Picture a man who spends forty years feeding a retirement account. He thinks of the balance as a gift: $600,000, waiting for his daughter. He never tells her what the gift is made of, because he assumes it is simply money. She is 52 and at the peak of her earning years. When she inherits it, she learns that much of it was never fully hers. A large share belongs to the IRS, and she has ten years to settle up.

This is the quiet trap of the inherited IRA. The balance on the statement and the value your heirs receive can be very far apart. How far depends on a rule most people have never read.

What the 10-year rule actually says

Before 2020, a child who inherited an IRA could often "stretch" withdrawals over their own life expectancy. That could mean decades of small, manageable distributions and decades of tax-deferred growth.

The SECURE Act, passed in 2019, largely ended that for deaths in 2020 and later. Most non-spouse beneficiaries, including adult children, now have to empty the account by the end of the tenth year after the owner's death.

A few people are exceptions. The law calls them "eligible designated beneficiaries":

  • A surviving spouse
  • The owner's minor children (only until they reach the age of majority, after which the ten-year clock starts)
  • A disabled or chronically ill beneficiary
  • A beneficiary not more than ten years younger than the owner

Everyone else, which is nearly every adult child, falls under the ten-year rule.

The detail that catches families off guard

Many people hear "ten years" and assume the heir can wait until year ten and withdraw everything at once. Sometimes that's allowed. Sometimes it isn't.

If the owner died before their required beginning date for minimum distributions, the heir generally has no annual requirement. They only have to be at zero by the end of year ten. If the owner died on or after that date, final IRS regulations issued in 2024 say the heir must also take annual required distributions in years one through nine, and empty the account in year ten.

The IRS waived penalties for missed annual distributions in several earlier years because the rules were unclear. That relief was temporary. Heirs who inherit now should assume the rules will be enforced, and the penalty for missing a required distribution can be steep.

The required beginning age has also changed over time. It is currently 73 and rises to 75 for people born in 1960 or later. These details are why this is worth confirming with a tax professional for your own situation, not guessing at.

Why the tax math is the real story

Here is the mechanism that makes this an emotional problem and not just a technical one.

Money in a traditional IRA or 401(k) has never been taxed. When your heir withdraws it, the withdrawals are taxed as ordinary income. Tax law calls this "income in respect of a decedent."

Compare that with a house, or a brokerage account of appreciated stock. Those generally receive a "stepped-up basis" at death. The heir's cost basis resets to the value on the date of death, so decades of gain can effectively escape income tax. Retirement accounts get no such reset.

Now add the ten-year deadline. A child in their peak earning years, already in a high bracket, inherits $600,000 of pre-tax money. Spread over ten years, that can add tens of thousands a year to their taxable income. It may push them into a higher bracket, reduce eligibility for certain credits and deductions, and raise other costs tied to income.

The same account might have been far kinder to a parent in a low bracket in retirement. The money didn't change. The taxpayer did, and the taxpayer's bracket is what decides how much the account is worth.

Roth accounts behave differently

A Roth IRA is the useful contrast. In general, qualified withdrawals from an inherited Roth are not taxed, but the ten-year emptying rule still applies to most non-spouse heirs. So a Roth leaves the heir the freedom to let it grow tax-free for up to a decade and then withdraw it without a tax bill.

That difference is why "Roth conversions" come up so often in estate conversations. You pay the tax now, at your bracket, so your heir doesn't pay it later at theirs. Whether that's worth it depends on your current income, your expected bracket, and how long you expect to live. It is not automatically the right move, and a conversion can have its own costs.

What spouses and trusts change

A surviving spouse has more options than any other heir, including treating the inherited IRA as their own. That's one reason spouses are usually the primary beneficiary and children the contingent ones.

Trusts add a different complication. Naming a trust as the beneficiary can protect an heir who is young, vulnerable, or bad with money. But it has to be written to qualify for favorable treatment, and an poorly drafted trust can force faster payout or higher tax rates. Retirement accounts and trusts should be coordinated on purpose, not by accident.

Your next moves

  • Pull a beneficiary report for every retirement account today. Log in to each IRA, 401(k), and 403(b) and read who is named as primary and contingent. Write them down in one place. Forms filed decades ago often name an ex-spouse, a deceased parent, or no one at all.
  • Estimate your heirs' tax situation. For each child, jot down a rough income range. If your daughter earns $250,000 a year, a pre-tax account may cost her far more than it would cost a son in a lower bracket. This is the starting point for any unequal split.
  • Ask a CPA one specific question. Ask whether partial Roth conversions in your lower-income years would reduce the total tax your family pays across both generations. Bring your last tax return and current balances.
  • Match the asset to the heir. Where possible, consider leaving pre-tax accounts to people in low brackets or to charity, which doesn't pay income tax, and leaving assets that get a stepped-up basis, such as a home or taxable investments, to heirs in high brackets. Check whether your plan treats the children fairly after tax, not just before it.
  • Tell the person who will inherit what it is. Tell them the account is pre-tax, that a ten-year clock exists, and that they should not simply cash it out. Non-spouse heirs generally can't roll an inherited IRA into their own. It has to be retitled as an inherited account through a direct transfer, and a careless withdrawal can create an avoidable tax bill.

The gift is in the clarity

Nobody wants to spend their last decade of lucid planning thinking about brackets. But what you are really deciding is whether the people you love inherit a clear plan or a puzzle that arrives during grief. Many of the costliest mistakes happen in the first few months, when someone cashes out an account to feel in control of a loss.

A beneficiary form, a short note about what each account is, and a few conversations now can mean the number on the statement is closer to the number your family actually receives.

This is the kind of detail Heirloom was built to hold in one place: which accounts exist, who is named on each, and what your family needs to know before they log in. If you'd like to start with a clear map, you can find it at heirloom.lumenlabs.works.