Don't Let Your IRA Beneficiaries Make This Costly Mistake

When it comes to leaving a financial legacy, most people assume their beneficiaries will receive their retirement accounts without any headaches. But with recent IRS changes, that assumption could lead to expensive mistakes—especially if your loved ones aren’t prepared for the 10-Year Rule.

I’ve seen it firsthand: families inheriting IRAs, unaware of the new tax implications, and ending up with a much bigger tax bill than expected. Here’s what you need to know to avoid that pitfall.

What Is the 10-Year Rule?

Under the SECURE Act, most non-spouse beneficiaries must now empty an inherited IRA within 10 years of the original account holder’s passing. Unlike the old rules that allowed withdrawals to be stretched over a lifetime, this change accelerates the tax burden.

Translation? If your beneficiaries don’t plan ahead, they could be forced into a higher tax bracket by taking large withdrawals toward the end of that 10-year window.

Who Needs to Pay Attention?

If you plan to leave your IRA to:
☑ Your adult children
☑ Grandchildren
☑ A trust (depending on its structure)

…then this rule applies to them.

Certain beneficiaries, like spouses, disabled individuals, or minor children, have different rules, but most heirs will need to withdraw the full balance within a decade.

A Real-Life Example (That I Wish Wasn’t Real)

A couple I worked with had planned to leave their sizable IRA to their two adult children. They assumed the kids could take small withdrawals over time, keeping taxes low. But under the new rule, those withdrawals had to happen within 10 years.

The problem? The children were in their peak earning years. If they took the entire balance in year 10, it could skyrocket them into a much higher tax bracket, wiping out a chunk of their inheritance.

How to Avoid This Costly Mistake

The good news? There are ways to plan around it.

☑ Roth Conversions: Converting some of your IRA to a Roth now could reduce the future tax burden on your heirs.
☑ Strategic Withdrawals: If beneficiaries spread withdrawals over the 10-year period instead of waiting until the last year, they can better manage their tax liability.
☑ Trust Review: If you have a trust as a beneficiary, now’s the time to review it with an advisor to ensure it aligns with the new rules.

Final Thought

Your retirement accounts are a legacy—but if you don’t plan ahead, that legacy could come with an unnecessary tax burden. If you want to make sure your loved ones aren’t caught off guard, let’s talk about a strategy that works for your unique situation.