For millions of Americans, an Individual Retirement Account (IRA) represents more than just a way to support themselves in retirement. Rather, it is a meaningful legacy to pass on to their children or other relatives. The accounts represent the culmination of decades of disciplined saving and smart financial decisions. It’s viewed by many as a way to leave a lasting impact. But recent changes in federal tax laws have significantly altered the playing field by turning what was once a generous financial gift into a potential tax problem for heirs.
It’s natural for people to want the remaining funds of their IRAs to benefit their loved ones after they’re gone. Many Americans believed that these accounts set up the next generation for financial success. This was a powerful strategy that could turn a modest inheritance into more of a long-term asset. However, what many don’t realize is that recent changes in tax laws have significantly altered how inherited IRAs are treated. Instead of offering long-term financial support, these inherited accounts can now create unexpected tax liabilities for beneficiaries.
“Most people think leaving their IRA to their kids is a generous gift, but under today’s tax laws, it can turn into a financial burden,” says Michael A. Scarpati, CEO of RetireUS, a retirement planning firm. “The ‘stretch IRA’ used to let beneficiaries spread distributions over their lifetime. That’s gone.”
Why is this the case for IRA’s today?
Before 2019, your children could “stretch” the required minimum distributions from an inherited IRA over their own lifetime. Meaning, they were allowed to withdraw a small, required minimum amount to extend the funds out over the course of their own lifetime. This approach allowed the inherited funds to continue growing while also minimizing the annual tax burden. Previously, the IRA had the potential of turning a modest inheritance into a much larger financial asset over decades. However, the SECURE Act introduction eliminated this option for most non-spouse beneficiaries, replacing it with a strict 10-year withdrawal rule.
The 10-year rule became the most impactful provision of the SECURE Act for inherited IRAs. This law now states that the beneficiaries must empty the account within 10 years of the original owner’s death. There is no required minimum distribution per year during this time, but the account must be fully and completely empty by the end of the tenth year after the original owner’s death. If the account is not empty, the IRS will impose a significant financial penalty.
Many retirees are unaware that their carefully built savings plan could unintentionally create a tax headache for their loved ones. If your child inherits a traditional IRA and has to withdraw large sums within a decade, they may face a much higher tax bill than expected. In some cases, the increased income could even negatively affect eligibility for other benefits, like college financial aid or Medicare premiums.
Scarpati warns, “That’s not a gift, that’s a tax bomb. If you want your money to actually benefit your family—not the IRS—you need to focus on tax diversification before it’s too late.”
Financial experts are increasingly urging retirees to rethink their estate planning strategies. This could involve Roth conversions, charitable giving strategies, or other vehicles that provide more flexibility and fewer tax surprises for beneficiaries.
For those nearing retirement or already living off their savings, understanding the evolving tax landscape is more critical than ever. The rules have changed, and without a proactive plan, what was meant to be a legacy could end up a liability. What was once a well-intentioned gift could become quite a financial burden.
“Good intentions don’t automatically lead to good outcomes—especially when taxes are involved,” Scarpati adds.
Leaving an IRA to your kids isn’t inherently bad, but under today’s laws, it’s no longer the tax-friendly gift it once was. Without careful planning, it can burden your children with big tax bills, wiping out much of the value you intended to leave behind.
If you’re serious about legacy planning, it’s smart to look at tax diversification strategies before more time passes. It’s not too late to explore options to ensure the next generation is set up for financial success.
