The SECURE Act: Inherited IRA Beneficiaries

By: Jon Theriault


The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement, was passed in late 2019 and subsequently enacted on January 1, 2020. This legislation contained major reforms for the rules surrounding retirement accounts, one of which has not received much public attention but that we wanted to highlight for IRA account holders and beneficiaries who could be adversely affected.

Prior to 2020, when an IRA account holder passed away, their beneficiaries were allowed to take (or “stretch”) required distributions from inherited IRA accounts over the remainder of their lifetimes. But in accordance with the SECURE Act, most non-spouse beneficiaries now only have ten years from the date of death to completely withdraw funds from an inherited IRA account. This is also known as the 10-year rule. Spouses and certain other eligible designated beneficiaries, however, are not subject to the 10-year rule and can still take minimum annual distributions over their lifetimes.

Given the fact that IRA distributions are taxable as ordinary income, the 10-year rule will likely create significant tax planning challenges for many IRA beneficiaries who are in or entering, their peak earning years.


Case Study: 

Let’s assume Mary is a 79-year-old widow with an IRA account worth $2.5 million. Mary has named her only child, Sam, as 100% beneficiary to her estate, including her IRA. If Mary were to pass away next month, Sam would need to distribute the entire IRA account balance to himself over the next ten years. Sam is a successful, 52-year-old business owner earning over $500,000 per year. Assuming equal annual distributions (and zero investment growth to keep it simple), this would result in Sam taking out an IRA distribution of $250,000 per year for ten years. These distributions would be taxable each year at prevailing ordinary income rates, over and above Sam’s already high-income level, which would create a hefty incremental tax obligation.


It should be noted, however, that non-spouse beneficiaries do not need to take a minimum distribution each year, so there is some planning flexibility to determine the best possible timing for taking withdrawals over the 10 year time period. The main takeaway should be that the SECURE Act’s new 10-year rule for inherited IRAs creates potential tax planning pressure on non-spouse beneficiaries that did not previously exist. And although we referenced traditional IRA accounts to illustrate this change, the 10-year rule also applies to defined contribution plans, including 401(k), 403(b), and 457(b) plans.

This is just one of numerous recent and potential changes that may impact the financial lives of our clients and their beneficiaries. If you have an interest in learning more about how these types of changes may impact your personal financial plan, please give us a call.