One Small Mistake with Your RMDs Could Cost You Thousands. Are You Confident You’re Doing It Right?
07/25/2025
Understanding the 10-Year Rule and How Strategic Planning Can Save Your Legacy
For families in Boca Raton, passing wealth to the next generation is often a key financial goal. Inherited IRAs have long been viewed as a tax-efficient way to transfer assets. But with the introduction of the SECURE Act in 2020, the rules have changed dramatically. Now, beneficiaries must navigate a complex and often misunderstood set of tax rules that can turn a well-intentioned gift into a costly burden.
The most impactful change is the “10-Year Rule” for non-spouse beneficiaries. This rule mandates that most inherited IRAs be fully distributed within 10 years of the original account holder’s death. Failure to comply can result in steep tax penalties and forfeiture of intended financial benefits.
This comprehensive guide will help you understand the current inherited IRA landscape, what you need to do to protect your inheritance, and how to plan more effectively for the future.
The SECURE Act and the End of the Stretch IRA
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was enacted to encourage retirement savings and make plans more accessible. However, one of its lesser-known consequences was the elimination of the “stretch IRA” for most non-spouse beneficiaries.
Before 2020, non-spouse beneficiaries could stretch required minimum distributions (RMDs) over their expected lifetime, minimizing their annual tax burden. The SECURE Act changed this — now the entire balance must be distributed within 10 years of inheritance.
This dramatically shortens the tax-deferral window and can lead to a significant increase in taxable income during the distribution period.
Tax Implications of the 10-Year Rule
Let’s say a Boca Raton resident inherits a $1 million traditional IRA. If they wait until year 10 to withdraw everything, they’ll add $1 million of income that year — possibly pushing them into the top federal income tax bracket and higher Medicare premiums.
Even spacing out withdrawals over 10 years ($100,000 annually) could result in:
- Loss of tax credits or deductions
- Increased IRMAA surcharges on Medicare
- More of Social Security becoming taxable
- Reduction in college financial aid eligibility (for beneficiaries with children)
Who Is Exempt from the 10-Year Rule?
The SECURE Act carved out limited exceptions to the rule for “Eligible Designated Beneficiaries” (EDBs):
- Surviving spouses
- Disabled individuals
- Chronically ill individuals
- Minor children of the account holder (until age 21)
- Individuals not more than 10 years younger than the original account holder
These beneficiaries may still stretch distributions over their life expectancy. But once a minor child reaches age 21, the 10-year clock starts ticking.
Inherited IRAs vs. Other Inherited Assets
Inherited IRAs are unique compared to other assets:
| Asset Type | Tax Treatment |
| Traditional IRA | Tax-deferred, taxed as ordinary income at withdrawal |
| Roth IRA | Tax-free withdrawals, but still subject to 10-year rule |
| Brokerage account | Step-up in basis; capital gains only on future growth |
| Real estate | Step-up in basis; depreciation recapture may apply |
| Life insurance | Generally tax-free payout |
Key takeaway: Traditional IRAs come with built-in tax liabilities. Proper planning is essential.
Planning Strategies to Minimize Taxes
Here are powerful strategies we use with clients in Boca Raton to avoid unnecessary tax burdens:
✅ Roth Conversions Before Death
If the IRA owner converts assets to a Roth IRA while alive, the beneficiary may inherit a tax-free account. It’s a great option during low-income years in retirement.
✅ Strategic Withdrawals
Rather than wait, consider withdrawing annually. This reduces the risk of bracket jumps, impacts on Medicare, and preserves tax flexibility.
✅ Charitable Remainder Trusts (CRTs)
Using a CRT as an IRA beneficiary can provide income for life to a beneficiary and leave the remainder to charity — simulating the old stretch IRA.
✅ Disclaimers
A high-income beneficiary can disclaim the inheritance to allow a younger or lower-income person to benefit with fewer taxes.
Case Study: Boca Raton Couple Protects Their Heirs
A Boca Raton couple in their late 60s had $1.4 million in traditional IRAs. Their adult children were in high tax brackets. Through partial Roth conversions, updating their beneficiary designations, and incorporating a testamentary CRT, they could reduce the projected tax burden on their heirs.
Frequently Asked Questions
Q: Can I name a trust as my IRA beneficiary?
Yes, but it must qualify as a “see-through trust” to maintain favorable treatment.
Q: What happens if I don’t take out the full balance in 10 years?
The IRS may impose a 25% penalty on the remaining balance, plus the regular income tax.
Q: Do Roth IRAs have the same 10-year rule?
Yes, but the distributions are tax-free, so the financial impact is much less severe.
Q: Can a spouse avoid the 10-year rule?
Yes. A spouse can roll over the IRA into their own and delay RMDs until age 73–75 (depending on birth year).
Glossary of Terms
- 10-Year Rule: Rule requiring non-spouse beneficiaries to fully distribute inherited IRAs within 10 years.
- RMD (Required Minimum Distribution): The minimum amount one must withdraw from a retirement account annually, after a certain age.
- IRMAA: Income-Related Monthly Adjustment Amount — determines Medicare premium surcharges.
- Stretch IRA: The former ability to distribute inherited IRAs over a lifetime.
- Roth Conversion: A taxable event in which a traditional IRA is converted to a Roth IRA for future tax-free growth.
Conclusion: Take Action Before It’s Too Late
Inherited IRAs used to be simple. Today, they are a potential tax minefield. Without proper planning, a well-meaning inheritance can cost beneficiaries tens or hundreds of thousands of dollars.
Whether you’re:
- An IRA owner planning your estate
- A beneficiary who just inherited a retirement account
- A family member hoping to preserve your loved one’s legacy
…it’s time to take action. At our fee-only firm in Boca Raton, we help clients navigate complex rules with strategic, conflict-free planning.
We invite you to visit our YouTube channel
Where you’ll find valuable information like this, but in video format.
Here we share our video that talks about:
Don’t Take a Risk: What You Should Know About Private Equity Funds BEFORE You Retire.
If you’ve recently inherited a retirement account—or are planning to leave one—don’t wait to understand the impact of the 10-year rule.
👉 Book your free consultation with our Boca Raton team today. Let’s protect your legacy, reduce unnecessary taxes, and build a plan that works for your family’s future.
