Picture a couple in Sun City West who spent forty years saving. Their traditional IRA now holds about $800,000, and they’ve always thought of it as the money that will go to their two kids someday. Both children are in their fifties, established in their careers, and earning good incomes.
Here’s what many families don’t realize until it’s too late to plan for it: the kids won’t inherit $800,000. They’ll inherit $800,000 plus a tax bill.
The money in your IRA isn’t just yours. When your adult children inherit a traditional IRA, most will have 10 years to empty it, and those withdrawals are generally taxed as ordinary income. That means the tax rate is set by their paychecks, often in their highest-earning years, not by yours.
So how do the rules work today, and why did they change?
The Stretch IRA Is Gone. Here's What Replaced It
For decades, heirs had a powerful option known as the “stretch IRA.” Before 2020, beneficiaries of inherited IRAs could stretch required distributions over their entire life expectancies. Younger heirs in particular benefited by taking smaller withdrawals for decades, deferring taxes while the accounts kept growing.
The SECURE Act of 2019 changed that. According to the IRS, for IRA owners who die after December 31, 2019, the entire balance of the account must be distributed within ten years.
A few beneficiaries are still treated differently. The IRS lists these exceptions:
- A surviving spouse
- A child who has not reached the age of majority (21)
- A disabled or chronically ill person
- A person not more than ten years younger than the IRA owner
For most families, though, the takeaway is simple. If your beneficiaries are adult children who don’t fall into one of those groups, the 10-year clock likely applies to them.
Why Your Kids Can't Always Wait Until Year 10
When the 10-year rule first arrived, many heirs assumed they could leave the money alone for nine years and withdraw everything in year ten. The IRS has since clarified that this isn’t always allowed. Final regulations that took effect in 2025 require many beneficiaries to take annual RMDs during the 10 years following the original owner’s death.
Whether your kids must take money out every year depends largely on when you pass away:
- If you die after your own RMDs have begun: most beneficiaries must take annual RMDs throughout the 10 years, with the account fully depleted by the end of the tenth year.
- If you die before reaching RMD age: beneficiaries have more leeway in their withdrawals within the 10-year window, but the account must still be emptied by the end of the 10 years.
Missing a required withdrawal can be costly. According to the IRS, the amount not withdrawn may be subject to an excise tax of 25%, or 10% if the RMD is corrected within two years. The IRS offered penalty relief during the years these rules were being finalized, but those waivers ended after 2024.
What "Ordinary Income" Means for Your Kids' Tax Bill
Withdrawals from an inherited traditional IRA don’t get special treatment. They’re added on top of your child’s salary, business income, and everything else on their tax return.
Federal rates are progressive. For 2026, married couples filing jointly pay 22% on taxable income over $100,800, 24% over $211,400, 32% over $403,550, and 35% over $512,450. Every inherited dollar is taxed at your child’s top rate, not yours.
Here’s a simplified illustration. Say your daughter and her husband earn $180,000 together. After the $32,200 standard deduction for married couples filing jointly, their taxable income is $147,800. She inherits half of your IRA, which grows to roughly $500,000 over the 10-year window.
- Spread evenly at about $50,000 per year: each withdrawal stays in the 22% bracket, for roughly $11,000 in federal tax per year, or about $110,000 over ten years.
- Taken all at once in year ten: the withdrawal climbs through the 22%, 24%, 32%, and 35% brackets, for roughly $142,000 in federal tax that single year.
That’s about $32,000 more for the same money, before state income tax. Higher reported income may also reduce credits and deductions your kids would otherwise qualify for.
This illustration uses 2026 federal brackets and simplified assumptions. Actual results depend on future tax law, account growth, and your heirs’ situations.
This article is educational and general in nature. Your own situation should be reviewed with a qualified professional before you act.
Not Every Inherited Dollar Is Taxed the Same
The 10-year rule tells your heirs when the money must come out. The type of account you leave decides how much of it is taxed.
- Roth IRAs: Roth IRAs have no required withdrawals while the owner is alive, but beneficiaries are subject to RMD rules. The difference is that qualified Roth distributions are tax-free. Since a Roth owner never has to start RMDs, heirs can generally take money out on their own schedule, provided the Roth is fully emptied within the 10-year period. That leaves room for ten years of tax-free growth.
- After-tax contributions: if you made nondeductible IRA contributions, the part that was already taxed (your basis) comes out tax-free. Good records help your heirs avoid paying tax twice.
- Your spouse: a surviving spouse is an exception to the 10-year rule, which generally means more flexible options than your children have.
The takeaway: the mix of accounts you leave behind may matter as much as the total.
Moves That May Help Lower the Tax Bill You Leave Behind
You can’t change the 10-year rule, but you may be able to change what your heirs inherit and when the taxes get paid. A few strategies worth discussing with your advisor:
- Roth conversions in lower-bracket years. Converting part of a traditional IRA to a Roth means paying tax now, at your rate, instead of later at your children’s rate. For retirees in the window between retirement and RMD age, this may help shift the tax bill to a year when your bracket is lower. [LINK: Roth conversion windows post]
- Drawing down the IRA earlier. Taking more than the minimum in modest-income years may help “fill up” lower brackets and leave a smaller taxable balance behind.
- Giving to charity from your IRA. A qualified charitable distribution lets IRA owners age 70½ and over donate directly to charity without including the amount in taxable income, and it can count toward their RMD. The 2026 limit is $111,000 per taxpayer, adjusted annually for inflation. If charity is part of your legacy, naming a charity as an IRA beneficiary while leaving other assets to your kids may also be worth exploring.
- Reviewing beneficiary designations. Outdated forms, missing contingent beneficiaries, or a trust without the right provisions can create problems your family discovers too late.
- Talking with your kids. Heirs who know what’s coming may be able to time withdrawals around lower-income years, like a sabbatical or early retirement.
These moves work best when tax planning, investments, and estate planning are coordinated. That’s where Paul Axberg’s background as both a CFP® and CPA may help families see the whole picture.
The Conversation Worth Having Now
Most families think of an IRA as something they’ll leave behind. It may be more useful to think of it as a tax decision that spans two generations: yours and your children’s.
The rules are complicated, but the planning doesn’t have to be. A few conversations now about Roth conversions, withdrawal timing, charitable goals, and beneficiary designations may help your kids keep more of what you’ve worked to build.
If you’d like to see how your IRA fits into your legacy plan, we invite you to schedule a Fit Meeting with Paul Axberg at Axberg Wealth. Together, we can look at your accounts, your heirs, and your goals, and build a coordinated plan to help you pursue the legacy you have in mind.
Disclosures
The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. We recommend everyone consult with a financial professional for advice related to their own, individual financial situation or plan. Paul Axberg is an investment advisor representative of, and securities and advisory services are offered through USA Financial Securities, Member FINRA/SIPC. A registered investment advisor located at 6020 E. Fulton St., Ada, MI 49301. Axberg Wealth Management is not affiliated with USA Financial Securities.