The Hidden “Death Tax” in the SECURE Act: What Every IRA Owner Needs to Know

If you’ve worked hard to build a substantial nest egg in your IRA or 401(k), you may think your wealth is protected and set to benefit the next generation. But thanks to a quiet change in legislation known as the SECURE Act, your loved ones could face a massive tax bill—and fast.

Welcome to the 10-Year Rule, a provision that could turn your retirement plan into a windfall… for the IRS.

What Is the SECURE Act’s 10-Year Rule?

Passed in 2019, the SECURE Act changed the rules for inherited retirement accounts. Under the new law, most non-spouse beneficiaries—such as adult children—must withdraw the entire balance of an inherited IRA within 10 years of the original owner’s death.

At first glance, this might not seem like a big deal. But here’s the kicker: these forced withdrawals often occur during your heirs’ peak earning years, pushing them into higher tax brackets and triggering a significant, unexpected tax burden.

A Case Study: How Your $2 Million IRA Could Become a $728,904 Tax Bill

Let’s take a look at John and Joan Smith—retirees who built a $2 million traditional IRA over a lifetime of diligent saving. Upon their passing, they leave the full account to their son, John Jr., and his wife, Lisa. Like many in their prime earning years, John Jr. and Lisa are already in the 24% tax bracket.

Because of the 10-Year Rule, they’re forced to withdraw the entire $2 million over a decade. This spikes their taxable income, pushing much of the inherited IRA distributions into the 35% tax bracket. The result? Over $728,000 in taxes and a sharply reduced inheritance.

It’s a stealthy, accelerated tax grab—a kind of death tax by another name.

The Smarter Strategy: ROTH Conversions While You’re Still Alive

What if John and Joan had taken action during their lifetime?

By systematically converting portions of their traditional IRA to a Roth IRA over several years—while staying in their own manageable 24% tax bracket—they could have drastically reduced the future tax burden on their heirs.

In the revised scenario, the Smiths convert $130,000 per year for nine years. At the time of their passing, they’ve left behind:

• $1,040,347 in traditional IRA funds

• $1,141,318 in Roth IRA funds

And here’s the kicker: Instead of their heirs paying $728,000 in taxes, they only pay $365,000. The total wealth passed to the next generation grows by $830,000, all thanks to proactive planning.

Why This Matters for You

If your IRA or 401(k) is worth more than $1 million—or even expected to be—this issue affects you.

And if your children or other heirs are likely to earn more than you do in retirement, the SECURE Act’s 10-Year Rule could end up transferring a large portion of your life savings to Uncle Sam.

The good news? There’s still time to plan.

Don’t Let the IRS Be Your Largest Beneficiary

With the right strategy—including Roth conversions, distribution planning, and estate coordination—you can dramatically reduce taxes and preserve more of your legacy for the people and causes you care about.

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Let’s create a plan that keeps your family’s wealth in the family—and out of the hands of the IRS.

Disclaimers & Considerations

Tax ramifications change drastically for client’s who have multiple beneficiaries at varying degrees of taxable income.   This is why strategic planning is so important for your qualified retirement estate. Tax brackets & a client’s taxable income are moving targets each year.  Tax brackets used in this case study follow the current 2024 MFJ progressive tax schedule.  To illustrate the impact of tax planning, these brackets were applied consistently to the case study without consideration of inflating income brackets, changes to the tax schedule, or the sunset of the TCJA in 2026. All growth rates were standardized at 6%. Taxation on investment income and/or capital gains from a trust account were excluded from calculations.  This may overstate the net value on re-invested assets within a trust or other taxable investment vehicle. The case study is for illustrative purposes only. Total tax costs presented are not to be represented as perfectly accurate. Scenario does NOT calculate total IRA taxes paid by John and Joan over the 9 years of distributions. Each client’s tax situation varies based on a variety of factors. This information has not been reviewed for accuracy or completeness. Consult your qualified tax professional, financial advisor, and estate planning attorney for specific questions regarding your needs.