The rules governing inherited IRAs have changed in recent years. Americans have as much as $18 trillion in IRAs and $13 trillion in defined contribution plans, and much of this is expected to pass to beneficiaries upon the death of the owners. The taxes on these assets are likely to be equally burdensome, according to the Journal of Accountancy article “How to ease taxes on inherited IRAs.” In the past, one could inherit an IRA and stretch the distributions out over your lifetime. This is no longer the case.
Most non-spouse beneficiaries are required to empty inherited accounts within ten years, following the SECURE Act of 2019. Lifetime stretching may only be done by spouses and certain eligible beneficiaries, which include disabled beneficiaries and those who are not more than ten years older than the IRA’s original owner.
Strategies can mitigate the impact
For adult children inheriting IRAs, a few strategies can mitigate the impact of the 10-year distribution rule.
Spreading withdrawals over the ten-year period is generally the best way to avoid a significant tax hit at the end of that period. Planning needs to be done with the heir’s tax brackets in mind. One approach is to take a tenth of the IRA in the first year, a ninth in the second year, a seventh in the third year and so on. However, each person’s tax situation needs to be considered.
Flexibility is key. If a strategy is set and circumstances change, adjustments may be needed to the plan.
If the original owner died before taking Required Minimum Distributions, the heir may have no obligation to take RMDs in years one through nine. However, waiting until the end may trigger a huge tax bill. Stretching out the distribution over the ten years is wiser.
Taxes should be withheld from withdrawals to avoid making estimated tax payments throughout the year.
Planning isn’t just for heirs
Planning isn’t just for heirs. Account owners can take certain steps to help beneficiaries later. If possible, converting traditional IRA or 401(k)s to Roth IRAs or Roth 401(k)s should be considered. The ten-year rule still applies. However. taxes will be paid at the time of the conversion. Heirs can generally receive withdrawals without incurring tax on distributions and can wait until the tenth year to empty the account, since there are no annual RMDs.
Another potential strategy is making a charitable gift. Leaving retirement account funds to charity is a good idea if someone is charitably inclined and plans on leaving assets to charity anyway.
Discuss the use of a Charitable Remainder Trust (CRT) with an estate planning attorney. Using a CRT, a beneficiary can be named to receive annual payments for life or for a set term of up to 20 years, with the remaining funds going to the charity upon the beneficiary’s death or at the end of the term.
The rules governing inherited IRAs have changed in recent years. There are many strategies to minimize taxes on IRAs and other tax-deferred accounts. An experienced estate planning attorney can ensure that tax strategies align with the overall estate plan. If you would like to learn more about retirement accounts and estate planning, please visit our previous posts.
Reference: Journal of Accountancy (Feb. 2, 2026) “How to ease taxes on inherited IRAs”
Image by Steve Buissinne
