For decades, leaving an IRA to your children was one of the most tax-efficient gifts you could make. That era is over. A 2019 law quietly rewrote the rules, and starting in 2025 the penalties for missing the new requirements begin to apply — so most heirs now have a clock running, and a real cost if they ignore it. The good news: this is one of the most fixable problems in your plan, while you're still alive to control the tax rate.
Deadline to fully empty most
inherited IRAs
Year penalties for missed annual
distributions begin applying
Maximum IRS penalty on a missed
required distribution
Wealth projected to pass to heirs
through 2048
The Stretch is Gone
Before 2020, a non-spouse heir — say, a 45-year-old daughter — could "stretch" required withdrawals from an inherited IRA over her own life expectancy. A $1 million account could keep compounding tax-deferred for 30 or 40 years, with only small distributions each year. The SECURE Act ended that for original owners who pass away in 2020 or later. Now, most non-spouse beneficiaries must empty the entire account within 10 years of the owner's death. The shelter that made an IRA such an elegant inheritance is gone.
The 2025 Wrinkle Most Heirs are About to Miss
Here's the part that catches people. If the original owner had already reached their required beginning date for RMDs — the age at which withdrawals must begin, now 73 for many retirees and 75 for younger ones under SECURE 2.0 — the heir can't just wait and drain the account in year 10. They must take a required minimum distribution every year during the 10-year window, too. The IRS finalized this rule in 2024 and waived the penalty for 2021 through 2024 while the dust settled — so for years, heirs heard "you have a decade" and assumed flexibility. Beginning with 2025 distributions, those penalties can now apply.
The Cost of Missing It
Starting with 2025, a missed annual distribution triggers an excise tax of up to 25% of the amount that should have come out (reducible to 10% if corrected promptly). If the required withdrawal was $20,000 and the heir took nothing, that's a $5,000 penalty — on top of still owing the income tax later. Many custodians won't calculate this for inherited accounts, so it falls on the family to get it right.
Why Ten Years is a Tax Trap
The deeper problem isn't the penalty — it's timing. A 10-year drawdown usually lands squarely in an heir's peak earning years. Picture a $1 million IRA passing to a 50-year-old already earning a strong salary in the 32–35% federal bracket. Spreading it over ten years stacks roughly $100,000 of extra taxable income on top of their paycheck every year — much of it taxed at the highest rates, plus state income tax, and potentially triggering surtaxes. A meaningful share of that million can end up with the IRS. The cruel irony: the parent who built it
may have been in a far lower bracket in retirement than the child who inherits it.
Who Still Gets to Stretch
Some beneficiaries are exempt and can still spread distributions over their lifetime — the IRS calls them "eligible designated beneficiaries": a surviving spouse, the owner's minor children (until they reach majority, then the 10-year clock starts), someone who is disabled or chronically ill, and anyone not more than 10 years younger than the owner. Anyone who inherited before 2020 also keeps the old rules. For most adult children, though, the 10-year rule is now the reality.
Four Ways to Defuse It
You can't change the law. You can change the tax rate your family pays — and most of the levers only work while you're alive:
1. Convert to Roth on Your Terms
Pay the tax at your rate now, not your child's rate later.
Converting traditional IRA dollars to Roth during your lifetime moves the tax bill to you — often at a lower retirement bracket than your working
children face. Heirs still empty an inherited Roth within 10 years, but the withdrawals are tax-free, and a Roth carries no annual-distribution
trap along the way.
2. Use Your Low-Bracket Years
The gap between retiring and starting RMDs is conversion gold.
Many retirees have a multi-year window of unusually low income before Social Security and required distributions kick in. Filling those lower
brackets with deliberate Roth conversions is one of the most effective ways to shrink the pre-tax IRA your heirs will inherit.
3. Match the Asset to the Heir
Not every beneficiary should get the IRA.
Pre-tax IRA dollars are best left to lower-bracket heirs — or to charity, which pays no income tax on them at all. Appreciated taxable assets,
which receive a step-up in basis at death, are often the better gift for higher-bracket heirs. Thoughtful beneficiary design can move real money.
4. Wrap it Differently
Replace what taxes may erode.
In some cases, strategic use of life insurance can help replace assets that may otherwise be lost to future income taxes.
The Bottom Line
The point isn't to panic about a law that's already on the books. It's that an inherited IRA is now one of the most heavily taxed assets you can leave behind — and one of the most fixable, if you plan ahead. The families who hand down the most aren't the ones who saved the most. They're the ones who decided who pays the tax, and at what rate, before the IRS decided for them.
Let's make sure your heirs inherit your IRA — not your tax bracket.
We'll map your retirement accounts against your beneficiaries' likely tax picture and build a multi-year plan to pass more of it on, tax-efficiently.
Schedule a legacy & tax review with the Shoreline team.
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