The Rules Changed. Most People Don’t Know It Yet.
When a parent, spouse, or loved one leaves you an IRA, it can feel like a generous gift — and it is. But it also comes with a set of tax rules that, if you ignore them or misunderstand them, can turn that inheritance into a much smaller windfall than you expected. The SECURE Act of 2019 overhauled how inherited IRAs work, and the IRS finalized regulations in 2024 that cleared up years of confusion. If you inherited an IRA recently — or you’re planning your own estate and want to understand what you’re leaving behind — this is information you genuinely can’t afford to skip.
The old rules were forgiving. Before 2020, most beneficiaries could “stretch” distributions from an inherited IRA over their own lifetime, keeping the money growing tax-deferred for decades. A 35-year-old who inherited a $500,000 IRA could take small required minimum distributions each year and let the rest compound for 40+ more years. That strategy is largely gone now. What replaced it is called the 10-Year Rule — and it’s more complicated than most people realize.
What the 10-Year Rule Actually Means
Here’s the core of it: if you inherit an IRA from someone who died after December 31, 2019, and you don’t fall into one of the exception categories (more on those in a moment), you must withdraw the entire account balance by December 31 of the tenth year following the year of death. There is no requirement to take money out in years one through nine — but everything must be gone by year ten.
That sounds simple enough. The problem is what the IRS clarified in 2024: if the original account owner had already started taking required minimum distributions (RMDs) before they died, then you as the beneficiary must also take annual RMDs during years one through nine, in addition to emptying the account by year ten. This caught a lot of people off guard. Many beneficiaries who inherited IRAs in 2020, 2021, and 2022 assumed they could just let the account sit and take everything in year ten — and for some of them, that approach may now create a compliance problem or a massive tax bill crammed into a single year.
Think about what that looks like in practice. Your father was 75 when he passed away and had been taking RMDs from his traditional IRA. He leaves you a $300,000 account. Under the rules as finalized, you likely need to take annual distributions in years one through nine based on your own life expectancy, and then withdraw whatever remains in year ten. If you skip those annual distributions, you could face a 25% excise tax on the amount you should have withdrawn. That’s a painful and avoidable mistake.
Who Gets an Exception — and Who Doesn’t
The 10-Year Rule does not apply to everyone who inherits an IRA. The IRS created a category called Eligible Designated Beneficiaries (EDBs), and if you fall into this group, you still get to use the old stretch rules. EDBs include:
- Surviving spouses
- Minor children of the original account owner (not grandchildren — just the owner’s own minor children, and only until they reach the age of majority)
- Disabled individuals, as defined under IRS rules
- Chronically ill individuals
- Beneficiaries who are not more than 10 years younger than the original account owner
Surviving spouses actually have the most flexibility of anyone. If you inherit your spouse’s IRA, you can roll it into your own IRA and treat it as if it were always yours — meaning no RMDs until you reach your own RMD age, and you can name your own beneficiaries. That’s a powerful planning tool that often gets overlooked in the fog of grief right after a loss.
For everyone else — adult children, grandchildren, siblings, friends, non-spouse partners — the 10-Year Rule applies. And here’s something many Michigan families don’t realize until it’s too late: even a trust named as beneficiary of an IRA can be subject to the 10-Year Rule, depending on how the trust is drafted. If you have a trust in your estate plan and that trust is the named beneficiary of your IRA, it’s worth reviewing whether the trust qualifies as a “see-through” trust and how the new rules interact with its terms.
The Tax Hit Nobody Plans For
Traditional IRAs are funded with pre-tax dollars, which means every dollar you withdraw gets added to your ordinary income for that year. When you’re forced to drain a significant IRA within ten years — especially if you’re already working and earning income — the tax impact can be significant.
Imagine you’re 45 years old, earning $95,000 a year, and you inherit a $400,000 traditional IRA from a parent. If you wait until year ten and take the entire $400,000 at once, you’ve just reported $495,000 of income in a single year. You’d be deep into the 35% federal tax bracket, and Michigan’s flat income tax rate of 4.25% applies on top of that. A distribution that size could cost you $150,000 or more in combined federal and state taxes — money that could have been saved with thoughtful planning spread across multiple years.
The smarter approach for most non-spouse beneficiaries is to spread withdrawals across all ten years in a way that keeps you in lower tax brackets. This takes actual planning, not just benign neglect. A good estate planning attorney working alongside a financial advisor or CPA can help you map out a distribution strategy that minimizes your lifetime tax bill on the inherited funds.
Roth IRAs are a different story. If you inherit a Roth IRA, the 10-Year Rule still applies — you still have to empty it within ten years — but qualified distributions from a Roth are tax-free. The catch is that the Roth must have been open for at least five years. So the urgency around strategic withdrawal timing is much lower for an inherited Roth, though you still want to make sure you’re not leaving money in there past the deadline.
What Michigan Beneficiaries Should Do Right Now
If you’ve recently inherited an IRA — whether it happened last year or several years ago — there are some concrete steps to take before this gets more complicated.
First, find out when the original owner died and whether they were already taking RMDs. This tells you which set of rules applies to you. If the death occurred before January 1, 2020, you’re still under the old stretch rules. If it happened after that date and the owner had already begun RMDs, you need to understand your annual distribution obligations, not just your year-ten deadline.
Second, check the beneficiary designation on the account. Sometimes there are primary and contingent beneficiaries named, sometimes a trust is involved, and sometimes the paperwork hasn’t been updated in decades. Understanding exactly how the account is titled and who the named beneficiaries are affects everything — from how quickly you need to act to how the funds are taxed.
Third, don’t take a lump sum just because it feels easier. The financial institution holding the IRA will typically allow you to take distributions any way you’d like within the ten-year window. There’s no rule that says you have to take it all at once. Spreading it out thoughtfully is almost always the better strategy from a tax perspective.
Fourth, if you inherited the IRA through a trust or as part of a larger estate, get legal and tax guidance before you do anything. The interaction between inherited IRA rules and trust administration is genuinely complex, and a mistake — like distributing funds in the wrong order or failing to comply with the trust’s terms — can have serious consequences.
What This Means If You’re the One Doing the Planning
If you have an IRA and you’re thinking about who will inherit it someday, the new rules should change how you approach that conversation. Leaving a large traditional IRA to an adult child or grandchild used to be a fantastic wealth transfer tool because of the stretch. Now, it’s still valuable — but the tax efficiency has shrunk considerably.
Some people in this situation are choosing to do Roth conversions during their lifetime, paying taxes now at their current rate so that their beneficiaries inherit a tax-free account. If you’re in a lower tax bracket now than you expect your children or grandchildren to be when they inherit, that strategy can save the family a significant amount of money. It’s not right for everyone, but it’s worth modeling.
Others are rethinking who they name as the IRA beneficiary altogether. In some cases, it makes more sense to leave the IRA to a surviving spouse (who has maximum flexibility) and leave other assets — real estate, brokerage accounts, life insurance proceeds — to children. The point is that your beneficiary designations on retirement accounts are not a “set it and forget it” decision. They need to be reviewed alongside your overall estate plan, especially after major tax law changes like the ones we’ve seen.
Naming a trust as your IRA beneficiary can still make sense in certain circumstances — particularly if you have a beneficiary with special needs, a spendthrift concern, or a blended family situation where you want more control over how funds are used. But the trust has to be drafted correctly to work within the post-SECURE Act framework. A trust that was set up years ago and named as an IRA beneficiary may not function the way you intended under today’s rules.
The Bottom Line
Inherited IRAs are one of the areas where people most often make expensive, avoidable mistakes — not because they’re careless, but because the rules are genuinely complicated and they changed significantly in recent years. The 10-Year Rule sounds straightforward until you realize there are annual distribution requirements layered on top of it for some beneficiaries, exception categories with their own rules, and serious tax planning decisions that can make a real difference in how much of that inheritance you actually keep.
Whether you’re the one inheriting or the one planning your estate, this is exactly the kind of issue that warrants a conversation with an attorney who understands both the legal framework and how it plays out for real families. The stakes are too high to guess — and the good news is, with the right guidance, there’s usually a smart path forward.
