What to Know Before You Inherit an IRA
Managing the taxes that come with an inherited IRA takes smart planning, especially since the SECURE Act eliminated the 'stretch IRA' game plan for most folks.


Individual retirement accounts represent an important part of the legacy many of us intend to pass on, but inheriting an IRA presents challenges that demand adequate planning and strategies. Notably, the SECURE Act and, more recently, SECURE 2.0 Act have ushered in sweeping changes to retirement and estate planning, especially for those inheriting retirement accounts.
Under the new rules, most IRAs inherited by non-spouse beneficiaries must be cleaned out within 10 years of the original owner's death. Previously, beneficiaries could "stretch" their distributions over their lifetimes, potentially lowering their tax obligations. This end to the "stretch IRA" strategy means you need a more calculated approach to managing any inherited funds.
Here are some key strategies for managing inherited IRA distributions under the new rules.
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Use smart timing to make tax-efficient withdrawals
One of the primary considerations when managing inherited IRA distributions is minimizing your tax exposure. While the new rules require that the entire account be fully depleted by the end of the 10th year, you can withdraw money at various times over that period. Thus, beneficiaries can strategically time their distributions to take advantage of lower-income years, such as during a sabbatical or after a job loss.
By withdrawing larger amounts during these periods, beneficiaries can potentially reduce their overall tax burden. Additionally, during market downturns, beneficiaries can consider taking more substantial distributions, reinvesting outside the IRA at depressed prices, and potentially benefiting from future market recoveries.
Maximize growth of inherited Roth IRAs
For beneficiaries of inherited Roth IRAs, the focus shifts toward maximizing growth. While recipients are still required to pull all the money out by the end of the 10th year, it typically makes sense to let an inherited Roth IRA compound for as long as possible.
Beneficiaries who can afford to wait will be treated to 10 years of tax-free growth. Unlike traditional IRAs, Roth IRAs offer tax-free withdrawals if certain conditions are met. By leveraging the tax-free status of Roth IRAs, beneficiaries can maximize the growth potential of their inherited funds.
Enjoy the benefits of the stretch IRA — if you’re eligible
Some beneficiaries, however, continue to be eligible for the old “stretch IRA” beneficiary rules and can gradually withdraw money from their inherited IRA account over their lifetimes. This group is called Eligible Designated Beneficiaries, and calculating the required distributions over their life expectancy may result in more tax-deferred growth, less taxes paid overall and more money in the hands of your beneficiaries.
A list of Eligible Designated Beneficiaries who can still do a stretch IRA after the SECURE Act is as follows:
Surviving spouses. Any marriage, whether heterosexual or same-sex, would qualify as long as a marriage license was issued and the marriage is legal in the state where it was performed.
Disabled individuals. The SECURE Act uses a stringent definition of disability. Basically, any person who is partially disabled or is able to be gainfully employed in any type of employment would most likely not qualify.
A chronically ill person. A person is considered "chronically ill" if they are unable to perform at least two of the six activities of daily living (ADLs) for a period of at least 90 days. Also, their condition must be expected to last indefinitely. The activities of daily living are toileting, eating, transferring, bathing, dressing and continence.
Minor children. It must be emphasized that this specification applies only to the decedent's minor children. It does not apply to other relatives, including grandchildren. Also, the decedent's minor children can only utilize the stretch provision until they reach the age of the majority, which is 21, according to SECURE 2.0 Act. At that point, the stretch provision ceases and reverts back to the "10-year" rule.
For example, Tim is 50 and has a minor daughter, who is 11. Tim passes away unexpectedly and leaves all of his IRA to his daughter. She is able to use the stretch IRA rules from age 11 to 21, distributing a little from the IRA each year based on her life expectancy. Once she reaches 21, the 10-year rule will apply, and she must deplete all remaining assets in the inherited IRA account by the end of year 10.
Individuals not more than 10 years younger than the decedent. This group, in particular, may offer some unique planning opportunities. For example, one may decide to leave money to a trustworthy sibling or even their parents instead of their children or grandchildren. The parent or sibling could then be instructed to gift the distributions to the decedent's children or grandchildren.
This may result in less taxes paid and the ability to allow the assets to grow in a tax-deferred manner for a longer period of time. Implementing a strategy like this is complex and should be coordinated with a competent financial adviser and tax professional to consider gift tax, income tax and other tax-related implications.
Coordinate among multiple beneficiaries
When an IRA is inherited by multiple beneficiaries, it's imperative to synchronize withdrawal strategies to serve both collective and individual financial objectives effectively. This collaborative effort entails open dialogue among beneficiaries to harmonize their diverse financial aspirations with the overarching estate strategy.
Stay informed
As legislation continues to evolve, beneficiaries should stay informed about any future changes that may affect retirement and estate planning. Proactively monitoring legislative developments and staying aware of regulatory changes can help beneficiaries adapt their distribution strategies accordingly.
Managing inherited IRA distributions requires careful consideration and planning. With the changes introduced by the SECURE Act and SECURE 2.0 Act, beneficiaries must adopt a more calculated approach to optimize tax efficiency and align distributions with their individual financial goals. By implementing these strategies and leveraging the expertise of professionals, beneficiaries can navigate the complexities of inherited IRA distributions and maximize the benefits of their inherited accounts.
Investment advisory services offered through Osaic Advisory Services, LLC (Osaic Advisory), a registered investment advisor.
Related Content
- Charitable Remainder Trust: The Stretch IRA Alternative
- Your Kids' Tax Brackets Could Lead to Unequal Inheritances
- Minimizing Taxes When You Inherit Money
- How to Optimize Taxes When You Tap Your Retirement Accounts
- 13 Smart Estate Planning Moves
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Antwone Harris, MBA, CFP®, is a seasoned financial professional with over 20 years of experience helping clients transition from their main careers to the next phase of their lives. As a former VP-Senior Financial Consultant at Charles Schwab Inc., he managed over $890 million in client assets and ranked in the top 5% of more than 1,100 advisers nationwide. His financial expertise has been featured in major media outlets such as CBS, ABC, NBC, FOX, The Washington Post, Bloomberg, The Financial Times and Kiplinger. Harris is a CERTIFIED FINANCIAL PLANNER™ and a Retirement Income Certified Professional®, focusing his practice on creating comprehensive plans for individuals approaching or already in retirement. Recognizing the anxiety surrounding retirement preparation, Harris founded Platinum Bridge Wealth Strategies to provide specialized financial planning for those nearing or in retirement.
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