Inheriting an IRA used to be straightforward. You’d receive the account, and you could stretch out the distributions over your lifetime, allowing the money to grow tax-deferred for decades. But recent federal legislation has completely transformed how inherited retirement accounts work—and if you’re a beneficiary or planning your estate, you need to know about these changes.
The Secure Act: A Game-Changer for Retirement Accounts
The Setting Every Community Up for Retirement Enhancement (SECURE) Act fundamentally altered the rules governing inherited IRAs. What was once a powerful wealth-transfer tool has become something quite different, and the implications affect both beneficiaries and people planning their estates.
California attorney Vinny Casiano explains that the old system allowed most beneficiaries to take distributions based on their own life expectancy. “Used to be children, spouses, anybody—you have an IRA, you make a beneficiary designation, and that person you’re leaving it to can then use their life expectancy in almost all cases to take the minimum amount of money out,” he notes.
This meant a young adult inheriting a retirement account could potentially stretch distributions over 50 or 60 years, allowing the account to grow substantially over time. Estate planning attorneys even created “stretch IRA trusts” specifically for grandparents leaving assets to grandchildren, where the money could grow to millions by the time that grandchild reached retirement age.
That’s no longer the case.
Who Qualifies as an Eligible Designated Beneficiary?
The SECURE Act created a new classification called “eligible designated beneficiaries”—a specific group of people who can still use the old life-expectancy method for taking distributions. Everyone else faces a much shorter timeline.
You qualify as an eligible designated beneficiary if you are:
The surviving spouse – Spouses maintain the most flexibility and can still use life-expectancy distributions or treat the IRA as their own.
A disabled individual – Those who meet the Social Security Administration’s definition of disabled retain access to stretch provisions.
A chronically ill person – Individuals requiring substantial assistance with daily living activities may qualify.
A minor child – The decedent’s minor children (not grandchildren) can use life expectancy distributions until they reach the age of majority, at which point the 10-year rule begins.
Someone not more than 10 years younger than the account owner – This typically applies to siblings or friends close in age to the deceased.
The 10-Year Rule: What Most Beneficiaries Face
If you don’t fall into one of the eligible categories above, you’re subject to the 10-year rule. This means you must withdraw all the money from the inherited IRA within 10 years of the account owner’s death.
You have flexibility in how you take these distributions—you could withdraw nothing for nine years and then take the entire balance in year 10, or you could spread it out evenly. However, the requirement to empty the account within a decade represents a dramatic shift from the old system.
This change has significant tax implications. Larger distributions mean potentially higher tax brackets, especially if you’re inheriting the account during your peak earning years. What was once a tool for multi-generational wealth building has become more of a short-term windfall with immediate tax consequences.
Why This Matters for Your Estate Plan
If you created your estate plan before 2020, there’s a good chance it was designed with the old stretch IRA rules in mind. Those carefully crafted trusts and beneficiary designations may no longer accomplish what you intended.
For California residents, this is particularly important because state tax laws interact with federal retirement account rules. While California doesn’t have its own estate tax, the income tax implications of compressed retirement account distributions can be substantial given the state’s progressive income tax rates.
Trusts and Inherited IRAs: A Complex Intersection
Many people named trusts as beneficiaries of their IRAs for various reasons—to provide asset protection, to maintain control over distributions, or to ensure money goes to specific purposes. The SECURE Act has made these arrangements more complicated.
Conduit trusts, which were commonly used to stretch IRA distributions, may now force beneficiaries to receive large distributions within 10 years. Accumulation trusts face even higher tax rates on undistributed income. The strategies that worked before 2020 need serious reconsideration in light of current law.
What You Should Do Now
Review your beneficiary designations – Look at who you’ve named on your IRA, 401(k), and other retirement accounts. Do these designations still make sense under the 10-year rule?
Consider Roth conversions – Since inherited Roth IRAs also must be distributed within 10 years but come out tax-free, converting traditional IRAs to Roth accounts during your lifetime can provide significant tax benefits to your heirs.
Evaluate existing trusts – If you have a trust named as an IRA beneficiary, have it reviewed by an attorney familiar with post-SECURE Act rules to confirm it still works as intended.
Plan for the tax impact – If you’re a beneficiary, start thinking about the tax consequences of receiving distributions over 10 years. You might benefit from strategic timing of withdrawals to minimize your overall tax burden.
Update your estate plan – Estate plans created before 2020 often assumed different rules. A fresh review can identify problems and opportunities.
The Bottom Line
The SECURE Act represents one of the most significant changes to retirement planning and estate planning in decades. For California residents, these federal changes interact with state tax laws and local probate rules in ways that require careful attention.
Whether you’re planning your estate or you’ve inherited an IRA, the rules have changed substantially. The strategies that made sense even just a few years ago may no longer be appropriate. Given the complexity of these issues and the significant financial stakes involved, working with a knowledgeable attorney who stays current with changing legislation is more important than ever.
This article is for informational purposes only and does not constitute legal advice. The rules governing inherited IRAs are complex and your specific situation may have unique factors. For personalized guidance on your estate plan or inherited retirement accounts, contact a qualified attorney in your area.
Need help with trust or probate litigation related to inherited retirement accounts? Visit San Diego Elder Law and Estate Planning or call to discuss your specific situation.
