The NY Inherited IRA Guide 2025-2026: How the SECURE Act’s 10-Year Rule Creates a Tax Time Bomb
Inheriting a retirement account used to be a straightforward financial blessing. Today, it is a complex tax time bomb. As a New York estate planning attorney with many years of experience, I have seen the devastating fallout from the SECURE Act. This 2019 law completely upended the rules for inherited IRAs, and most beneficiaries—and even many financial advisors—are still scrambling to understand the new reality.
I am Russel Morgan, and my firm, Morgan Legal Group, has successfully guided over 1,000 families through complex estate and trust administration. The most dangerous part of the new law is the “10-Year Rule.” It has replaced the old, simple “Stretch IRA” with a compressed timeline that can force beneficiaries to withdraw 100% of a retirement account during their peak earning years, triggering a massive, unexpected tax bill.
If you have inherited an IRA, 401(k), or other retirement account, what you do in the next 12 months is critical. A single mistake—like taking a distribution at the wrong time, or *failing* to take one you didn’t know you owed—can result in a 50% IRS penalty. This 2025-2026 guide will explain the new rules, who is affected, and how to defuse this tax time bomb. As our 900+ positive online reviews show, our greatest value is providing clarity in a crisis.
The “Good Old Days”: What Was the “Stretch IRA”?
To understand the danger, you must first understand what we lost. Before the SECURE Act, a non-spouse beneficiary (like a child or grandchild) could “stretch” the inherited IRA’s distributions over their *own* life expectancy.
- Example (Pre-2020): Your 40-year-old daughter inherits your $1 million IRA. She could take small Required Minimum Distributions (RMDs) based on her 40+ year life expectancy.
- The Result: The vast majority of the $1 million IRA would stay invested and growing, tax-deferred, for decades. It was a powerful tool for building multi-generational wealth.
Congress saw this as a “loophole.” The SECURE Act was passed to close it, accelerating tax revenue by forcing beneficiaries to withdraw the money—and pay taxes on it—much faster.
The SECURE Act: The New Rules and the “10-Year Time Bomb”
The SECURE Act of 2019 (and its successor, SECURE 2.0) eliminated the “Stretch IRA” for *most* non-spouse beneficiaries. It replaced it with a new, blunt instrument: the 10-Year Rule.
What is the 10-Year Rule?
The 10-Year Rule states that a “Designated Beneficiary” (e.g., an adult child) who inherits an IRA must withdraw 100% of the account’s assets by December 31st of the 10th year following the year of the original owner’s death.
- Example (Today): You die in 2025 and leave your $1M IRA to your 40-year-old daughter. She must fully empty that $1M account by December 31, 2035.
- The “Tax Bomb”: Your daughter is a doctor in New York City, already in the highest tax bracket. She is now forced to add $1,000,000 of *taxable income* to her peak earning years, pushing her into the top federal (37%) and state (10.9%) brackets. This is a tax nightmare.
The 50% Penalty: The “Bomb” in the Time Bomb
The IRS is not messing around. If you fail to take a Required Minimum Distribution (RMD), the penalty is severe. While SECURE 2.0 reduced the penalty from 50%, it is still a painful 25% (or 10% if corrected quickly). If you fail to empty the account by the 10-year deadline, the entire remaining balance could be subject to this penalty. This is a six-figure mistake that we see happen when people rely on “DIY” advice.
The Most Important Question: Are You an “Eligible Designated Beneficiary”?
This is the single most important part of this guide. The 10-Year Rule does *not* apply to everyone. The SECURE Act created a special, protected class called “Eligible Designated Beneficiaries” (EDBs). If you are an EDB, you can *still use the old “Stretch IRA” rules*. If you are not, you are stuck with the 10-Year Rule.
You MUST determine which category you fall into.
Category 1: Eligible Designated Beneficiaries (EDBs) – The “Lucky” Few
If you are in one of these five groups, you can still “stretch” distributions over your lifetime.
- The Surviving Spouse: Spouses have the most options. They can (and usually should) perform a “Spousal Rollover,” treating the IRA as their own.
- Minor Children of the Original Owner: A minor child can stretch distributions *until they turn 21*. The moment they turn 21, the 10-Year Rule clock begins. This is a common trap.
- Disabled Individuals: As defined by the strict IRS and Social Security rules.
- Chronically Ill Individuals: Also defined by strict IRS rules.
- Individuals Not More Than 10 Years Younger: This is typically a sibling or unmarried partner who is close in age to the decedent.
Category 2: Designated Beneficiaries (DBs) – The 10-Year Rule Applies
This is most people. A “Designated Beneficiary” is any non-EDB individual named on the beneficiary form.
- An adult child (over 21).
- trust
If you are in this group, you are subject to the 10-Year Rule. The $1M IRA must be empty by December 31, 2035.
Category 3: Non-Designated Beneficiaries (The 5-Year Rule)
This is the worst-case scenario. This happens when the IRA has no “human” beneficiary.
- The beneficiary is “My Estate.”
- trust
If this is the case, the 10-Year Rule does *not* apply. A different, more punitive “5-Year Rule” applies. The entire IRA must be emptied by December 31st of the 5th year. This is a common disaster we see in “DIY” wills that fail to properly coordinate with the IRA.
The Great Confusion: Do I Take RMDs *During* the 10 Years?
This is the “tax time bomb” in action. For years, the IRS itself was unclear. The question: “If the 10-Year Rule applies, can I just wait until Year 10, withdraw everything, and pay the tax then?”
The answer, according to proposed IRS regulations, is a dangerous “it depends.” It depends on *when the original owner died*.
- If the owner died *BEFORE* their Required Beginning Date (RBD) (generally April 1 after they turn 73): Then you have NO RMDs in years 1-9. You just have to empty the account by Year 10.
- If the owner died *AFTER* their Required Beginning Date (RBD) (i.e., they were already taking RMDs): Then you are in the trap. You *must* continue taking RMDs (based on *your* life expectancy) in years 1-9, *AND* you must still empty the entire remaining balance in Year 10.
This is a brutally complex rule. If you are a 50-year-old beneficiary of a 75-year-old decedent, you have RMDs *every single year*. Failure to take one results in a 25% penalty on the amount you *should* have taken. This is not a “DIY” calculation. In our 1,000+ cases of estate administration, this is the #1 most expensive mistake we see.
Your Action Plan: The 4 Choices for an Inherited IRA
If you have just inherited an IRA, you have choices. You must make the right one. As your probate and estate attorney, here is the legal and financial playbook we review with clients.
Option 1: The Spousal Rollover (Spouses Only)
This is the “gold standard” for a surviving spouse. You can roll the inherited IRA directly into your *own* IRA.
- The Result: The account is now treated as if it were always yours. You follow your *own* RMD rules (starting at age 73). This allows the money to grow tax-deferred for many more years. This is almost always the best option.
- The Exception: If the surviving spouse is under 59 ½, they may want to keep it as an “Inherited IRA” (see below) to access the funds without a 10% early withdrawal penalty. This is a key strategy we analyze.
Option 2: The “Inherited IRA” (The Non-Spouse Default)
This is the required option for a non-spouse. You *cannot* roll the IRA into your own account. You must open a new, specially titled “Inherited IRA.”
- Correct Titling: “[Decedent’s Name] IRA, FBO [Your Name], Beneficiary.”
- The Rules: This new account is now subject to the EDB (Stretch) or DB (10-Year) rules. You cannot contribute new money to it.
This is a non-negotiable step. Moving the money to your personal checking account is considered a 100% “distribution” and will trigger a massive, immediate tax bill.
Option 3: Disclaiming the IRA (Strategic Refusal)
Why would you *refuse* an inheritance? For strategic estate planning.
- Example: You are a high-earning doctor in New York City. You do not need the money. Your mother leaves you her $1M IRA. The contingent (backup) beneficiary is your 25-year-old son, who is in a low tax bracket.
- The Strategy: You file a “qualified disclaimer” within 9 months. You legally “refuse” the IRA. It passes to your son as if you had died first. He is still subject to the 10-Year Rule, but his tax bracket is 12%, not 37%. You’ve just saved the family hundreds of thousands in taxes.
This is an advanced, irrevocable legal maneuver that *requires* an attorney.
Option 4: Cashing Out (The Worst Option)
You can just cash out the entire IRA. The custodian will send you a check for $1M (minus 20-30% for tax withholding). This is almost always a terrible idea. You are taking a 100% tax hit in a single year, which is the very “tax bomb” we are trying to avoid.
The Trust Problem: What if an IRA is Left to a Trust?
This is where estate planning and tax law collide. Often, a person’s Will or Trust says, “all my assets go to my trust.” But an IRA *cannot* just be “dumped” into a trust.
If a trust is the beneficiary, it must be a “see-through” trust to even qualify for the 10-Year Rule. If it’s not, the 5-Year Rule applies. But the SECURE Act created a disaster for the most common type of IRA trust, the “Conduit Trust.” These trusts were designed to *force* RMDs out to the beneficiary, “stretching” them. Now, with the 10-Year Rule, a “Conduit Trust” may force the *entire IRA* to be paid out in Year 10 to a beneficiary who is not ready for it.
If you are planning your *own* estate, naming a “SECURE Act-compliant” Accumulation Trust may be a far better strategy for asset protection. If you have *inherited* an IRA in a trust, you must contact an attorney immediately to interpret the trust and determine the tax consequences.
NY-Specific Traps: How IRAs Affect NY Estate Tax
Your IRA is not just an income tax problem. It is also an *estate tax* problem.
A $1M IRA is 100% included in your estate for *both* federal and New York estate tax purposes. In New York, we have a $6.94M estate tax exemption. Many New Yorkers in Long Island or Brooklyn have a $2M home and $3M in savings. They are safe. But add in their $2.5M IRA, and their estate is now $7.5M. They just fell off the New York “Cliff Tax.” Their estate will owe over $700,000 in *state estate tax*… and their heirs *still* have to pay income tax on the IRA as they withdraw it. This is a brutal double-taxation.
Why You Need an Expert NY Attorney (Not Just a CPA)
Your CPA or financial advisor is a crucial part of your team. But they have different jobs.
- A Financial Advisor *invests* the money.
- A CPA *reports* the taxes you owe.
- An Estate Planning Attorney *creates the legal strategy* to minimize those taxes and protect the assets.
When you inherit an IRA, you need a legal strategy *first*. You need to title the account correctly. You need to know if you are an EDB. You need to know if you have to take RMDs. You need to analyze if a disclaimer makes sense. This is the work of an expert attorney. As our 900+ positive reviews show, clients are relieved when our firm takes charge and coordinates *with* their CPA and financial advisor.
Conclusion: Your Legacy Is on a 10-Year Clock
Inheriting an IRA in 2025 is a high-stakes, complex event. The SECURE Act’s 10-Year Rule is a “tax time bomb” designed to trip up beneficiaries who are not properly advised. The 50% penalty for a mistake is too high to risk “DIY” planning.
Your first step is to do *nothing*. Do not cash the check. Do not roll the account. Schedule a consultation with our expert team at Morgan Legal Group. We have handled over 1,000 estates and can guide you through this. You can see our Google Business Profile and reviews, and then call us to defuse this bomb and protect your inheritance.
For more information on the SECURE Act and retirement accounts, you can visit the IRS Required Minimum Distribution FAQs.
