The Big IRA Tax Trap You Might Have Missed 

For years, your IRA could pass to the next generation while continuing to grow tax-deferred over your beneficiaries’ lifetime. The strategy—called a stretch IRA—was a valuable estate planning tool; that is, until Congress quietly phased it out in 2019’s SECURE Act. If that’s news to you, you’ll want to read on. 

Stretch IRA vs. The 10-Year Rule. 

The Stretch IRA was an effective way for beneficiaries to spread distributions from an inherited IRA over their lifetime, delaying taxes along the way. Instead of taking one large payout, heirs could withdraw smaller amounts over many years, helping them avoid being pushed into a higher tax bracket. Meanwhile, the remaining assets could continue growing tax-advantaged. It was a win-win for families—but not for the government. 

Then came the SECURE Act. For most non-spouse beneficiaries, inherited IRAs must now be emptied within 10 years of the original owner’s death. That rule applies to both traditional and Roth IRAs, marking one of the biggest changes to inherited retirement accounts in decades. 

Let’s Look at the Numbers. 

Before the SECURE Act, if you inherited an IRA at the age of 60, and lived until 90, you’d have 30 years to withdrawal the money. For argument’s sake, let’s say that IRA was worth $1 million. And for simplicity’s sake, let’s leave interest out of the equation. 

In this example, you’d withdrawal $33,333 per year for 30 years. If your gross annual income would otherwise be $100,000, those withdrawals would augment it nicely, but not enough to bump you out of the 22% tax bracket. Sounds great, right? 

Under the new 10-year rule, the withdrawal schedule would be accelerated. Instead of taking out $33,333 per year, you now have to withdrawal $100,000 annually. That’s a solid chunk of change, capable of causing a huge tax jump. Yikes. So, what do you do? 

The Problem with Doing Nothing. 

Here’s the catch. If you do nothing, your loved ones could end up paying significantly more in taxes than necessary. But you don’t have to sit idly by. 

First, consider your current tax bracket. Chances are it’s lower than the one your heirs will be in when they inherit your IRA, likely at the peak of their earning potential. So, let’s take advantage of that lower tax rate and start de-taxing your IRA. 

Using the $1 million dollar IRA example once more, let’s say you withdrawal $100,000 per year in retirement. You don’t have to spend it. You could reinvest it in another after-tax account, like a Roth conversion, where it can continue to grow tax free over 10 years. If you’re in the 22 – 24% tax bracket, that would translate to more than $195,000 in tax savings, compared to what your heirs would pay in the 32-37% tax backet. 

Why Hasn’t Your Financial Advisor Mentioned This? 
Tax planning takes a lot of work. You’ve got to create the plan, then adjust it every year for 10 years. And, many financial planners don’ t understand the intricacies of tax law, or have CPAs on staff.  

Fortunately, there are ways to plan around the 10-year rule—but they require more than simply choosing investments. In fact, we build a complimentary personalized tax plan in every Roadmap for Retirement we create. With that in hand, you’ll know how much to withdrawal and when, plus how to pivot if the world changes. We also help make sure withdrawals don’t unintentionally increase your Medicare premiums, coordinate Roth conversions, and adjust your strategy as tax laws and your retirement evolve. Simply put, we remove a lot of the guesswork, so you and your loved ones can have confidence you’ll avoid any nasty tax surprises. Take the first step toward paying taxes on your own terms by requesting your free Roadmap here.

Disclaimer: Numbers are for illustrative purposes only. Consult a professional for personalized advice.