By W Financial Advisors • Wealth Wednesday Brief • 3–5 min read
SCENARIO
When Patricia inherited her father's $450,000 IRA, she was relieved. The estate had passed cleanly, and she was now the account owner. Her plan: leave the money invested, let it grow, and take small distributions as needed over her lifetime, just as her financial planning books from twenty years ago had suggested.
Her new advisor delivered difficult news. The rules she had read about, known as the stretch IRA strategy, that allowed non-spouse beneficiaries to take distributions over their own lifetime, had been eliminated in 2019. Patricia, now 53, was required to withdraw the entire $450,000 within 10 years of her father's death.
The tax implications hadn't occurred to her. The required distributions wouldn't be spread evenly across the decade; they would start smaller and grow larger each year, adding to her salary and, over time, pushing more of her income into a higher bracket than she had planned for.
THE CONCEPT
Prior to the SECURE Act of 2019, non-spouse beneficiaries who inherited IRAs could take distributions over their own life expectancy, sometimes a period of 30, 40, or more years. This "stretch IRA" strategy allowed inherited accounts to continue growing tax-deferred for decades, compounding the tax benefit significantly.
The SECURE Act largely eliminated this option for most non-spouse beneficiaries. Under current rules:
The 10-Year Rule: Most non-spouse beneficiaries (adult children, other individuals) must withdraw all funds from an inherited IRA within 10 years of the account owner's death.
The Annual Distribution Question: IRS guidance clarified that if the original account owner had already begun Required Minimum Distributions, the beneficiary must also take annual distributions during the 10-year period, not just a lump sum at the end. (If the original owner had not yet reached RMD age, the beneficiary has more flexibility in how distributions are timed within the 10-year window.)
Exceptions exist for "Eligible Designated Beneficiaries," including: surviving spouses, minor children of the account owner (until they reach majority), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the original owner. These individuals may still use the stretch strategy.
Example
Back to Patricia. Her father was 82 when he died and had already begun RMDs. Under IRS guidance, Patricia must take at least annual distributions during the 10-year window. Her first year's required distribution is calculated using the IRS Single Life Expectancy factor for her age (33.4 for someone age 53): $450,000 ÷ 33.4, or approximately $13,500. That factor is reduced by one each subsequent year, so her required distributions grow larger over the remaining nine years as the divisor shrinks.
Patricia earns $120,000 in salary. Adding roughly $13,500 in inherited IRA distributions pushes her 2026 taxable income to approximately $133,500, keeping her well within the 24% marginal bracket. As her required distributions grow in later years, the additional tax burden could become more substantial.
With planning, however, some of this can be managed. Her advisor suggests taking distributions in the years when Patricia's income is expected to be lower, for example when she transitions to part-time work or in years with larger deductions. She can also consider taking larger distributions in lower-income years and smaller ones in higher-income years, rather than allowing forced annual distributions to determine the timing.
STRATEGY
Planning around inherited IRA rules involves both the account owner (in estate planning) and the beneficiary (after inheriting):
For account owners: Consider naming a trust as IRA beneficiary if you have specific distribution wishes or want to protect assets from beneficiary creditors or divorce, but only with proper trust drafting, as not all trusts qualify for favorable inherited IRA treatment. Also consider Roth conversions during your lifetime: a Roth IRA inherited by a non-spouse still requires the 10-year distribution window, but distributions are tax-free, significantly reducing the tax burden on heirs.
For beneficiaries: Don't simply withdraw evenly over 10 years without analysis. Model your income across each year of the distribution window and identify the years with the most bracket space for taxable withdrawals. If your own income varies significantly (retirement, career changes), timing distributions to low-income years may meaningfully reduce taxes.
COMMON MISTAKE
The most common mistake is assuming the old stretch rules still apply. Many financial plans drafted before 2019, and many informal family discussions about inheritance, still reference the ability to stretch distributions over decades. Beneficiaries who act on this outdated assumption may face penalties for not taking required annual distributions, or may miss planning opportunities by not managing the 10-year window deliberately.
KEY TAKEAWAY
Inherited IRAs now come with a 10-year withdrawal requirement for most non-spouse beneficiaries; understanding the rules and timing distributions thoughtfully may significantly reduce the tax burden on your heirs and preserve more of the legacy you intend.
SOURCES & REFERENCES
1. Internal Revenue Service / U.S. Department of the Treasury. Required Minimum Distributions, Final Regulations (T.D. 10001), 89 Fed. Reg. 58886, July 19, 2024; Publication 590-B. irs.gov.
This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or financial advice. All examples are hypothetical and for illustrative purposes only. Please consult a qualified financial professional regarding your individual situation. This information is not intended as tax advice. Individuals should consult their tax professional regarding their specific circumstances.
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