The SECURE Act 10-Year Rule Explained: Higher Taxes for Kids Who Inherit IRAs

When Congress passed the SECURE Act, one of the most significant changes for families came from the new 10-year rule for inherited IRAs. The rule eliminated the ability for most non-spouse beneficiaries, especially adult children, to stretch required distributions over their lifetime. Now, they must empty the account within 10 years of inheriting it.

While this might sound simple, the tax impact can be severe. Compressed distribution windows often push heirs into higher brackets, accelerating income tax on decades of savings. Here is what the rule actually requires and how strategic planning can reduce the hit.

What the SECURE Act’s 10-Year Rule Says

Under the SECURE Act, when a child or other non-spouse inherits an IRA or 401(k), they must withdraw all funds by December 31 of the 10th year following the account owner’s death.

Before 2020, many beneficiaries could stretch required minimum distributions over their own life expectancy, sometimes 30 years or more, allowing continued tax-deferred growth. The SECURE Act ended that option for most heirs.

The result is that your kids will likely pay taxes on inherited retirement funds faster, and at potentially higher marginal rates, than they would have under the old rules.

Who the Rule Applies To

The 10-year rule applies to most non-spouse beneficiaries, but there are exceptions.

The rule applies to:

• Adult children or grandchildren
• Siblings, nieces, nephews, or other non-spouse heirs
• Trusts named as beneficiaries unless they qualify as see-through trusts

The rule does not apply to:

• Surviving spouses
• Minor children until they reach age 21, when the 10-year clock starts
• Disabled or chronically ill beneficiaries
• Beneficiaries less than 10 years younger than the account owner

The Hidden Tax Trap

For many families, the problem is not just the loss of tax deferral. It is the timing of the withdrawals. Most heirs inherit these accounts in their 40s or 50s, right in their peak earning years. Adding large inherited IRA distributions on top of salary and bonuses can easily push them into higher tax brackets.

Example:
If your child earns $120,000 per year and inherits a $1 million traditional IRA, they have just 10 years to withdraw it. Even spreading it evenly means an extra $100,000 in taxable income per year, enough to move them into a much higher bracket and increase Medicare or Net Investment Income taxes if applicable.

Our analysis at Greenbush Financial Group shows that this compression effect often results in 5 to 10 percent higher effective tax rates on inherited IRA dollars compared to pre-SECURE Act rules.

Planning Strategies to Reduce the Impact

There are several ways to mitigate the 10-year rule’s tax impact:

1. Roth conversions during your lifetime
   Converting pre-tax IRAs to Roths allows your children to inherit tax-free assets. They will still follow the 10-year withdrawal rule, but distributions will be tax-free.

2. Strategic beneficiary designations
   Leave portions of retirement assets to lower-income heirs or to charitable remainder trusts.

3. Staggered inheritances
   Use taxable accounts, life insurance, or non-retirement assets to balance out future income for your kids.

4. Pre-death withdrawals
   Taking larger distributions during your own lower-income retirement years can smooth taxes across generations.

5. Trust planning
   Review existing conduit trusts. Many written before 2020 no longer operate as intended under the 10-year rule.

At Greenbush Financial Group, we often run multi-scenario tax projections showing how different withdrawal schedules, Roth conversions, or charitable strategies affect heirs’ long-term tax burdens.

Why This Matters for Your Estate Plan

The 10-year rule changed how retirement wealth passes between generations. What used to be a slow, tax-efficient transfer can now create a rapid, high-tax inheritance event.

Updating your beneficiary designations, estate documents, and withdrawal strategy is critical if you want your children to keep more of what you have saved. Even a modest Roth conversion plan or trust revision can reduce total taxes by hundreds of thousands of dollars over time.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQs: SECURE Act 10-Year Rule

1. Do my kids have to take money out every year?
   Maybe. Annual required minimum distributions may be required if the decedent was of RMD age at passing. The RMD amount is likely less than one tenth of the account. The beneficiaries must still empty the inherited IRA by the end of year 10, so creating a strategy to reduce the overall tax burden is recommended.
2. Does the 10-year rule apply to Roth IRAs?
   Yes, but Roth withdrawals are tax-free. Heirs still need to empty the account within 10 years.
3. How does this affect trusts as IRA beneficiaries?
   Many conduit trusts written before 2020 now force the entire balance out in year 10, losing the intended protection and control. These should be reviewed.
4. Can I avoid the 10-year rule for my kids?
   Not directly, unless your child qualifies as an eligible beneficiary such as a minor or disabled dependent. Strategic Roth conversions or life insurance can help achieve similar goals.
5. Should I change my IRA beneficiaries now?
   Possibly. If your current structure assumed lifetime stretch distributions, it is time to review it under the new law.