If you plan to leave a 401(k) or IRA to your child—or you’ve recently inherited one yourself—there’s a new set of rules you need to know. Thanks to changes under the SECURE Act, the way retirement accounts are inherited has undergone a significant shift. Most beneficiaries can no longer “stretch” distributions over their lifetime, and mandatory withdrawals are now required, often on a fixed timeline.

Let’s break down what’s changed and what it means for your estate plan.

What’s the New Rule?

Under the SECURE Act, most non-spouse beneficiaries (like adult children) must now follow what’s called the 10-year rule. That means:

• The entire balance of the inherited 401(k) or IRA must be withdrawn within 10 years of the original account holder’s death.
• If the account owner had already started required minimum distributions (RMDs) before passing away (typically after age 73), the beneficiary must also take annual RMDs during the 10 years following the owner’s death.

This is a significant shift from prior rules that allowed beneficiaries to stretch distributions (and the associated tax burden) over their lifetime.

Who Does the Rule Apply To?

Most non-spouse beneficiaries are subject to the 10-year rule, including:

• Adult children
• Grandchildren
• Friends or other named individuals

There are exceptions for certain “eligible designated beneficiaries” who may still stretch distributions over their life expectancy. These include:

• Surviving spouses
• Minor children (until they reach legal adulthood)
• Disabled or chronically ill individuals
• Beneficiaries who are less than 10 years younger than the account holder

Why It Matters

The new rules may create unintended tax consequences for your heirs. Large withdrawals over a short period can push a beneficiary into a higher income tax bracket, especially if they’re working during that time.

For example, if you leave a $500,000 retirement account to your adult child and they must withdraw it over 10 years, they could be adding $50,000 or more per year to their taxable income, on top of their salary. And if you passed away after your RMDs began, they’ll need to start annual withdrawals immediately, based on their own life expectancy.

Traditional vs. Roth 401(k)s

It’s worth noting that the 10-year rule applies to both traditional and Roth 401(k)s. Even though Roth accounts don’t have RMDs for the original owner during their lifetime, beneficiaries are still required to follow the 10-year withdrawal period, and possibly take annual distributions if the original owner dies after starting RMDs from a traditional account.

Planning Ahead

If you want to minimize the tax impact on your beneficiaries and ensure your retirement accounts are passed on in the most efficient way, here are a few planning strategies:

• Review your beneficiary designations regularly to confirm they align with your current wishes.
• Consider Roth conversions during retirement to reduce the taxable burden on your heirs.
• Explore trust planning options if your beneficiary is a minor, has special needs, or may benefit from a structured distribution timeline.
• Work with an estate planning attorney to factor in the SECURE Act rules as part of your overall legacy plan.

Final Thoughts

The SECURE Act has added complexity to an already confusing area of estate planning. If you’re planning to leave retirement accounts to your children or other loved ones, now is the time to review your strategy and adjust where needed.

At Lester Law, we help Colorado families make informed and thoughtful decisions about their estate plans, including how to handle retirement assets. We offer flat-fee estate planning with no surprises, and we’re here to guide you through the options.

👉 Schedule your free consultation today

Because protecting your family’s future shouldn’t be left to guesswork.