Page 1: What Is the SECURE Act and Why Does It Matter?
In 2020, a law called the SECURE Act was passed. This law changed the way people inherit retirement accounts, like IRAs and 401(k)s. When someone dies and leaves one of these accounts to a loved one, that person is called a beneficiary.
Before the SECURE Act, if you inherited a retirement account, you could take small payments over your whole life. This helped keep taxes low. But now, with the SECURE Act, most people must take all the money out within 10 years. This is called the 10-year rule.
Why does this matter? Because when you take money out of a retirement account, you usually have to pay income tax. This means the money you inherit could raise your tax bill — sometimes a lot.
That’s why it’s so important to understand the tax consequences of inheriting retirement accounts under the SECURE Act. In 2025, many people will inherit these types of accounts and need to know how to handle the taxes.
Page 2: Who Must Follow the 10-Year Rule?
Not everyone has to follow the 10-year rule. The law divides people into two groups:
1. Eligible Designated Beneficiaries (EDBs)
These are people who are very close to the person who passed away. They include:
- A spouse
- A minor child (under 21)
- A disabled or seriously ill person
- Someone less than 10 years younger than the person who died
If you are in this group, you might still be able to stretch payments over your life. This can help lower your taxes each year.
2. Non-Eligible Designated Beneficiaries
This group includes adult children, grandchildren, and friends. If you are in this group, you must follow the 10-year rule. That means all the money in the account must be taken out by the end of the 10th year after the person dies.
This could mean paying a lot of tax in a short time. Imagine getting $500,000 and having to take it out over 10 years — that’s $50,000 per year. That amount adds to your regular income and can move you into a higher tax bracket.
So again, the tax consequences of inheriting retirement accounts under the SECURE Act can be serious if you don’t plan wisely.
Page 3: How to Plan and Pay Less in Taxes
If you inherit a retirement account in 2025, don’t panic. There are smart ways to reduce your taxes.
Tip 1: Make a Plan for Withdrawals
You don’t have to take all the money at once. You can take some out each year. This spreads out the income and helps avoid big tax bills. For example, taking $20,000 per year might keep you in a lower tax bracket than taking $100,000 in one year.
Tip 2: Use Roth Accounts Wisely
If you inherit a Roth IRA, you still have to follow the 10-year rule. But the good news is that Roth withdrawals are tax-free. This can save you a lot of money. You still need to take out all the money by year 10, but you won’t owe income tax on it.
Tip 3: Talk to a Financial Advisor
The rules are tricky. A professional can help you follow the law and pay less in taxes. They can show you the best times to take money out and how it affects your other income.
In 2025, it’s more important than ever to understand the tax consequences of inheriting retirement accounts under the SECURE Act. Without a good plan, you could lose a lot of money to taxes.
Final Thoughts
The tax consequences of inheriting retirement accounts under the SECURE Act can be confusing, but learning the rules makes a big difference. Know who you are as a beneficiary, plan your withdrawals, and get help when you need it. That way, you can keep more of what your loved one left you.
