Inherited IRAs and Legacy Planning: 7 Traps That Can Cost Families

Written by Davis Mobley, Financial Advisor at Anthem Advisors 

Inherited IRAs and Legacy Planning: 7 Traps That Can Cost Your Family (2026 Guide)

For families here in Huntsville and across North Alabama, building your savings, making thoughtful investment decisions, and preparing for retirement all take years of hard work, sacrifice, and patience. One of the thoughts along the way often is how those assets that you have saved could someday help your children, grandchildren, or support a special church or charity you have in mind.

But, building an inheritance and preparing to pass it along require different planning.

An account that served you well in retirement could end up having unexpected tax consequences for your heirs. A trust designed to protect your children may produce withdrawal requirements you didn’t anticipate. Even dividing assets equally among heirs can equate to vastly different financial outcomes among each heir. All are examples of how even a well-intended legacy plan can fall short when the details are overlooked.

Proverbs 13:22 speaks to the eternal significance of leaving an inheritance to future generations. This level of stewardship requires asking, “What will I leave and how will it be received?”

Inherited IRA rules are an important part of answering these questions. Below are seven potential traps and the planning opportunities that come with each.

1) What is the 10-Year Rule for Inherited IRAs, and do heirs really get 10 years?

For many non-spouse beneficiaries, which includes most adult children, an IRA that has been inherited from an owner who died in 2020 or later must be emptied by December 31^st of the tenth year following the death of the owner. For example, if a parent dies in July of 2026, the deadline for the account to be emptied would be December 31, 2036.

For a traditional IRA subject to the 10-year rule, the owner’s required beginning date (in reference to required minimum distributions, or RMDs) determines whether annual distributions are required.

If the death occurred before the required beginning date (RBD), no annual RMDs are usually required in years 1-9.

However, if the death occurred on or after the RBD, annual RMDs apply in years 1-9.

In both cases, the remaining balance must be distributed by the end of year 10.

Looking at another example, consider an adult child inherits their father’s traditional IRA after he passes away at age 85. They may understand that they have 10 years to empty the account, but may leave it untouched until year 10. In this situation, that assumption not only fails to take into consideration RMD requirements, but also leaves a very large tax bill to be recognized in the final year when the funds have to be withdrawn.

There are important exceptions to the standard 10-year withdrawal requirement. Eligible designated beneficiaries who are not bound to this schedule include surviving spouses, qualifying disabled or chronically ill individuals, minor children of the owner, and individuals no more than 10 years younger than the owner. These beneficiaries can qualify for life expectancy distributions.

For the minor child example, the special treatment usually ends at age 21, when the standard 10-year payout period begins. It is important to note that a grandchild would not count for this distinction, even if the grandchild is a minor, as it has to be the child of the owner.

The practical first step is to identify the beneficiary’s category, establish the applicable deadlines, and create a withdrawal calendar. Investment decisions should follow a clear understanding of those obligations.

2) What Happened to the Stretch IRA after the SECURE Act?

Before the SECURE Act of 2019, many individual beneficiaries could spread IRA withdrawals over their remaining life expectancies, which became known as the “stretch IRA.”

A younger beneficiary could take relatively small annual distributions, leaving much of the account invested for decades. For many adult children today, this rule no longer applies and has since been replaced by the 10-year requirement. This changes the assumptions behind a meaningful legacy strategy.

A parent may have selected their beneficiaries years ago, expecting their retirement assets to provide gradual support to the child over their lifetime. However, this change means the child may need to receive the entire account over a much shorter period, possibly while working and earning a substantial income.

The account can still provide lasting financial support, although it makes prudent legacy planning that much more important.

For example, a beneficiary might decide to use distributions to pay down debt, support household expenses, or build an investment portfolio. Ultimately, the proper approach depends on their circumstances, but the underlying question of, “How will this inheritance support my long-term financial stability?” remains the same.

Parents should revisit legacy plans built around the old stretch strategy, while heirs should avoid assuming that withdrawal rules described by a friend or relative apply to their own inheritance.

3) How are Inherited Traditional IRA Withdrawals Taxed?

A traditional IRA often represents years of tax-deferred saving. When an heir receives distributions, those withdrawals usually become ordinary income except for any portion attributable to the owner’s after-tax (nondeductible) contributions.

The timing of these distributions may be difficult. Adult children oftentimes inherit during years when they are advancing in their careers, receiving large bonuses, managing business income, paying college expenses, helping aged relatives, or preparing for their own retirement. Adding inherited IRA income to an already elevated income can make the inheritance more expensive than the parents of the heirs originally expected.

Let’s look at an adult son who inherits an $800,000 traditional IRA. With calculated annual withdrawals averaging $80,000 over 10 years before considering investment results, this is a substantial amount of annual income to recognize for an adult heir who most likely has a sizeable income of his own.

Taking only the required minimum each year may be enough to satisfy annual RMD obligations, but it could end up leaving a substantial balance for the final year. Waiting can be painful.

An approach that can prove more beneficial is to project withdrawals over the full 10 years. Important questions to consider include:

• Will the beneficiary retire before the deadline?
• Is a lower-income year likely because of a career transition?
• Will a business sale or unusually large bonus make a particular year expensive?
• Would taking more than the minimum now reduce a larger problem later?
• How will state income taxes affect the result?

Parents can address these issues before an inheritance occurs. Roth conversions may be worth looking into when parents expect to pay a tax at a lower rate than their children would pay on future inherited withdrawals. In doing so, a Roth conversion generally creates taxable income in the conversion year, and should be evaluated as a family tax decision, with the proper attention being given to the parents’ resources and retirement needs.

The goal here is to compare realistic alternatives across generations, rather than assume that postponing taxes always produces the best outcome.

4) Are Inherited Roth IRAs Tax-Free?

Roth IRAs offer a more compelling benefit for heirs: qualified distributions are tax-free. For inherited Roth IRAs, the original owner’s five-year holding period matters. If the five-year holding period has not been satisfied, earnings withdrawn may be taxable.

Many non-spouse beneficiaries must still empty an inherited Roth IRA by the end of the tenth year. However, unlike inherited traditional IRAs, there is no annual distribution requirement in years 1-9. This can create valuable flexibility.

Consider an adult daughter who inherits a Roth IRA. She has 3-6 months of cash savings and does not need additional funds for current lifestyle expenditures. She may elect to not withdraw any funds from the account in the first nine years, emptying it before the deadline in year 10.

On the other end of that example, another heir might need the inheritance immediately to help address a pressing need, prompting this heir to elect to withdraw most of the account earlier on.

It is important that the investment approach reflects the expected withdrawal schedule if the funds are needed to supplement lifestyle expenses or go to any other need. If, in the 10^th year, the heir plans to immediately invest the funds in a taxable brokerage account after withdrawing them from the inherited Roth IRA, then a more aggressive investment allocation can be justified.

Families should also preserve records showing when the original owner first established the Roth IRA. Good documentation can prevent uncertainty when beneficiaries begin taking distributions.

5) Should You Name a Trust as Your IRA Beneficiary?

A trust can serve as an important vehicle when leaving retirement assets to family members.

Parents may want to protect an inheritance for a child who struggles with money, provide oversight for a young beneficiary, or address the needs of a beneficiary with disabilities. Those goals rightfully deserve careful consideration.

However, naming a trust as the beneficiary of an IRA opens up a whole new can of worms. Certain trusts qualify for “see-through” treatment, allowing the underlying beneficiaries to be considered when determining payout requirements. Qualification involves specific requirements including the validity of the trust, irrevocability at death, and identifiable beneficiaries.

Trust design also affects what happens once IRA funds are withdrawn. A conduit trust passes retirement distributions through to the designated trust beneficiary, while an accumulation trust can retain distributions. Each structure comes with different payout rules.

This creates two separate questions: How long can assets remain in the IRA, and what happens when those assets move into the trust?

If taxable income stays in a trust, trust federal income tax brackets can produce a high tax rate at a much lower income level than would apply to an individual. It takes only $16,000 of taxable income in a trust to reach the 37% tax bracket in 2026. A trust that fails the applicable requirements can also produce an unfavorable payout schedule. For example, if the IRA owner died before the required beginning date, a nonqualifying trust may face a five-year payout.

An older trust deserves even more scrutinized attention. Language designed to distribute only required withdrawals under the former stretch framework may operate very differently under a 10-year payout requirement.

As a best practice, have your estate attorney evaluate the actual trust language alongside the beneficiary designation and the intended family outcome. The review should address both asset protection and the tax cost of delivering that protection.

6) Can You Leave an IRA to Your Church or Charity?

For families who have charitable intentions, a traditional IRA can be an especially useful asset to leave directly to a qualified tax-exempt charity.

An individual beneficiary generally owes income tax on taxable IRA distributions. A qualified tax-exempt charity generally does not, allowing the retirement assets to support its work without losing a portion to income tax.

This difference creates an opportunity to coordinate charitable gifts with family inheritances.

Suppose a couple wants to leave $200,000 to their church and the remainder of their estate to their children. They own a traditional IRA, a Roth IRA, and a taxable investment account.

One approach worth evaluating would direct some traditional IRA assets to the church while leaving other assets to the children. The charitable amount could remain the same, while the choice of assets improves what the family retains after taxes.

That outcome depends on the full estate plan, but it illustrates why the funding source matters.

The paperwork matters as well. Confirm the charity’s correct legal name, tax identification number, and intended share on the beneficiary designation. Coordinate the gift with the rest of the estate documents.

A gift at death also differs from a qualified charitable distribution made during life. The rules are not interchangeable. For example, an eligible donor-advised fund sponsor can receive a retirement account beneficiary gift, even though donor-advised funds cannot receive qualified charitable distributions.

Begin with the people and causes you want to support, then determine which assets can most effectively fulfill those intentions.

7) Why Equal Inheritances Aren’t Always Fair

A common legacy goal is to treat children fairly. But equal dollar amounts on an account statement can produce very different outcomes.

Consider four assets, each valued at $500,000:

The adjustment to basis on inherited property can significantly reduce the taxable gain when the property is sold, such as capital gain property which receives a step up in basis on the original owner’s death. Tax-deferred IRA income does not receive the same treatment.

For example, if one child receives a $500,000 traditional IRA and another receives a $500,000 Roth IRA, the first child’s traditional IRA withdrawal could face a combined effective rate (all else being equal) of around 30%, leaving approximately $350,000 after taxes. The second child, meanwhile, would receive $500,000 from qualified Roth distributions income tax free.

Yes, this example ignores potential growth and other important variables, but it shows why equal face values may deliver unequal benefits.

A house introduces another difference. One child may welcome the property, while another would prefer it be sold for cash. Shared ownership can create disagreements about repairs, occupancy, and when to sell.

Ultimately, there is no universal formula for fairness. Some families may find that dividing each account proportionally among children reduces differences caused by account type. Others may need to allocate particular assets to particular heirs and estimate the after-tax effect.

Trying to achieve perfect mathematical equality can become complicated because tax rates, asset values, and family circumstances change. Clear intentions and thoughtful communication remain essential.

Preparing Your Family to Receive the Legacy You Intend

A truly impactful legacy review begins with a few practical questions:

1. Who is currently named on each retirement account?
2. What withdrawal rules would apply to those beneficiaries?
3. How might inherited distributions fit into their expected incomes?
4. Does any account still reflect assumptions from the old stretch IRA rules?
5. Are charitable gifts funded with appropriate assets?
6. Have you considered the after-tax value and responsibilities attached to each inheritance?
7. Will your heirs know who to contact and where to find important records when needed?

These questions are easier to address while you are still able to clearly explain your intentions and make adjustments.

At Anthem Advisors, we believe legacy planning should bring your financial decisions into alignment with your faith, your family responsibilities, and the causes you value. Wealth is a valuable tool, but without wisdom and unity, it often leads to division. Psalm 78:5–7 provides a beautiful framework for legacy planning across generations. These verses highlight three keys to a lasting legacy: remember God’s works, share your stories, and live in obedience. Through safe and guided discussion, we encourage families to reflect on the ways God has been present in their journey.  Legacy doesn’t build itself—intentional steps must be taken. Unfortunately, many families delay because they don’t know where to start or feel too busy or distracted. Don’t let procrastination be the “silent killer” of your family legacy. Careful preparation helps your family receive that gift with greater clarity and fewer preventable surprises.

FAQs:

1. Do I have to take RMDs from an inherited IRA every year?
   1. Sometimes, as it depends on the beneficiary, account type, and when the owner passed away.
2. What happens if I miss an inherited IRA RMD?
   1. A 25% penalty may apply, potentially reduced to 10% if it is corrected in a timely manner or waived for reasonable error.
3. Can I roll an inherited IRA into my own IRA?
   1. Generally, only surviving spouses can. Other beneficiaries need a separate inherited IRA.
4. Does a grandchild get special inherited IRA treatment?
   1. Most oftentimes, no. Most follow the 10-year rule (even minors), unless another exception were to apply.
5. Is it better to leave a Roth IRA or a traditional IRA to my children?
   1. Roth IRAs offer tax-free qualified withdrawals, but ultimately the better choice depends on your family’s tax situation.

Disclosure: This material is provided for informational and educational purposes only and should not be construed as personalized investment, legal, tax, or accounting advice. Advisory services are provided only pursuant to a written advisory agreement. Information contained herein has been obtained from sources believed to be reliable; however, we do not guarantee its accuracy or completeness.

Sources:

IRS Publication 590-B: Distributions from Individual Retirement Arrangements https://www.irs.gov/publications/p590b?utm

IRS: Retirement Topics: Beneficiaries https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary?

IRS Final RMD Regulations: Internal Revenue Bulletin 2024-33 https://www.irs.gov/irb/2024-33_IRB?utm

IRS Publication 559: Survivors, Executors, and Administrators https://www.irs.gov/publications/p559?utm

IRS Topic 703: Basis of Assets https://www.irs.gov/taxtopics/tc703?