Isn't That Rich Podcast

Most people have heard of retirement accounts like 401(k)s and IRAs. They’re tools we use during our working years to save for the day we no longer bring home a paycheck. But here’s something a lot of people never think about: what happens to those accounts after someone passes away?

This is where inherited IRAs enter the picture. If you’re named as a beneficiary on someone’s retirement account, you could end up with what feels like a financial windfall — but it comes with strings attached. The IRS has very specific rules about how and when you can access that money, and in 2025, those rules are getting stricter.

Financial advisor John Forbes of Forbes Financial Group has been guiding families through these tricky waters for decades. He explains what an inherited IRA really is, how the rules are changing, and what you can do to protect yourself (or your loved ones) from big tax headaches.

The Good Old Days of the “Stretch IRA”

Not long ago, inheriting an IRA was like hitting a slow-and-steady jackpot. Beneficiaries could use what was called the “stretch IRA” strategy. That meant you didn’t have to take out all the money quickly — you could stretch withdrawals over your entire lifetime.

For example, if you inherited $200,000 from your mom’s IRA, you might only be required to take out a few thousand dollars per year. The rest could stay invested, continuing to grow tax-deferred for decades. It was a win-win: you got a little extra income, and the money had time to multiply.

But in 2019, the government changed the game. Why? Because every dollar in a traditional IRA is pre-tax. That means the IRS is sitting there waiting for you to withdraw it so they can collect their share. They didn’t want to wait 30 or 40 years anymore. The SECURE Act (2019) and SECURE 2.0 (2022) eliminated the stretch IRA for most non-spouse beneficiaries.

The 10-Year Rule: What It Means

Now, if you inherit an IRA, you’re on the clock. For most heirs, the entire account must be emptied within 10 years of the original owner’s death.

Here’s where it gets tricky:

• If your parent passed away before they had to start their own required minimum distributions (RMDs) — generally age 73 — then you can technically wait until year 10 to withdraw the whole thing.

• But if they passed after their RMDs had begun, you’re required to take annual withdrawals in years 1–9, and then clean out the account by year 10.

Up until now, the IRS has been a little loose about enforcing these rules. From 2020 to 2024, penalties were waived because even they weren’t clear about the details. But starting in 2025, the grace period ends. Fail to withdraw properly, and you could face a penalty on top of taxes owed.

Imagine inheriting $300,000 and thinking, “I’ll just let it grow for 10 years and then cash it all in.” Sounds smart, right? Not necessarily. That giant lump-sum withdrawal could double your taxable income in year 10, pushing you into a much higher bracket. Which brings us to…

Who’s Exempt from the 10-Year Rule?

Not everyone has to follow these new rules. A few groups are exempt:

• Spouses: They can roll the account into their own IRA and continue as if it were theirs all along.

• Minor children of the original owner: They don’t have to start the 10-year countdown until they reach age 21.

• People with disabilities or chronic illnesses: They may be able to continue using the stretch option.

• Heirs less than 10 years younger than the original owner: For example, if a 72-year-old leaves an IRA to their 68-year-old sibling, the rules are different.

But for most adult children and grandchildren — the majority of beneficiaries — the 10-year rule applies.

Why Timing Matters: Taxes, Taxes, Taxes

Here’s the big reason these changes matter: taxes.

Traditional IRAs are funded with pre-tax dollars. That means when you take money out, every penny counts as taxable income. If you’re working a full-time job and already making $60,000 a year, adding $30,000 from an inherited IRA withdrawal could bump you into a higher tax bracket. Suddenly, you’re paying more on that extra income — and possibly increasing your Medicare premiums or changing how much of your Social Security benefits are taxed.

Even Roth IRAs, which are known for tax-free withdrawals, have a catch. Once you take the money out and reinvest it elsewhere, future growth could become taxable. The IRS has designed these new rules to make sure they get their share sooner rather than later.

The takeaway? When you withdraw matters just as much as how much you withdraw.

Strategic Options for Families

Thankfully, there are ways to play this smart. John suggests a few strategies:

• Roth Conversions While Alive: If Grandma is in a low tax bracket, she could convert her traditional IRA to a Roth before she passes. She pays taxes at her lower rate, and her kids inherit tax-free assets.

• Charity as a Beneficiary: Charities don’t pay income tax. If you want to support a cause, leaving your IRA to charity and giving your kids other assets could mean thousands more dollars stay in the family’s pocket.

• Gifting During Life: Sometimes it makes sense to withdraw and gift money while you’re still alive. You pay the taxes at your rate, but your heirs receive it tax-free — and get the joy of using it now.

Every family’s situation is unique, but these are the kinds of conversations that can make a huge difference.

Communication: The Missing Piece

This is where most families fall short. Money is left behind, but no guidance or context comes with it. That’s why one study found 33% of inheritances are gone within 24 months.

Think about it: you leave your kids $200,000, and instead of investing wisely, they use it to buy a new car, pay off someone else’s debt, or make risky financial moves. Without communication and preparation, it’s easy for money to disappear.

John stresses that legacy isn’t just about wealth — it’s about wisdom. Telling your kids why you saved, what your values are, and how you’d like them to use that gift matters just as much as the dollars themselves. Writing letters, sharing stories, or even planning family conversations can turn inheritance into a meaningful continuation of your values.

The Emotional Side of Legacy

It’s not easy to talk about death, money, and “what happens after.” But avoiding the conversation can leave your family with confusion, conflict, and sometimes even resentment.

Planning ahead is another form of generosity. Pre-planned funerals, written wishes, or even notes left on family heirlooms give your loved ones clarity in the middle of grief. Imagine your children opening a box and finding not just jewelry, but a handwritten note explaining its history and why it mattered to you. That’s legacy.

When people know your intentions — both financially and emotionally — they’re free to honor you without second-guessing or arguing.

Key Takeaways

• Inherited IRAs now come with a 10-year withdrawal rule (with a few exceptions).

• Starting in 2025, enforcement gets serious. Missed withdrawals could mean penalties.

• Taxes matter. Poor timing could push heirs into higher brackets, costing thousands.

• Strategize. Consider Roth conversions, gifting, or naming charities to minimize tax burdens.

• Communicate. Don’t just leave money — leave clarity, stories, and values that will live on long after you.

Inheritance is never just about money. It’s about taking care of the people you love. If you or your family are facing questions about inherited IRAs, now is the time to talk to a financial advisor and put a plan in place. It’s not the most comfortable conversation, but it may be the most important one you’ll ever have.