Your Traditional IRA Legacy: What Your Loved Ones Need To Know

When you think about your IRA, you probably think about retirement. But what happens to that account after you’re gone is just as important. For many families, an inherited IRA becomes a meaningful financial gift. But it also comes with rules—some of which can be confusing, and costly if misunderstood. Taking a little time now to plan ahead can help your loved ones keep more of what you intended to pass on.

The Hidden Complexity of Inherited IRAs

Here’s where things can get tricky. When someone inherits an IRA, they don’t just receive the account—they also inherit a set of rules called Required Minimum Distributions (RMDs). These rules determine how quickly the money must be withdrawn by your beneficiaries. The timeline depends on who you name as the beneficiary is and, in some cases, when you pass away.

There are three general categories of beneficiaries:

1. Eligible designated beneficiaries – such as a spouse, minor child, or someone who is disabled, chronically ill, or close in age to the original owner

2. Other individual beneficiaries – such as most adult children or friends

3. Non-individual beneficiaries – such as an estate or charity

   
   

Based on the beneficiary type, one of the following payout rules will apply:

• 5-Year Rule

  Typically applies to non-individual beneficiaries when the Traditional IRA owner passed away before starting required distributions. The entire IRA balance must be withdrawn by the end of the fifth year following the IRA owner’s death.

  
  

• 10-Year Rule

  Applies to most individual beneficiaries. The full balance must be distributed by the end of the tenth year following the IRA owner’s death. In some cases, annual withdrawals may also be required during that period.

  
  

• Life Expectancy Rule (“Stretch”)

  Available to eligible designated beneficiaries. This allows the IRA to be distributed gradually over the beneficiary’s lifetime, potentially extending tax deferral.

  
  

  Special note: Minor children of the IRA owner may use the life expectancy rule until reaching adulthood (age 21), at which point the 10-year rule begins — requiring the IRA to be fully emptied in the year the child turns age 31.

  
  

Without a clear understanding, beneficiaries may take withdrawals too quickly (and pay more taxes than necessary) or not take them at all (and face penalties).

Why This Matters More Than Ever

We’re in the middle of one of the largest wealth transfers in history. Did you know that:

• An estimated $124 trillion is expected to pass between generations by 2048

• About $105 trillion will go to heirs

At the same time:

• Roughly 1 in 3 U.S. households own a Traditional IRA

• And trillions of dollars are currently held in these accounts

  
  

That means there’s a good chance your IRA will play a role in your family’s future.

You Can Make a Difference

A significant amount of wealth will pass between generations in the coming years, and inherited IRAs will play an important role for many families. Understanding the rules—especially IRS requirements for inherited IRA withdrawals—can help your beneficiaries avoid penalties and make informed decisions.

It’s also important to review your IRA beneficiary designations regularly. Making sure they still match your wishes, and discussing them with your loved ones, can help protect the legacy you want to leave.

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Lessons for Life and (Death): Understanding Inherited IRAs