneficiaries (children, grandchildren, friends) must withdraw the entire inherited IRA by the end of the 10th calendar year after the owner's death—no distributions required in years 1–9, but the account must be empty by year 10.
- Special rules apply to "eligible designated beneficiaries" (certain disabled or chronically ill individuals, children under age of majority until they reach age of majority, and others) who can still stretch distributions.
- These rules create planning opportunities: retirees can use charitable giving, qualified longevity annuity contracts (QLACs), and income-splitting strategies to minimize taxes on inherited IRAs.
Understanding the old stretch IRA
Before 2020, the stretch IRA was a common and powerful estate planning tool. When a non-spouse beneficiary inherited an IRA, they could "stretch" the inherited account—taking only RMDs based on their own life expectancy. A 35-year-old inheriting a $500,000 IRA could take only about $12,000 in year one (5% of the account based on their 38-year life expectancy), leaving $488,000 to grow, and compound growth could mean the account lasted 40+ years.
The stretch was attractive for two reasons: (1) it spread the income tax burden over decades instead of years, and (2) it allowed inherited funds to remain invested and grow, compounding returns. A $500,000 IRA inherited at age 35 could grow to $1 million+ by the time the heir reached 75, all while paying taxes gradually.
However, the stretch IRA was criticized as a tax-avoidance strategy for wealthy families—they could essentially defer inherited wealth indefinitely without taxation. Congress, seeking revenue, eliminated it for most heirs in the SECURE Act.
The 10-year rule: How it works
Under the SECURE Act, a non-spouse beneficiary who inherited an IRA on or after January 1, 2020, must withdraw all remaining funds by December 31 of the year that is 10 calendar years after the original owner's death.
Example 1: Tom dies on March 15, 2024, leaving a $600,000 IRA to his daughter Amy. Amy must withdraw the entire $600,000 by December 31, 2034 (10 calendar years after Tom's death). Amy can withdraw any amount in years 1–9 (2024–2033), but the account must be completely empty by year 10. The tax bill is deferred throughout, but the concentrated withdrawal in year 10 will likely push Amy into a high tax bracket, resulting in a large tax liability.
Example 2: Sarah dies on July 10, 2026, leaving a $200,000 Roth IRA to her son Marcus. Marcus must withdraw all funds by December 31, 2036. The difference: because this is a Roth IRA, Marcus's distributions are tax-free. So while the Roth still drains within 10 years, there's no income tax hit. Roth IRAs are therefore excellent to leave to non-spouse heirs, as they avoid the SECURE Act's tax squeeze.
The 10-year rule itself requires NO distributions in years 1–9—only that the account be depleted by year 10. However, some inherited IRAs (particularly those left to a non-spouse beneficiary who was already taking RMDs from the original owner's IRA) also have annual RMD requirements during years 1–9. The rules here are complex and depend on whether the original owner was at RMD age when they died.
10-year timeline and distribution decisions
Who is an "eligible designated beneficiary"?
The SECURE Act includes exceptions for certain heirs, called eligible designated beneficiaries (EDBs), who can still stretch inherited accounts. These include:
- Spouse: A spouse who inherits an IRA can treat it as their own, delaying distributions until their own RMD age.
- Minor child: A child under the age of majority (usually 18, or 21 or 25 depending on state) can stretch distributions until they reach the age of majority, then must deplete the account within 10 years after that.
- Disabled individual: Someone disabled (as defined by Social Security) can stretch distributions over their lifetime.
- Chronically ill individual: Someone with a condition requiring substantial care can stretch distributions over their lifetime.
- Individual not more than 10 years younger: Someone close in age to the original owner (not more than 10 years younger) can stretch.
For most beneficiaries—adult children, grandchildren, friends—none of these exceptions apply, and the 10-year rule is mandatory.
Real-world tax impact: Examples
Example A: Derek's $800,000 IRA. Derek dies at age 78 with an $800,000 traditional IRA. His two adult children are beneficiaries, 50/50. Each child inherits $400,000. Neither can stretch—both must deplete within 10 years.
Child 1 withdraws $40,000 per year for 10 years. Each $40,000 withdrawal is taxable income. If this is the only large income in the child's life, the tax rate might be 24%, resulting in $9,600 per year in tax ($96,000 total). The child keeps $304,000.
Child 2 waits and withdraws nothing for 9 years, then withdraws all $400,000 in year 10. The $400,000 withdrawal will almost certainly push the child into the top tax bracket (say, 37%), resulting in $148,000 in federal tax alone (plus state taxes). The child keeps only $252,000.
The same $400,000 inheritance results in vastly different net outcomes (difference of $52,000) depending on withdrawal strategy. This is why planning and communication between retiree and heirs is essential.
Example B: Linda's $1.2 million mix. Linda has a $1.2 million estate: a $600,000 Roth IRA, a $400,000 traditional IRA, and a $200,000 taxable brokerage account. She has one daughter.
Her daughter inherits the Roth IRA ($600,000) and can withdraw it tax-free by year 10. She inherits the traditional IRA ($400,000) and must pay income tax on withdrawals by year 10. She inherits the taxable brokerage account ($200,000), which comes with a stepped-up basis at Linda's death—so the daughter's capital gains taxes are eliminated, and she can sell immediately with minimal tax.
The total inheritance is $1.2 million, but the tax impact varies dramatically by asset type. Roth: no tax. Traditional IRA: significant income tax (maybe $100,000+ at 24–37% rates). Taxable account: no tax due to stepped-up basis. A coordinated plan ensures the daughter receives the most tax-efficient distribution.
Strategies to minimize taxes on inherited IRAs
Strategy 1: Roth conversion before death. A retiree with a large traditional IRA can convert a portion to a Roth IRA before dying. The conversion creates a tax bill in the year of conversion, but then the converted Roth grows tax-free and can be inherited tax-free by heirs. For a high-income retiree in a high tax bracket, this is sometimes worth considering, especially if they expect heirs to be in higher brackets.
Strategy 2: Charitable giving via beneficiary designation. Instead of leaving a large IRA to heirs, you can name a charity as beneficiary of the IRA (or a portion of it). The charity receives the funds tax-free, you get a charitable deduction on your final tax return, and the heirs inherit other assets. This way, the IRA's tax burden doesn't fall on heirs.
Strategy 3: Qualified longevity annuity contract (QLAC). A retiree can use up to $152,000 (as of the mid-2020s) from their IRA to purchase a longevity annuity, which provides guaranteed income starting at age 80 or later. The purchased annuity is not part of the inherited IRA account at death, so it doesn't create a tax burden for heirs.
Strategy 4: Educate heirs about withdrawal timing. You can't change the SECURE Act's rules, but you can educate heirs to withdraw strategically. If an heir is between jobs or in a lower-income year, that's an ideal time to withdraw a larger amount from the inherited IRA and pay the tax at a lower rate.
Strategy 5: Coordinate the overall estate. If you have a Roth IRA, a traditional IRA, and taxable savings, plan which goes to which heirs. Give the Roth to heirs expecting lower tax brackets, the traditional IRA to heirs in high brackets (who can absorb the tax), and taxable accounts to those who benefit from the stepped-up basis.
Comparing old vs. new inherited IRA rules
| Feature | Pre-SECURE (Stretch IRA) | SECURE Act (Post-2020) |
|---|---|---|
| Non-spouse beneficiary distribution timeline | Over beneficiary's lifetime (40+ years possible) | Within 10 calendar years |
| Annual RMD requirement | Yes, based on beneficiary's age | Usually no annual RMD, but full withdrawal by year 10 |
| Tax spreading | Decades of gradual withdrawals and taxes | Concentrated withdrawal, higher tax bracket risk |
| Growth potential | Decades of tax-deferred compounding | Limited growth window |
| Spouse beneficiary | Can stretch over lifetime | Can treat as own IRA, same as pre-SECURE |
| Planning complexity | Moderate | Higher due to tax concentration |
Common mistakes
Mistake 1: Assuming an inherited IRA can be stretched indefinitely. Many heirs (and some advisors) still operate under the old pre-2020 rules. Your heirs need to understand the 10-year deadline and plan accordingly.
Mistake 2: Inheriting a traditional IRA and withdrawing nothing for 9 years, then a lump sum in year 10. While technically allowed, a $500,000 lump-sum withdrawal in year 10 will create a massive tax bill in that year, potentially pushing the heir into the 37% tax bracket. Spreading withdrawals across years 1–10 is usually smarter tax planning.
Mistake 3: Failing to communicate the SECURE Act's impact to heirs. Many retirees don't explain to heirs that they'll owe income tax on inherited IRAs. Heirs often assume an inherited IRA is tax-free, then face an unwelcome surprise. Use the 10–20 years before you die to educate heirs and help them plan.
Mistake 4: Not optimizing which heirs get which accounts. If you have a Roth and a traditional IRA, leaving the Roth to a child in a low tax bracket and the traditional IRA to a higher-earning child spreads the tax burden more efficiently.
Mistake 5: Overlooking the QLAC option. For retirees with large IRAs, a QLAC can reduce the inherited IRA balance, lower the tax burden on heirs, and secure guaranteed income for yourself in very old age. This option is under-utilized.
FAQ
Does the 10-year rule apply to my Roth IRA inheritance?
Yes, the 10-year rule applies to inherited Roth IRAs as well. However, because Roth distributions are tax-free, there is no income tax impact on heirs—they inherit tax-free funds. This is one reason Roths are excellent to leave to heirs.
If I leave my IRA to my spouse, do the SECURE Act rules apply?
No. A spouse inheriting an IRA can treat it as their own, rolling it over into their personal IRA name. The spouse can then delay distributions until their own RMD age and doesn't face the 10-year rule. Spouse beneficiaries have the most flexibility.
Can my heir choose to stretch the inherited IRA over more than 10 years?
No. The 10-year rule is mandatory—the account must be fully distributed by year 10. However, a heir can choose to withdraw gradually over 10 years (years 1–10) or all at once at year 10, or any combination. They cannot extend beyond 10 years.
What if I die before age 73 and haven't started taking RMDs?
If the original owner dies before their RMD age (before the year they turn 73), different rules apply to non-spouse beneficiaries. Generally, they still must deplete the inherited IRA within 10 years, but annual RMDs during years 1–9 may not be required. This is one complex area—consult a CPA for specifics.
Can my heir inherit my IRA and split it among multiple beneficiaries?
The 10-year rule applies to the entire inherited IRA, regardless of how it's divided. If you name two children as equal beneficiaries, they can split the IRA into two separate inherited IRAs (one per child), but each still faces the 10-year rule. The split allows each child to manage their portion independently but doesn't extend the timeline.
Is there a way to avoid the tax on an inherited IRA?
Not entirely, but you can minimize it through planning: leaving Roth IRAs (which are inherited tax-free), naming a charity as beneficiary for a portion, using a QLAC, or coordinating the overall estate plan with a CPA. The tax is not avoidable, only manageable.
If my heir doesn't have the cash to pay the tax on an inherited IRA, what happens?
If your heir withdraws $100,000 from an inherited IRA but doesn't have cash to pay the tax bill, they can use funds from the IRA withdrawal itself—but this requires taking a larger withdrawal to cover both the required amount and the tax. This is one reason financial planning and communication with heirs before you die is so important.
Related concepts
- Estate planning for retirees
- Beneficiary designations on retirement accounts
- The 10-year rule for heirs explained
- Roth conversions and tax planning
- Account types and tax rules
- Glossary
Summary
The SECURE Act (2020) fundamentally changed how non-spouse beneficiaries inherit retirement accounts, eliminating the stretch IRA and requiring most heirs to withdraw all funds within 10 calendar years. This concentrates the income tax burden into a shorter timeframe, pushing heirs into higher tax brackets and reducing the after-tax inheritance. Spouse beneficiaries retain flexibility and can treat inherited IRAs as their own. Strategic planning—such as converting traditional IRAs to Roths before death, naming charities as IRA beneficiaries, and coordinating which heirs inherit which accounts—can mitigate the tax impact. Communicating these rules to your heirs years in advance helps them prepare financially for the inherited IRA's tax burden.