What Your Heirs Actually Keep From an Inherited IRA

The Ten-Year Rule

Under the SECURE Act, most non-spouse beneficiaries who inherit a traditional IRA or 401(k) must empty the account within ten years. There are exceptions: a surviving spouse, a minor child of the account owner, someone disabled or chronically ill, and someone not more than ten years younger than the owner.

For most adult children, though, the ten-year window applies. And depending on whether the original account owner had already started required distributions, the heir may also have to take money out every year along the way, not just empty it by year ten.

Taxed at Their Rate, Not Yours

Every dollar that comes out of an inherited traditional account is taxed as ordinary income, at the heir's rate. That timing matters more than people think. Many people inherit in their fifties, often in their highest-earning years. Adding a large inherited IRA on top of a working salary can push them into a higher bracket for a decade.

An Example to Make It Concrete

Say a $600,000 traditional IRA passes to one adult child who is already in the 24 percent federal bracket. Spread evenly over ten years, that's $60,000 a year of extra taxable income before any growth.

Depending on the rest of their income, a meaningful share of each withdrawal may be taxed at their highest marginal rate. Over the full ten years, the federal tax alone can easily reach six figures. State tax may add more.

This isn't an argument against leaving retirement accounts to family. It's an argument for looking at it before it happens, while you still have choices.

Questions Worth Asking

A few questions are worth sitting with before this becomes your heirs' problem instead of your plan:

• Who is named on each retirement account today, and is that still right?
• Would some heirs be better served by different assets than others?
• How does the account fit with the rest of the estate plan?
• What would your heirs' tax picture look like in the years after they inherit?

Those last questions belong with your CPA and your financial professional, working alongside your estate attorney. The structure of who inherits what, and in what form, is something you can still shape now. Once the account passes, the tax rules are fixed.