Inherited IRAs and the SECURE Act: What Beneficiaries Need to Know

The End of the Stretch IRA

For decades, inheriting an IRA was one of the most powerful wealth transfer strategies in the American tax code. A non-spouse beneficiary could "stretch" distributions over their own life expectancy — sometimes 40 or 50 years. A 30-year-old inheriting a $500,000 IRA could take small annual distributions, letting the rest compound tax-deferred for decades.

That strategy died on January 1, 2020.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 replaced the stretch IRA with a simple — and often painful — requirement: most non-spouse beneficiaries must empty an inherited IRA within 10 years of the owner's death.

No extensions. No exceptions (with a few important carve-outs we'll cover). Ten years, then the money must be out — and taxed.

If you've inherited or expect to inherit retirement accounts, this change fundamentally alters how you should think about the distribution strategy. Getting it wrong can mean paying tens of thousands more in taxes than necessary.

Who Is Affected by the 10-Year Rule?

The 10-year rule applies to designated beneficiaries who are not in one of the exempt categories. In practice, this means:

• Adult children inheriting from a parent (the most common scenario)
• Siblings inheriting from each other
• Friends or other non-family beneficiaries
• Most trusts named as beneficiaries

If you inherited an IRA from someone who died after December 31, 2019, and you're not a surviving spouse, minor child, disabled, chronically ill, or within 10 years of the deceased's age — the 10-year clock is ticking.

The Five Exempt Categories

Not everyone is subject to the 10-year rule. The SECURE Act carved out five categories of eligible designated beneficiaries (EDBs) who can still stretch distributions over their life expectancy:

1. Surviving spouses. The most advantageous position. A surviving spouse can either:

• Roll the inherited IRA into their own IRA and treat it as their own
• Keep it as an inherited IRA and take distributions based on their life expectancy
• If the deceased was younger, the spouse can delay RMDs until the deceased would have turned 73

2. Minor children of the deceased. Children under 18 (or 21 in some states) can stretch distributions over their life expectancy — but only until they reach the age of majority. Once they become adults, the 10-year clock starts. Note: this applies only to the deceased's own children, not grandchildren or other minor relatives.

3. Disabled individuals. As defined by IRS standards (unable to engage in substantial gainful activity due to a medically determinable condition).

4. Chronically ill individuals. Those unable to perform at least two activities of daily living, or who require substantial supervision due to cognitive impairment.

5. Beneficiaries not more than 10 years younger than the deceased. This typically applies to siblings or close-in-age friends.

Everyone else gets the 10-year window.

The Annual RMD Wrinkle

Here's where the IRS made things confusing. The 10-year rule doesn't always mean "take money out whenever you want over 10 years."

If the owner died BEFORE their required beginning date (typically before age 73), you have maximum flexibility. You can take distributions in any amount, at any time, over the 10 years. Want to take nothing for 9 years and drain it all in year 10? You can — though it's usually a terrible tax strategy.

If the owner died AFTER their required beginning date (they had already started RMDs), you must take annual distributions based on your own life expectancy AND fully empty the account by year 10. You can always take more than the minimum, but you can't skip years entirely.

This distinction caught many beneficiaries off guard. The IRS issued guidance in 2022 and 2024 clarifying these rules, and even waived penalties for missed RMDs in the transition years. But going forward, the rules are firm.

Tax-Smart Distribution Strategies

The 10-year window creates both a challenge and an opportunity. The challenge: you can't stretch the tax hit over 30+ years anymore. The opportunity: you have flexibility in when you take distributions within those 10 years.

The worst strategies:

• Ignoring it for 9 years, then taking everything in year 10. You'll push yourself into the highest possible tax bracket for that single year.
• Taking a lump sum in year 1. Same problem — one massive tax hit.

The best strategies:

Level Out Your Income

Spread distributions across all 10 years to keep yourself in a consistent (and ideally lower) tax bracket. If you inherited $500,000, taking roughly $50,000 per year is almost always better than taking $500,000 in one year.

Coordinate with Your Earned Income

If you know your income will vary over the 10 years — maybe you're planning to retire, take a sabbatical, start a business, or have a low-earning year — front-load distributions in the low-income years. Pulling $80,000 from the inherited IRA in a year you earn $30,000 is far cheaper than pulling the same amount in a year you earn $200,000.

Consider Roth Conversions

If the inherited account is a traditional IRA, each distribution is taxable. But if you have room in your tax bracket, you might convert some to a Roth IRA (note: you cannot directly convert an inherited IRA to a Roth, but you can take distributions and contribute to your own Roth if eligible). The key is managing the overall tax picture.

Use Distributions to Fund Your Own Retirement Savings

Take the inherited IRA distributions and use the after-tax proceeds to maximize your own 401(k), Roth IRA, or annuity purchases. You're converting the tax-disadvantaged inherited account into tax-advantaged accounts in your own name.

Inheriting an Annuity Inside an IRA

When someone holds an annuity inside their IRA and passes away, the beneficiary inherits both the IRA rules and the annuity contract terms. This creates a unique set of challenges.

The Contract Doesn't Disappear

The annuity contract has its own rules — surrender periods, death benefit provisions, annuitization options — that interact with the IRA distribution requirements. You can't just "cash out" an annuity without considering:

• Surrender charges. If the annuity is still in its surrender period, early withdrawal penalties may apply. Some carriers waive surrender charges for death benefit claims; others don't.
• Death benefit provisions. Many annuities include a guaranteed death benefit — often at least the original premium or the highest anniversary value. This can be more than the current account value if the market has declined.
• Annuitization requirements. Some contracts require you to annuitize (convert to a stream of payments) rather than taking a lump sum. The annuitization schedule must comply with the 10-year rule.

Options for Inherited Annuities

As a beneficiary, you typically have several options:

Lump sum distribution. Cash out the entire annuity. Simple, but triggers a big tax hit and may incur surrender charges.

Systematic withdrawals over the 10-year window. Take regular distributions that comply with the 10-year rule while avoiding surrender charges (if the contract allows).

Annuitize the contract. Convert to an income stream — but the payout period must be structured to fully distribute within 10 years (or over your life expectancy if you're an eligible designated beneficiary).

1035 exchange to a new contract. In some cases, you may be able to exchange the inherited annuity for a new contract with better terms. This doesn't change the 10-year distribution requirement, but it might give you better payout options or lower fees.

Spousal Inherited Annuities

A surviving spouse has the most options:

• Spousal continuation. Continue the annuity contract as the new owner, maintaining all contract features and delaying distributions.
• Roll into their own IRA. Cash out the annuity and roll the proceeds into their personal IRA.
• Annuitize. Begin taking income payments based on their own life expectancy.

This is one area where working with both a financial advisor and the insurance company's claims department is essential. The interaction between contract terms and tax rules is complex enough that mistakes can be very expensive.

Inheriting a Non-Qualified Annuity

When the annuity is held outside an IRA (non-qualified), different rules apply:

• There's no 10-year rule from the SECURE Act (that applies only to qualified retirement accounts)
• Non-spouse beneficiaries must typically begin distributions within one year of the owner's death
• Options include a lump sum, systematic withdrawals over 5 years, or annuitization over the beneficiary's life expectancy
• Only the gains are taxable — the original owner's cost basis passes through tax-free
• There's no step-up in basis for annuities (unlike stocks or real estate)

The lack of step-up in basis is a critical planning point. If someone has a $200,000 annuity with $80,000 in gains, the beneficiary will owe income tax on that $80,000. With stocks worth $200,000, the beneficiary would get a step-up to the current value and potentially owe nothing.

Planning Ahead: What Account Owners Should Do

If you're the account owner — the person whose IRA will eventually be inherited — there are proactive steps you can take to minimize the tax burden on your beneficiaries:

Consider Roth conversions. Converting traditional IRA funds to Roth during your lifetime means your beneficiaries inherit tax-free money. They still face the 10-year distribution rule, but the distributions won't be taxable. This is especially powerful if you're in a lower tax bracket now than your beneficiaries will be during the 10-year window.

Use annuity death benefits strategically. Some annuities offer enhanced death benefits that guarantee a minimum payout to beneficiaries regardless of account performance. If you're concerned about market risk affecting your legacy, these riders provide certainty.

Name beneficiaries carefully. Beneficiary designations on retirement accounts override your will. Review them after major life events (marriage, divorce, death of a beneficiary) and consider contingent beneficiaries.

Consider the age and circumstances of your beneficiaries. Leaving a large traditional IRA to a high-earning adult child means they'll likely pay 32-37% federal tax on distributions. Roth conversions, charitable giving strategies, or trusts may be more efficient.

Don't forget about state taxes. Many states tax IRA distributions as income. Your beneficiary's state of residence matters — inheriting a $1 million IRA in California (13.3% top rate) costs far more in taxes than inheriting the same IRA in Texas (0% state income tax).

The SECURE Act 2.0 Updates

The SECURE Act 2.0 (passed in December 2022) made additional changes relevant to inherited IRAs:

• RMD age moved to 73 (and will move to 75 in 2033), which affects when the "before/after required beginning date" distinction applies
• Roth 401(k) accounts no longer have RMDs for the original owner, making them more attractive for inheritance planning
• Penalty for missed RMDs reduced from 50% to 25% (and 10% if corrected promptly)

These changes generally work in your favor, but they add complexity to an already complex landscape.

The Bottom Line

The SECURE Act fundamentally changed inherited IRA planning. The stretch IRA is gone for most beneficiaries, replaced by a 10-year window that concentrates the tax hit into a shorter period.

But "shorter" doesn't mean "inevitable." With thoughtful distribution timing, coordination with your other income, and strategic use of Roth accounts, you can manage the tax impact significantly.

If you've inherited retirement accounts — or expect to — the time to plan is now. Every year you delay reduces your options and flexibility. And if you're the account owner, consider what you can do today (Roth conversions, beneficiary designations, annuity death benefit riders) to make the inheritance as tax-efficient as possible for the people you care about.