Most people do not think of inherited retirement accounts as complicated estate planning assets.

They should.

An IRA, 401(k), or other retirement account may look simple because it passes by beneficiary designation. But the tax rules for inherited retirement accounts changed dramatically beginning in 2020. As a result, an estate plan drafted before the SECURE Act may no longer work the way the account owner intended.

The problem is not that inherited retirement accounts suddenly became taxable. Traditional IRAs and many retirement accounts were already taxable when money came out. The problem is timing.

Before 2020, many beneficiaries could stretch withdrawals from an inherited retirement account over their life expectancy. That often allowed the income tax to be spread out gradually over many years.

The SECURE Act changed that result for many families. Most non-spouse beneficiaries now must withdraw the entire inherited retirement account by the end of the tenth year after the account owner’s death. In many cases, this can force income into a much shorter period, increase the beneficiary’s tax burden, and create planning problems that older trusts and beneficiary designations were never designed to handle.

This article is a general educational overview. It is not legal, tax, or financial advice. The rules for inherited retirement accounts are technical and depend on the account type, beneficiary designation, trust language, family circumstances, and tax law in effect at the time of death.

What Changed Under the SECURE Act

Before the SECURE Act, many individual beneficiaries could take required distributions from an inherited retirement account over their life expectancy. This was often called the “stretch IRA” strategy.

For example, if an adult child inherited an IRA, that child might have been able to take relatively small required distributions each year over several decades. The remaining account could continue growing tax-deferred.

That changed for many beneficiaries after the SECURE Act.

For account owners who died after 2019, most non-spouse beneficiaries are now subject to a 10-year rule. In general, that means the inherited retirement account must be fully distributed by the end of the tenth year after the account owner’s death.

This does not always mean the beneficiary can wait until year ten and take everything out at once. Under the 2024 final Treasury regulations, if the original account owner had already reached the required beginning date for required minimum distributions, the beneficiary may also have to take annual distributions in years one through nine, with the remaining balance distributed by the end of year ten.

That is a major planning change.

An older estate plan may still look complete, but the tax result may be very different from what the account owner expected.

Who Can Still Use Life Expectancy Distributions?

The SECURE Act did not eliminate life expectancy distributions for everyone. It preserved more favorable treatment for a narrow group called eligible designated beneficiaries.

Eligible designated beneficiaries generally include:

• A surviving spouse;
• A minor child of the account owner;
• A disabled beneficiary;
• A chronically ill beneficiary; and
• An individual who is not more than 10 years younger than the account owner.

These exceptions are important, but they are narrower than many families assume.

A surviving spouse usually has the most flexibility. Depending on the situation, the spouse may be able to roll the account into the spouse’s own IRA or take distributions using favorable rules.

A minor child of the account owner may be able to use life expectancy distributions temporarily. But that treatment does not last forever. Once the child reaches the age of majority, the 10-year rule begins. Under the final regulations, age 21 is generally used as the age of majority for this purpose.

A disabled beneficiary must meet a specific tax-law definition. This is not necessarily the same as how a family might use the word “disabled” in ordinary conversation.

A chronically ill beneficiary must also meet a technical definition, often involving an inability to perform certain activities of daily living or the need for substantial supervision because of severe cognitive impairment.

A beneficiary who is not more than 10 years younger than the account owner may qualify, but this exception often helps siblings, unmarried partners, or other close-in-age beneficiaries more than children.

For many adult children, the 10-year rule applies.

Why the 10-Year Rule Can Create a Tax Problem

The 10-year rule does not change the basic tax character of a traditional IRA or retirement account. Distributions are generally taxable as ordinary income to the beneficiary.

What changes is how quickly the account must be emptied.

That timing matters.

A beneficiary who inherits a large traditional IRA may already have a salary, business income, investment income, or other taxable income. Adding inherited IRA withdrawals on top of that income can push the beneficiary into higher tax brackets.

For example, assume a child inherits a $1,000,000 traditional IRA. If the beneficiary delays withdrawals and the account grows during the 10-year period, the year-ten balance could be much larger than the original account.

If a large balance is withdrawn in a single year, the beneficiary may face several tax consequences at the same time:

• A large ordinary income tax bill;
• Higher marginal tax rates;
• Possible Net Investment Income Tax exposure on investment income;
• Possible Medicare premium surcharges if the beneficiary is Medicare age;
• Reduced or phased-out deductions, credits, or tax benefits.

The exact result depends on the beneficiary’s filing status, state, income, deductions, age, and other facts. But the general risk is clear: forcing a large inherited retirement account into a short distribution window can create a much worse tax result than spreading the income over many years.

That is the “tax bomb” people often refer to with inherited retirement accounts.

Why Waiting Until Year Ten Can Be Risky

Some beneficiaries assume they can simply leave the inherited account untouched for nine years and deal with it in year ten.

That may be allowed in some cases, depending on whether annual required distributions apply. But even when it is allowed, it can be a poor tax strategy.

If the account continues growing and the beneficiary waits until the final year, the entire remaining balance may have to come out at once. That can create an income spike.

A better strategy may involve taking planned distributions over the 10-year period, especially in years when the beneficiary’s income is lower. But that requires planning.

The SECURE Act did not merely change beneficiary withdrawal rules. It changed the income tax planning around inherited retirement accounts.

Why Older Conduit Trusts May No Longer Work Well

Many estate plans drafted before 2020 used conduit trusts for retirement accounts.

A conduit trust is a trust that receives retirement account distributions and then passes those distributions out to the beneficiary. The trustee generally does not keep the retirement account distribution inside the trust.

Before the SECURE Act, this often worked well. If the beneficiary could stretch distributions over life expectancy, the annual required distributions were usually smaller. The conduit trust could pass those smaller amounts to the beneficiary each year while preserving some structure.

After the SECURE Act, the same trust language may produce a very different result.

If the inherited retirement account is subject to the 10-year rule, the trust may eventually receive much larger distributions than expected. And because a conduit trust usually requires those distributions to be passed through to the beneficiary, the trustee may not be able to hold the funds back, stage them, or protect them inside the trust.

That can create two problems.

First, it can create a large taxable distribution to the beneficiary.

Second, it can deliver a large amount of money outright to the beneficiary, even if the original purpose of the trust was to provide control, protection, or oversight.

This is one of the biggest reasons older estate plans should be reviewed.

Naming the Children Directly May Not Solve the Problem

Some people respond to the conduit trust problem by saying, “Then I’ll just name my children directly.”

That may be appropriate in some families, but it does not solve the tax issue. It simply removes the trust.

If adult children are named directly as beneficiaries, they may still be subject to the 10-year rule. They will have to manage the withdrawals themselves. If they take too much in one year, they may increase their tax burden. If they wait too long, they may face a large final-year distribution.

Naming children directly also removes trust protections.

That may matter if a beneficiary is young, financially inexperienced, in a troubled marriage, vulnerable to creditors, struggling with addiction, receiving government benefits, or simply not prepared to manage a large inheritance.

The issue is not only tax. It is control, timing, and protection.

Minor Children: A Common Misunderstanding

Families often assume that minor children avoid the SECURE Act problem.

That is only partly true.

A minor child of the account owner can qualify as an eligible designated beneficiary, but only temporarily. Once the child reaches the age of majority, the 10-year rule begins. Under the final regulations, age 21 is generally used for this purpose.

For example, assume a parent dies when a child is 13 and leaves a large traditional IRA to that child. The child may be able to use life expectancy distributions while still a minor. But when the child reaches 21, the 10-year clock begins.

That means the account generally must be emptied by the time the child is 31.

This can still be a serious planning issue. The child may receive large taxable distributions during young adulthood, possibly before the child has the maturity, financial experience, or creditor protection the parent would have wanted.

The Control Problem With Outright Beneficiary Designations

The SECURE Act is often discussed as a tax issue. But it is also a control issue.

If a retirement account passes outright to a beneficiary, the beneficiary generally controls the inherited account. The beneficiary decides when to withdraw funds, subject to the required distribution rules. Once money is distributed, it is outside any trust structure.

That may be acceptable for a responsible adult beneficiary.

It may be a poor fit for a young beneficiary, a financially vulnerable beneficiary, or a beneficiary who should not receive large sums outright.

Estate planning for inherited retirement accounts should consider both questions:

How will the account be taxed?

And who should control the money after death?

Accumulation Trusts: More Control, But Not a Tax Cure

An accumulation trust works differently from a conduit trust.

Instead of requiring the trustee to pass every retirement account distribution directly to the beneficiary, an accumulation trust may allow the trustee to retain distributions inside the trust and distribute them later under the standards in the trust agreement.

That can restore control.

It may prevent an automatic pass-through of a large retirement account distribution to a beneficiary. It can also preserve trust protections for younger beneficiaries, financially immature beneficiaries, beneficiaries with creditor concerns, or beneficiaries in unstable personal situations.

But an accumulation trust does not make the income tax disappear.

Trust income tax brackets are compressed. If taxable income is retained inside the trust, the trust may reach high federal income tax brackets at relatively low income levels. That can make accumulation trust planning expensive from an income tax standpoint.

Even so, an accumulation trust may still be appropriate when control and protection are more important than minimizing income tax in every year.

The point is not that an accumulation trust is always better. The point is that the trust should be chosen intentionally.

Charitable Remainder Trusts: A Specialized Option

A charitable remainder trust, often called a CRT, is another possible strategy for certain families.

A CRT is a split-interest trust. It pays an income stream to one or more noncharitable beneficiaries for life or for a term of years. At the end of that period, the remaining assets pass to charity.

A CRT can sometimes be used as the beneficiary of a retirement account. Because a qualifying CRT is generally exempt from income tax, the retirement account can be paid to the CRT without the CRT itself immediately paying income tax on the full amount. The CRT then makes payments over time to the individual beneficiary, and those payments are taxable to the beneficiary under specific CRT tax rules.

This can spread the economic benefit over a longer period than the 10-year rule would otherwise allow.

But a CRT is not a simple replacement for the old stretch IRA.

The charitable remainder is required. The family does not keep everything. The trust must meet technical requirements. The payout rate, beneficiary age, charitable remainder value, investment assumptions, and tax treatment all matter.

A CRT may be worth considering when the account owner has charitable goals and wants to create a structured income stream for beneficiaries. It is usually not the right fit if the goal is simply to keep all retirement assets in the family.

Why Beneficiary Designations Need Review

Retirement accounts usually pass by beneficiary designation, not by the will.

That means even a carefully drafted will or revocable trust may not control the IRA or 401(k) unless the beneficiary designation points to the right person or trust.

After the SECURE Act, beneficiary designations should be reviewed alongside the estate plan.

Important questions include:

• Who is named as primary beneficiary?
• Who is named as contingent beneficiary?
• Is a trust named as beneficiary?
• Is the trust a conduit trust or an accumulation trust?
• Does the trust qualify as a see-through trust?
• Are any beneficiaries eligible designated beneficiaries?
• Are minor children involved?
• Is the surviving spouse protected?
• Are there charitable goals?
• Would Roth conversion planning help?
• Should retirement assets and non-retirement assets be divided differently among beneficiaries?

These questions are especially important for large traditional IRAs and 401(k)s because those accounts carry built-in income tax liability.

Roth Accounts Need Planning Too

Roth IRAs and Roth retirement accounts are often more tax-friendly for beneficiaries because qualified distributions may be income-tax-free.

But Roth accounts are still subject to inherited account distribution rules.

That means a beneficiary may still have to empty an inherited Roth account within 10 years, even if the distributions are not taxable in the same way as traditional IRA distributions.

The planning issue may be different, but it does not disappear. Beneficiary designations, trust structure, timing, and control still matter.

Practical Planning Options After the SECURE Act

There is no single solution for every family. The right plan depends on the size of the retirement account, the beneficiaries, tax brackets, charitable intent, state law, and the account owner’s goals.

Common planning options may include:

• Updating beneficiary designations;
• Revising old conduit trust language;
• Using accumulation trusts where control is important;
• Leaving retirement accounts directly to responsible adult beneficiaries;
• Using charitable remainder trusts where charitable planning is desired;
• Coordinating retirement accounts with other estate assets;
• Considering Roth conversions during life;
• Planning withdrawals during lower-income years;
• Using charitable gifts from retirement accounts where appropriate;
• Reviewing the plan after major life changes.

The most important point is that inherited retirement account planning should not be left on autopilot.

The Bottom Line

The SECURE Act changed the rules for inherited retirement accounts in a way that many older estate plans do not reflect.

A plan drafted before 2020 may still look complete. The trust may still exist. The beneficiary designation may still be on file. The documents may still say what they always said.

But the tax result may now be very different.

For many non-spouse beneficiaries, the old stretch IRA is gone. The 10-year rule now controls the timing. Older conduit trusts may force distributions out to beneficiaries faster than intended. Naming children directly may create tax, control, and creditor-protection problems. Minor children receive only temporary special treatment. CRTs and accumulation trusts may help in the right cases, but each comes with tradeoffs.

Inherited retirement accounts require intentional planning under the current rules.

If your estate plan has not been reviewed since the SECURE Act, SECURE 2.0, and the 2024 final regulations, it may no longer work the way you think it does. With inherited retirement accounts, the cost of discovering that too late can be substantial.