The 10-Year Rule for Inherited IRAs: How SECURE Act Changes Affect Your California Heirs

Under the SECURE Act of 2019 and the IRS Final Regulations issued in 2024, most non-spouse beneficiaries who inherit a traditional IRA must withdraw the entire account within ten years of the original owner’s death. If the original owner had already begun required minimum distributions, the beneficiary must also take annual distributions during years one through nine. Eligible designated beneficiaries —(surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries within ten years of the owner’s age) — remain subject to different rules

For decades, the “stretch IRA” was a cornerstone of retirement-account estate planning. A non-spouse beneficiary who inherited an IRA could take distributions over their own life expectancy, often spreading the tax bill across thirty or forty years and allowing the account to continue growing tax-deferred.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 ended that strategy for most inheritors. For account owners who died on or after January 1, 2020, most non-spouse beneficiaries must now drain the inherited account by the end of the tenth calendar year after the original owner’s death. For California families with substantial IRA balances, this is one of the most significant federal changes to estate planning in a generation.

The SECURE Act divides beneficiaries into three categories:

• Eligible Designated Beneficiaries (EDBs). This group can still take distributions over a longer period. It includes surviving spouses, minor children of the account owner (until they reach the age of majority), individuals who are disabled or chronically ill, and beneficiaries who are not more than ten years younger than the original account owner.
• Non-Eligible Designated Beneficiaries (NEDBs). This is the largest group and includes most adult children, siblings, friends, and other named individuals. These beneficiaries are subject to the 10-year rule.
• Non-Designated Beneficiaries. This category covers estates, charities, and certain trusts that do not meet “see-through” requirements. The rules for these beneficiaries are generally even less favorable.

For most Orange County families planning for the transfer of a parent’s IRA to adult children, the practical answer is the 10-year rule. The exceptions are real but narrow.

Two Groups, Two Sets of Rules

After several years of uncertainty, the IRS finalized regulations on July 18, 2024 that clarified how the 10-year rule actually works. Beneficiaries subject to the rule fall into one of two groups,depending on whether the original account owner had begun taking required minimum distributions (RMDs) before death.

If the original account owner died before reaching their required beginning date (currently age 73 under the SECURE 2.0 Act), the beneficiary may withdraw funds at any pace during the ten-year period (even nothing at all in early years), as long as the entire balance is distributed by December 31 of the tenth year after the year of death.

If the original account owner had already begun taking RMDs at the time of death, the beneficiary must take annual distributions during years one through nine, calculated based on the beneficiary’s own life expectancy, and must still empty the account by the end of year ten. This is the rule that surprised many beneficiaries when the IRS clarified it in the final regulations; the 10-year rule was not, as many had assumed, simply a “drain it whenever you want, by year ten” rule for everyone.

A simplified example illustrates the difference. Suppose a parent dies in 2026 at age 78, holding a $1 million traditional IRA. The parent had been taking RMDs since age 73. Their adult child, who is a Non-Eligible Designated Beneficiary, inherits the IRA. Under the final regulations, the child must take an annual RMD in each of 2027 through 2035, calculated based on the child’s own life expectancy, and must withdraw any remaining balance by December 31, 2036 — the end of the tenth year after the parent’s death.

Note that the IRS provided penalty relief for missed RMDs during 2021 through 2024 while the rules were being finalized. Beginning in 2025, the annual RMD requirement for Group 2 beneficiaries is fully in effect, and missed distributions can trigger a 25 percent excise tax (reduced to 10 percent if corrected promptly).

The California Tax Layer

California fully taxes IRA distributions as ordinary income. Unlike some states that exempt retirement income from state taxation, California applies its regular income tax rates to inherited IRA withdrawals. The state’s top marginal rate is— currently 12.3 percent, with an additional 1 percent mental health services tax on income above $1 million. Therefore, — makes the combined federal and state tax burden on a large inherited IRA distribution can be significant

For a beneficiary in their peak earning years who suddenly receives a multi-hundred-thousand-dollar inherited IRA, the temptation to take the full distribution in a single year, or to wait until year ten and take it all at once, can be expensive. A lump-sum distribution can push the beneficiary into a substantially higher marginal tax bracket for both federal and California purposes, and it eliminates the planning opportunities available across a ten-year window

Consider a California beneficiary already earning $250,000 a year who inherits a $1.2 million traditional IRA. Taking the full balance in a single year layers another $1.2 million of ordinary income on top of regular earnings, pushing a meaningful portion into the highest federal bracket and the top California brackets. Spreading the same distribution across the ten-year windowgenerally produces a substantially lower combined tax bill. The right pattern is fact-specific, which is why coordination between the estate plan, a financial planner, and the family’s tax advisor matters more than ever under the new rules.

Because the rules are complex and the tax consequences meaningful, families with substantial retirement accounts often benefit from coordinated planning across their estate plan, their tax advisor, and their financial planner. Common considerations include:

• Spreading distributions across the ten-year period rather than concentrating them in one year, which can significantly reduce the combined federal and California tax bill.
• Reviewing whether Roth conversions during the account owner’s lifetime might make sense, since Roth IRAs follow similar 10-year distribution rules but are generally income-tax-free to the beneficiary.
• Considering whether a charitable remainder trust may make sense as a beneficiary in certain situations, allowing income to be paid out over a longer period while ultimately benefiting a charity.
• Reviewing trust beneficiary designations carefully. Naming a trust as beneficiary of an IRA can trigger different rules, and trusts that do not meet specific “see-through” requirements may be subject to even less favorable distribution rules.
• Updating beneficiary forms after major life events. The beneficiary form on file at the IRA custodian controls who inherits the account, and an outdated form can produce results the account owner never intended.

None of these strategies is right for every family. The right path depends on the account size, the family’s tax situation, the ages and circumstances of the beneficiaries, and the broader estate plan.

What does apply to nearly every family with a meaningful IRA balance is the importance of a current review. The rules changed, the IRS guidance has now been finalized, and the planning environment in 2025 and 2026 looks meaningfully different from the one that existed when most older estate plans were drafted. A short conversation with your estate planning attorney, ideally in coordination with your tax advisor, can confirm that beneficiary designations and trust provisions still produce the outcome you intend.

Goodman Estate Law

Brett J. Goodman is the founder and lead attorney at Goodman Estate Law, based in Laguna Hills, CA. The firm specializes in Estate Planning, Trust Administration, and Probate, helping individuals and families create or update wills and trusts. With a focus on personalized, compassionate, and professional guidance, Goodman Estate Law ensures clients’ assets and futures are protected during every stage of estate planning.