Will Your IRA Leave Your Kids With a Tax Mess?
Executive Summary
If you plan to leave your IRA to your children, there’s a critical tax rule you need to understand. The SECURE Act changed how inherited IRAs work—and if you’re not prepared, your heirs could end up paying far more in taxes than necessary. Keith Demetriades, CFP®, CKA®, explains what the 10-year rule means for your estate plan, how to reduce the tax burden on your beneficiaries, and what smart planning looks like under the new rules.
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Check out this video on my YouTube channel, @SavvySteward: Will Your IRA Leave Your Kids With a Tax Mess?
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Will Your IRA Leave Your Kids With a Tax Mess?
You might assume that leaving your IRA to your kids is a generous, straightforward gift. But under current law, it can come with a significant downside: a major tax bill.
The SECURE Act, which went into effect in 2020, eliminated a key estate planning tool called the “stretch IRA.” As a result, many families are now facing higher taxes than they expected when they inherit retirement accounts.
If you haven’t revisited your estate plan since the SECURE Act passed, now’s the time!
What happens to your IRA when your kids inherit it?
When your children inherit a traditional IRA, they also inherit the taxes that come with it.
Traditional IRAs are tax-deferred. That means the money hasn’t been taxed yet, so any withdrawals are taxed as ordinary income, not capital gains. And that can have major consequences, especially when distributions are large or timed poorly.
Before 2020, heirs could stretch those distributions over their entire lifetime, spreading out the tax liability. But that’s no longer the case for most non-spouse beneficiaries.
What is the 10-year rule, and how does it impact taxes?
The SECURE Act requires most non-spouse beneficiaries—like your adult children—to empty an inherited IRA within 10 years of the original account owner’s death.
There’s no annual RMD requirement within that 10-year window, but the account must be fully distributed by the end of year ten.
That flexibility can backfire. If your children are in their 40s or 50s when they inherit your IRA, they may already be in high-earning years. Adding IRA distributions on top of their income could push them into a higher tax bracket, meaning they could owe 30% or more in taxes on the inheritance, depending on the timing and size of the account.
If they wait until year ten to take the full distribution, the tax bill could be even worse.
How can Roth conversions help reduce the tax burden?
One of the most effective ways to reduce future taxes for your heirs is through Roth conversions.
If you’re in a lower tax bracket than your children—which is often the case after retirement—you can convert a portion of your traditional IRA to a Roth IRA now. You pay the tax today at a known rate, and your children inherit a tax-free account that doesn’t increase their taxable income.
That gives you more control over your legacy—and gives your heirs more flexibility.
You don’t have to convert everything all at once. In fact, converting gradually over several years while staying within a manageable tax bracket often works best. But the key is starting early so you can model out the options.
What beneficiary strategies can reduce taxes for heirs?
If you plan to leave different assets to different heirs, you can also think strategically about who gets what.
- Children in lower tax brackets may be better suited to inherit traditional IRAs.
- Children in higher brackets might be better off inheriting Roth IRAs or capital gains-based assets.
- If you plan to give to charity, the IRA is often the best asset to donate because charities don’t pay income tax.
Coordinating your estate plan with the individual tax situations of your heirs can reduce the overall tax burden and preserve more wealth across generations.
Why does your withdrawal and distribution plan matter?
If your heirs are going to inherit a traditional IRA, the timing of distributions matters.
Even within the 10-year window, they have options:
- Taking even distributions each year
- Delaying withdrawals until a lower-income year
- Coordinating with career transitions or retirement dates
What doesn’t make sense is ignoring the account until year ten and then triggering a massive lump-sum distribution, especially during a peak earning year.
Good planning includes giving your heirs a strategy, not just an account.
Should you name a trust as the IRA beneficiary?
Trusts can be useful in some cases, especially when you want to control the timing or conditions of distributions. But under the SECURE Act, naming a trust as the IRA beneficiary can cause unintended problems.
If the trust hasn’t been updated to reflect the 10-year rule, it may trigger:
- Immediate taxation
- Limited access to funds
- Rigid distribution schedules that create unnecessary tax exposure
If your IRA currently lists a trust as the beneficiary, have it reviewed by someone familiar with post-SECURE Act planning. Don’t assume an older document still works under today’s rules.
Contact Information
Keith Demetriades, CFP®, CKA®
For more information or to start a conversation about your financial future, contact Keith at (806) 223-1105 or visit Kingsview Partners.
Disclaimer: The information provided in this blog is for educational purposes only and should not be considered financial advice. Please consult a qualified financial advisor to discuss your specific situation and needs. Past performance does not indicate future results, and all investments carry risks, including potential loss of principal. Any financial product or strategy references are purely illustrative and should not be construed as endorsements or recommendations.
