Planning For Year 10 Under SECURE

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning
Lisa Joseph, Senior Relationship Advisor, Certified IRA Specialist

June 9, 2025

2020 was a memorable year for many reasons. For those in the tax world, one of the biggest new ideas was the SECURE Act dealing with retirement benefits. A key change was institution of the 10-year rule (in place of life expectancy) as the withdrawal period for most non-spouse beneficiaries. As it has now been five years since this rule went into place, it is appropriate to consider planning options for beneficiaries of inherited IRAs who are subject to it.

What Is the 10-Year Rule?

Under SECURE, designated beneficiaries (DBs)¹ who are not eligible designated beneficiaries (EDBs)² under the terms of the statute are required to withdraw all assets from the inherited account no later than the end of the tenth calendar year following the account owner’s death. EDBs, including surviving spouses, disabled or chronically ill beneficiaries, and beneficiaries who are older than the account owner, can take the withdrawals over their respective life expectancies, while non-DBs such as charities, estates, and non-see-through trusts have five years to withdraw.

If the original owner of the retirement account died before reaching their required beginning date (RBD) for required minimum distribution (RMDs), then the EDB does not need to withdraw any assets until the end of year 10. However, the beneficiary of an inherited account where the decedent died after their RBD for RMDs, the beneficiary must take RMDs in years one through nine based on their own life expectancy. The remaining assets must be withdrawn by the end of year 10.

What Is New in 2025?

Although the new SECURE rules apply to accounts of decedents dying after January 1, 2020, one aspect of the 10-year rule was not enforced from 2021 through 2024. Due to uncertainty regarding the regulations issued by Treasury, the IRS suspended enforcement of the RMD rule for years one through nine where the decedent died after reaching the age for RMDs. Pursuant to final regulations issued in 2024, 2025 is the first year when there will be a penalty for a beneficiary who does not withdraw the RMD. Since beneficiaries can withdraw without a penalty at any time, some have made withdrawals since 2021. Others, however, have left the assets in the inherited IRA to accumulate since the decedent’s death and will be taking their first interim RMD in 2025. Note that there is no requirement for “make-up” RMDs for 2021 through 2024.

Tax Planning for Beneficiaries Under the 10-Year Rule

For beneficiaries who do not need the RMD amounts for regular living expenses, there is a careful income tax planning calculus used to maximize the net benefit of the retirement account assets. Think of a balance scale — on one side is the tax-deferred growth in the account, and on the other are the tax rates that will be applicable to the assets when they are withdrawn (see below for an analysis for Roth accounts).

The common wisdom has been to defer the withdrawal as long as possible, and the old “life expectancy” or stretch-out rules encouraged owners of retirement accounts and their beneficiaries to do just that. However, with a withdrawal of the entire balance at stake, it is important to project what the income tax on those assets will be and whether the increased period of tax-deferred growth can overcome increased tax rates applicable to a taxpayer pushed into a higher tax bracket. Even those currently in the highest marginal bracket now will want to undertake an analysis based on their projected income tax rates.

Several factors influence these tax projections. They include:

• What federal income tax bracket is expected to apply to the beneficiary each year, based on their other income sources and potential deductions?
• What state will the beneficiary owe tax to, based on their residence each year?
• What state and, if applicable, local income tax will be due?
• What part of that state and local tax will be deductible for federal purposes?
• What options does the beneficiary have to defer or accelerate other income and/or deductions to impact the rate applicable to the withdrawal of the retirement account assets?

For example, a beneficiary who earns $150,000 in income in most years expects to be in the 24% federal income tax bracket. Income in excess of about $197,000 is taxed at rates over 24%. If the beneficiary will have to make a $2 million withdrawal at the end of year 10, most of that income is going to be taxed at 37% under current law. If the beneficiary is currently a resident of New York, their marginal income tax rate is 6.5% on income of $150,000, but it would be 9.65% if an additional $2 million is taxable. However, if the beneficiary moves to Florida and is domiciled there when they make the year 10 withdrawal, they will owe no state income tax on the assets withdrawn from the retirement account.

Example 1:

Olive dies in 2025 at the age of 70 with an IRA worth $2,000,000. Bonnie, her named beneficiary, is not an EDB but qualifies as a DB, and thus is (a) subject to the 10-year rule and (b) not required to take RMDs in years one through nine. Bonnie makes $150,000 in income each year and expects that she will receive only cost of living adjustments to her income between now and 2035. Bonnie is a resident of Sacramento, California and expects to remain so throughout this period. We can compare the tax costs of three options for withdrawals from the IRA: (1) withdrawing all assets at the end of year 10, (2) withdrawing $100,000 in years one through nine to use up the lower tax bracket Bonnie is in now and taking the rest at the end of year 10, and (3) taking roughly equal withdrawals over the 10-year period. We assume a 5% annual growth rate for assets inside the IRA and on assets held outside the IRA, and that assets withdrawn from the IRA, less tax paid, are held until year 10 when they are sold (and incur tax as long-term capital gains). In addition, it assumes that Olive’s estate was not subject to estate tax, so there is no income tax deduction for estate tax paid.

The chart shows that the overall lowest amount of tax paid is option two, with the $100,000 withdrawal each year. However, the largest cumulative value is option three, with even withdrawals over the 10-year period. This reflects that in scenario three, the fewest assets are taxed at the higher tax bracket rates AND that the additional taxes paid in scenario three compared to scenario two are due to more tax-deferred growth in value.

Example 2:

Owen died in 2025 at age 80 after having taken his 2025 RMD before his death. The beneficiaries of Owen’s $4,000,000 IRA are his twin children, Scott and Debbie, in equal shares. Scott and Debbie are 55 at Owen’s death. Scott is a New Jersey resident and earns about $750,000 per year. Debbie is a Texas resident with anticipated annual income of $300,000. As in the prior example, this one assumes 5% annual growth on assets inside the IRA and on assets outside the IRA, assets withdrawn from the IRA, less tax paid, are held until year 10 when they are sold (and incur tax as long-term capital gains), and there is no estate tax.

This illustrates that even beneficiaries receiving exactly the same withdrawals from the IRA (RMDs in years one through nine and the balance in year 10) do not receive exactly the same value from the account, due to differences in their tax brackets and applicable state taxes. In the modeling, the beneficiaries will want to take into account what tax bracket they expect to be in later. For example, if they retire, they may have less income, or they may have more because they must take RMDs from their own retirement accounts as well as the inherited account. In retirement, do they plan to move to a state with a different tax regime? For example, what if Scott moved to Florida in year five?

Scott pays approximately $331,000 less in taxes with the move to Florida in year five.

What If the Beneficiary Is Charitably Inclined?

Beneficiaries of inherited IRAs who themselves are over age 70 ½ are eligible to make qualified charitable distributions (QCDs) from the inherited IRA and exclude the distributions from income. This is particularly useful for beneficiaries who do not itemize their deductions for income tax purposes and therefore do not get a tax benefit from ordinary charitable contributions. The QCD limit in 2025 is $108,000.

Example 3:

Oscar died in 2025 at age 81 with a $2 million IRA that named his brother, Bill, aged 70, as the beneficiary. Because Bill is more than 10 years younger than Oscar, he is a DB and not an EDB. Bill is married, and he and his wife, Wendy, have income of $200,000, which supports their lifestyle comfortably, and a portfolio of their own to cover unanticipated expenses. Bill and Wendy plan to give the bulk of their estate to charity after the death of the survivor. The following chart compares scenario one, where Bill takes his RMD from Oscar’s IRA for himself, with scenario two, where Bill makes a QCD each year and only takes (and pays tax on) the remaining portion of the RMD.

If Bill and Wendy want the money to ultimately go to charity, using the QCDs significantly reduces their lifetime tax burden.

How Do Things Work for Roth Accounts?

The RMD rules for non-spouse beneficiaries of Roth accounts are the same as those for traditional retirement accounts with two key differences. First, because there are no RMDs for the account owner of a Roth, there are no RMDs in years one through nine for the beneficiary, regardless of the account owner’s age at death. Second, distributions from a Roth account are not taxable, so there is not the same pressure to plan for the income tax consequences if the beneficiary withdraws all the assets in year 10. This could provide additional incentives for the account owner to consider converting all or part of their traditional retirement account to a Roth if the account owner does not anticipate spending the assets in retirement.