In 2020, the rules for inherited retirement accounts changed in a significant way.
For many years, most beneficiaries could “stretch” withdrawals from an inherited IRA over their lifetime. This meant they could take small required withdrawals each year based on their life expectancy, allowing the remaining funds to continue growing tax-deferred for decades.
That assumption shaped many estate plans.
Beginning in 2020, that option changed and no longer applies to most families.
The SECURE Act changed how inherited retirement accounts must be distributed. For most adult children who inherit a retirement account, the lifetime stretch has been replaced with a 10-year deadline.
If you have named your children as beneficiaries of a retirement account, this change likely affects them.
This is Part 1 of a two-part series explaining what the 10-year rule means and why it matters for estate planning.
The 10-Year Rule. What It Means
Before 2020, most non-spouse beneficiaries could calculate required minimum distributions based on their own life expectancy. This allowed withdrawals to be spread out over many years.
“You can review the IRS guidance on inherited retirement account rules on the IRS website.”
Under current law, most non-spouse beneficiaries must withdraw the entire inherited retirement account within 10 years of the original owner’s death. In many cases, these beneficiaries are the IRA owner’s adult children.
Withdrawals do not have to be taken in equal amounts each year. A beneficiary may take only the required minimum or withdraw more in a given year. Regardless of the timing, the account must be completely emptied by the end of the tenth year.
Spouses are treated differently.
A surviving spouse who inherits a retirement account has significantly more flexibility. A spouse may roll the inherited IRA into his or her own IRA and treat it as a personal retirement account. Alternatively, the spouse may maintain it as an inherited IRA and take distributions over the spouse’s lifetime.
Why This Matters
Retirement accounts such as traditional IRAs and 401(k)s are typically income tax-deferred. This means taxes are not paid until money is withdrawn.
If withdrawals must occur within ten years instead of over several decades, that income may:
- push beneficiaries into higher tax brackets
- overlap with peak earning years
- reduce the benefit of long-term tax-deferred growth
For example:
If an adult child inherits a $700,000 retirement account and must withdraw it within ten years, those withdrawals may be taxed during the child’s highest earning years, when salary is already at its peak.
Under the prior rules, that same account could have been distributed gradually over decades, potentially smoothing out taxable income and reducing the overall tax impact.
Shorter payout periods often mean higher taxes for the account beneficiary.
A Common Misunderstanding
Many people still assume their children can stretch inherited retirement accounts over a lifetime.
For most families, that is no longer the case.
If your estate plan was drafted before 2020, it may rely on distribution assumptions that no longer apply.
Why This Is an Estate Planning Issue
Retirement accounts are often among a person’s largest assets.
When distribution rules change, the tax impact changes.
When the tax impact changes, what beneficiaries ultimately receive may change as well.
Estate plans created before 2020 should be reviewed to confirm they still operate as intended under current law.
A brief review can help ensure your plan aligns with today’s rules and with your original goals for your family.
Coming Next:
Part 2. Exceptions to the 10-Year Rule. Who Is Treated Differently?