Beneficiary IRA rules are changing how we should plan for retirement assets

For years, one of the most attractive features of an IRA was the ability to accumulate money during your lifetime and then pass that account to the next generation, allowing your children to continue taking relatively small distributions over their own life expectancy. That strategy changed dramatically with the SECURE Act, which was signed into law in December 2019.

The rules surrounding inherited IRAs have become more complicated since then, particularly after the IRS issued final regulations in 2024. The basic planning takeaway is relatively straightforward: for many people, an IRA is no longer an asset that can simply be passed to the next generation and stretched over their lifetime. That change should influence how we think about Roth conversions, charitable giving, withdrawals in retirement, and which assets we ultimately leave to our children.

What changed with the SECURE act?

The Setting Every Community Up for Retirement Enhancement Act of 2019, commonly known as the SECURE Act, fundamentally changed the rules for many beneficiaries of retirement accounts. For account owners who died after December 31, 2019, most non spouse beneficiaries who are not considered "eligible designated beneficiaries" generally must distribute the entire inherited retirement account within 10 years of the owner's death.

Before the SECURE Act, a child who inherited an IRA could generally use his or her own life expectancy to determine required distributions. A child in his or her 50s could potentially stretch distributions over several decades. That allowed the IRA to continue compounding on a tax deferred basis for a very long time.

The 10-year rule significantly shortened that window. If, for example, a parent dies in 2026 and leaves a Traditional IRA to an adult child who is not an eligible designated beneficiary, the child generally must have the entire account distributed by December 31, 2036.

When does the 10-year rule actually come into play?

This is where the rules become more nuanced.

For an adult child who is a non-eligible designated beneficiary, the 10-year rule generally applies regardless of whether the IRA owner died before or after reaching the required beginning date. However, the distribution requirements during those 10 years can differ depending on when the original owner died.

If the IRA owner died before their required beginning date, the beneficiary generally does not have to take annual distributions during years one through nine. Instead, the entire account must be distributed by the end of year 10. This creates significant planning flexibility because the beneficiary can potentially allow the IRA to continue growing for several years and then determine when to recognize the taxable income.

If the IRA owner died on or after their required beginning date, however, the IRS final regulations generally require annual distributions to continue during the 10 year period, in addition to requiring the entire account to be distributed by the end of the tenth year.

This distinction is important. The 10-year rule does not necessarily mean, "You can wait 10 years and then take everything out." For many inherited IRAs, the beneficiary needs to plan for annual distributions along the way and make sure the entire account is emptied by the end of the 10th year.

There are important exceptions for eligible designated beneficiaries, including a surviving spouse, a minor child of the account owner, certain disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the account owner.

Why this changes retirement planning

The new rules change the conversation about what assets we should try to preserve for the next generation.

Consider a hypothetical retiree with a $2 million Traditional IRA and $2 million of taxable investments. Under the old rules, there could be a strong argument for preserving the IRA because a child could potentially stretch the inherited IRA over his or her lifetime.

Today, the analysis can be very different. If the child inherits the Traditional IRA at age 55, the child may be required to recognize substantial taxable income from that account over a relatively short period. That child may be inheriting the account during his or her peak earning years.

That creates a potential mismatch. The parent may have spent decades accumulating tax deferred assets at relatively low tax rates during retirement, only for the child to inherit those assets and be forced to recognize taxable income at much higher marginal tax rates.

This is one reason retirement planning should not stop at determining how much money you need to live comfortably. The tax characteristics of the assets you leave behind matter too.

Lean more heavily on IRA distributions during retirement

For some retirees, the new rules provide another reason to consider taking more money from Traditional IRAs during their lifetime rather than automatically minimizing distributions.

That does not mean every retiree should take more than they need. But it does mean that the traditional goal of keeping an IRA untouched for as long as possible deserves another look.

The key is to compare the tax cost of taking additional distributions today with the potential tax cost your children may face when they inherit the account.

Qualified charitable distributions can be particularly valuable

For charitably inclined retirees, qualified charitable distributions, or QCDs, can be an especially attractive way to reduce the size of a Traditional IRA.

Individuals who are at least age 70½ can generally make qualifying charitable distributions directly from an IRA to eligible charities. A QCD can satisfy all or part of an individual's required minimum distribution and generally is not included in taxable income, subject to the applicable rules and annual limits.

This can be particularly valuable because it allows an individual to use pre-tax assets for a charitable purpose without first recognizing the distribution as taxable income. Instead of leaving a large Traditional IRA to children who may have to distribute it over 10 years, a charitable-minded retiree can gradually reduce the IRA during his or her lifetime while supporting organizations that matter to the family.

Roth conversions become even more interesting

Roth conversions can also take on greater importance under the new beneficiary rules.

When you convert money from a Traditional IRA to a Roth IRA, you generally recognize taxable income today in exchange for moving the assets into a Roth account. Once the money is in the Roth, qualified distributions are generally tax free.

The conversion does not eliminate the 10 year rule for a child who later inherits the Roth IRA. The child will generally still need to empty the inherited Roth IRA within 10 years. But there is a major difference: distributions from an inherited Roth IRA are generally not taxable to the beneficiary.

That changes the planning equation. A parent may pay the income tax on a Roth conversion during his or her lifetime, potentially at a lower marginal tax rate than the child's future rate, while the child receives an asset that can generally be distributed tax free.

The question is therefore not simply, "Should I do a Roth conversion?" It is, "Who is likely to pay the tax if I don't convert, and when will that tax be paid?"

What assets should you leave to your children?

This also raises an interesting question about asset location in an estate.

A retiree may have three broad categories of assets: Traditional retirement accounts, Roth accounts, and taxable investments. These assets do not all carry the same tax characteristics for the next generation.

Traditional IRAs generally contain income tax that has not yet been paid. Taxable investments, on the other hand, may receive a step up in cost basis at death under current law, which can significantly reduce or eliminate the capital gain attributable to appreciation that occurred during the owner's lifetime. Roth IRAs can generally provide tax free distributions to beneficiaries, although the 10 year distribution requirement can still apply.

This means that, depending on the circumstances, there can be a compelling planning argument for using Traditional IRA assets more heavily during retirement while preserving taxable assets and Roth assets for the next generation.

That is not a universal rule. Tax brackets, charitable intentions, estate taxes, state taxes, portfolio composition, cash flow needs, and the specific characteristics of the beneficiaries all matter. But the tax consequences of each asset should be considered rather than assuming that the best estate plan is simply to leave every account untouched.

The bottom line

The SECURE Act changed the inherited IRA landscape, and the IRS's final regulations have made the rules more precise. For many adult children inheriting a parent's IRA, the account must now be fully distributed within 10 years. If the original owner had reached the required beginning date, annual distributions may also be required during that period.

That creates a planning opportunity during the parent's lifetime. Rather than automatically trying to maximize the size of a Traditional IRA, retirees should consider whether it makes sense to draw down those assets through normal retirement spending, QCDs, Roth conversions, or other tax planning strategies.

For many families, the most important question is no longer simply, "How much can I leave my children?" It is "What type of assets am I leaving them, and what will those assets look like from a tax perspective when they receive them?"

That question becomes particularly important because children often inherit their parents' retirement accounts when they are in their 50s or 60s, potentially during some of their highest earning years. Thoughtful planning can help determine whether the next generation receives a large future tax liability, a potentially tax-free Roth account, or taxable assets with different tax characteristics.

The beneficiary rules have changed. Our estate and retirement planning should change with them.

Reid Schwartz is a columnist for The Sumter Item and Co-Founder of Creech Schwartz Wealth Management &Partners in Sumter, SC, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.

Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners, LLC.

This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional.

Securities and investment advisory services offered through &Partners, LLC, a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission and member FINRA, SIPC.