If you’re expecting to inherit an IRA someday—or if you have one you’ll eventually pass to loved ones—the rules have changed in ways that can have a big financial impact.
The SECURE Act (and its follow-up, SECURE Act 2.0) made a major shift in how non-eligible beneficiaries—like most adult children—must handle inherited IRAs. Gone are the days when you could “stretch” distributions over your lifetime to spread out the taxes. Now, the clock starts ticking the moment you inherit.
Who Is a “Non-Eligible Beneficiary”?
In IRS terms, you’re considered a non-eligible designated beneficiary if you don’t meet special exceptions such as:
- Being the spouse of the account owner
- Being a minor child of the account owner (until you reach the age of majority)
- Having a qualifying disability or chronic illness
- Being less than 10 years younger than the deceased account owner
For most people, adult children who inherit from their parents fall into this non-eligible category.
The 10-Year Rule: The Game Has Changed
Before 2020, you could take small required minimum distributions (RMDs) each year based on your own life expectancy—sometimes decades—keeping taxes and growth potential in check.
Now, under the SECURE Act, non-eligible beneficiaries must withdraw the entire inherited IRA balance within 10 years of the original owner’s death.
The details get tricky:
- If the original owner had already started RMDs, you may also be required to take annual distributions in years 1–9, not just drain the account in year 10.
- There’s no penalty for taking more than the minimum—but whatever you take is fully taxable income in the year you receive it.
Why This Matters for Adult Children in Peak Earning Years
If you inherit an IRA while you’re in your 40s, 50s, or 60s—often the highest-earning years of your career—those extra withdrawals can push you into a higher tax bracket.
Example:
- You earn $180,000 from your job.
- You inherit a $500,000 IRA.
- Even spreading withdrawals evenly over 10 years would mean an extra $50,000 in taxable income each year.
- That extra income could bump you into the next federal tax bracket, phase you out of certain credits/deductions, raise household income used for college financial aid calculations and even increase Medicare premiums once you’re 65.
Planning Opportunities
If you’re inheriting—or planning to leave—an IRA, you can still make smart moves to minimize the hit:
- Time withdrawals strategically: Consider taking more in lower-income years and less in high-income years.
- Roth conversions (before death): Original owners may convert some traditional IRA funds to a Roth IRA, which passes tax-free to heirs (though the 10-year rule still applies to withdrawals).
- Charitable giving: Qualified Charitable Distributions (QCDs) during the original owner’s lifetime can reduce the account balance (and future tax burden) for heirs. Leaving an IRA to a charity, bypasses taxation and acts as a deduction to your overall estate.
- Coordination with other income: Increasing your pre-tax contributions to your own Traditional IRA or employer retirement plan can help offset the taxable income from inherited IRA withdrawals.
The Bottom Line
The new rules make inherited IRAs much less flexible for non-eligible beneficiaries—especially adult children in their highest-earning years. Without a plan, you could be forced to take large taxable withdrawals at the worst possible time, costing you far more in taxes than you expect.
If you’re leaving an IRA to your kids—or you’re set to inherit one—now’s the time to talk to a financial planner or tax professional about strategies to keep more of that money working for you and less going to the IRS.