Carlos Garcia spent thirty-five years working as a senior engineer at a telecom company in Richardson. He was disciplined about money in the way that first-generation Americans often are — careful, consistent, and deeply aware that no one was coming to save him if he got it wrong. Every year, he maxed out his 401(k). He rolled it into a traditional IRA when he changed jobs. By the time he died in the spring of 2022, at the age of seventy-three, he had built a retirement account worth just over $640,000. He had named his two adult children — Sofia, an elementary school teacher in Frisco, and Miguel, a physical therapist in McKinney — as equal beneficiaries. It was, in the language of estate planning, a clean arrangement. Clear beneficiary designations. No trust complications. Just a lifetime of disciplined saving, passed directly to the children who watched him build it.
Sofia and Miguel's financial advisor walked them through the basics. They had inherited an IRA, he explained. Under the rules that applied to them, they had ten years to take the money out — and as long as they emptied the account by 2032, they were fine. Each of them had inherited roughly $320,000. They decided to leave the accounts largely alone, letting the investments continue to grow, planning to take larger distributions toward the end of the ten-year window when they might need the money more. It seemed reasonable. It seemed, in fact, like exactly the kind of thoughtful planning their father would have approved of.
In January 2025, each of them received a letter from their IRA custodian. The letters were dense with federal tax language, but the message was not difficult to understand: because Carlos had already been taking required minimum distributions from his IRA before he died, his children were not simply subject to the ten-year rule. They were also required to take annual distributions in each of the nine years preceding the final emptying of the account — distributions calculated according to their father's remaining life expectancy at the time of his death. The IRS had waived penalties for those missed annual distributions during 2022, 2023, and 2024, providing relief while it finalized the regulations. That relief period had now ended. Starting in 2025, the distributions were mandatory, the penalties for missing them were real, and Sofia and Miguel had not taken a single dollar.
The tax bill that followed — combined for both siblings, accounting for the catch-up distributions they now needed to take — added more than $80,000 in ordinary income to their household returns in a single year. Sofia, whose teaching salary was modest, found herself pushed into a higher federal bracket than she had ever occupied. Miguel, whose income from his physical therapy practice was already substantial, faced a marginal rate on the inherited distributions that approached thirty-two percent. The money their father had spent thirty-five years building them was being taxed at rates neither of them had planned for — and the planning window they thought they had was far smaller than anyone had told them.
The Death of the Stretch IRA — and Why It Mattered
To understand why the Garcia family's situation unfolded the way it did, you have to understand what was lost in 2019. For most of the history of the individual retirement account, a non-spouse beneficiary who inherited an IRA could do something called stretching the account. Instead of taking the money out quickly, they could spread required minimum distributions across their own life expectancy — sometimes forty or fifty years. A thirty-five-year-old who inherited a $400,000 IRA could take small distributions each year, letting the bulk of the account continue growing tax-deferred, supplementing their income well into retirement. The stretch IRA was not an exotic loophole. It was a standard feature of the tax code, available to anyone whose parent or relative had the discipline to save for retirement and the foresight to name them as a beneficiary.
Congress eliminated the stretch IRA for most beneficiaries through the Setting Every Community Up for Retirement Enhancement Act — the SECURE Act — which took effect on January 1, 2020. The stated rationale was revenue: letting inherited IRAs grow tax-deferred across multiple generations was costing the Treasury too much in deferred income tax. The practical effect, for Texas families like the Garcias, was that a planning strategy worth hundreds of thousands of dollars in tax savings over a lifetime was simply gone. What replaced it was the ten-year rule — and, as Sofia and Miguel discovered, the ten-year rule is significantly more complicated than it sounds.
The Ten-Year Rule Is Not One Rule — It's Two
Here is the part that most financial advisors, and many estate planning attorneys, got wrong in the years immediately following the SECURE Act: the ten-year rule operates differently depending on whether the original account owner had already started taking required minimum distributions before death.
If the original owner died before their required beginning date — the age at which they were legally required to start taking distributions from the account — then the ten-year rule is relatively straightforward. A non-spouse beneficiary must empty the account within ten years. They can take the money in any pattern they choose: all in year one, all in year ten, in equal installments, or in any other sequence. There are no mandatory annual distributions. The only hard requirement is that the account be fully emptied by the end of the tenth year following the year of death.
But if the original owner died on or after their required beginning date — as Carlos Garcia did, at seventy-three, having started RMDs the year he turned seventy-two — the beneficiary must do two things. First, they must take annual minimum distributions in each of years one through nine, calculated using the deceased owner's remaining life expectancy. Second, they must still fully deplete the account by the end of year ten. This is not optional, and beginning in 2025, it is no longer penalty-free to ignore. The IRS issued final regulations in July 2024 confirming that these annual distributions are required, and enforcement began with the 2025 tax year.
The penalty for missing a required minimum distribution is a twenty-five percent excise tax on the amount that should have been distributed. For beneficiaries who inherited in 2020, 2021, or 2022 and did not take annual distributions during the penalty relief period, 2025 is the year the calculation becomes urgent: they must assess what they owe, determine whether the IRS's correction procedures apply to reduce the penalty, and start taking distributions on schedule going forward. Missing 2025 distributions will carry no relief.
Who Still Gets the Stretch — the Eligible Designated Beneficiary Exception
Not everyone is subject to the ten-year rule. The SECURE Act preserved the stretch option for a category of beneficiaries called eligible designated beneficiaries, and understanding whether you or your heirs qualify can significantly change your estate planning calculus.
An eligible designated beneficiary — one who can still use their own life expectancy to stretch inherited IRA distributions — is one of the following: a surviving spouse, a minor child of the account owner (until they reach the age of majority, after which the ten-year rule kicks in), a person who is chronically ill or disabled, or a beneficiary who is no more than ten years younger than the account owner. Adult siblings who are close in age, a life partner, or a family member within that age window may qualify under the last category. But the vast majority of inheriting adult children — like Sofia and Miguel, who were in their forties when Carlos died — are not eligible designated beneficiaries and are fully subject to the ten-year rule with annual RMDs.
The Texas Tax Reality
Texas has no state income tax. This is genuinely good news for inherited IRA recipients, and it is one area where Texans have a structural advantage over heirs in California, New York, or any other state that taxes ordinary income at the state level. But the absence of a state income tax does not reduce the federal burden — and the federal burden on forced inherited IRA distributions can be severe.
Inherited IRA distributions are treated as ordinary income in the year they are received. For a Texas family where both spouses work and already occupy the twenty-two or twenty-four percent federal bracket, adding $30,000 to $60,000 in annual inherited IRA distributions can push a portion of that income into the thirty-two or even thirty-seven percent bracket. Over ten years, the cumulative tax cost of poorly timed distributions — large amounts taken late, in years when income is already high — can be tens of thousands of dollars more than a well-sequenced strategy would have cost.
The math argues for planning, not passivity. A beneficiary who takes equal distributions across all ten years, and who times larger distributions for years with lower income, will almost always pay less in federal tax than one who waits and takes large sums in the final years. And for inheritors who are currently in lower income years — a teacher between jobs, a parent on parental leave, a business owner in a lean year — pulling forward some inherited IRA income to fill lower brackets can create meaningful lifetime tax savings. None of this happens automatically. It happens because someone planned for it.
What Texas Estate Plans Must Address Now
If you have a traditional IRA or 401(k) and you are planning to leave it to your adult children, the rules have changed in ways that may require you to update your approach. Here is what estate planners are recommending for Texas families in 2026:
- Consider Roth conversions during your lifetime. A Roth IRA is not subject to required minimum distributions during the owner's lifetime, and inherited Roth IRAs are still subject to the ten-year rule — but the distributions come out tax-free, not as ordinary income. If you convert traditional IRA balances to a Roth account now, paying the tax at your current rate, you may spare your heirs a much larger tax bill at their rates. Texas's lack of state income tax makes this conversion math particularly favorable.
- Name charities for a portion of your retirement account. Charitable organizations are not subject to income tax on inherited IRA distributions. If part of your estate plan includes charitable giving, naming a charity as a partial beneficiary of your IRA — and leaving other assets to your heirs — can satisfy your charitable intent while steering the most tax-efficient assets to your children.
- Consider a standalone retirement trust. For larger retirement accounts, a specially drafted trust named as the IRA beneficiary can give the trustee discretion over how and when to distribute inherited funds, potentially allowing more strategic tax planning than a direct beneficiary designation. These "see-through" trusts require careful drafting to qualify under IRS rules, but for estates where asset protection or controlled distribution is a priority, they can serve an important function.
- Communicate with your heirs. Sofia and Miguel were not told about the annual distribution requirement. Their advisor was not wrong, exactly — he just gave them an incomplete picture. The single most underrated part of estate planning for retirement accounts is making sure the people who will inherit them understand what they are inheriting and what the rules require. A letter of instruction, a family meeting, or even a conversation with your attorney in which your adult children participate can prevent the kind of expensive surprise the Garcias experienced.
For those already navigating an inherited IRA, our related article on how beneficiary designations control your estate is worth reading alongside this one. The two issues are deeply connected: the form you fill out determines not just who inherits the account, but what rules govern how they must distribute it.
What the One Big Beautiful Bill Changed — and Didn't Change
In mid-2025, Congress passed the One Big Beautiful Bill Act, which made significant changes to the federal estate and gift tax exemption, raising it permanently to $15 million per individual. For most Texas families, who will never approach that threshold, this change is largely beside the point. What the One Big Beautiful Bill did not do is change the inherited IRA rules. The ten-year rule, the annual RMD requirement, the eligible designated beneficiary exception — all of these remain exactly as the SECURE Act and its 2022 successor, SECURE 2.0, established them. The IRS regulations finalized in July 2024 remain in effect. The enforcement that began in 2025 is ongoing.
If you have been waiting to update your retirement account estate plan because of uncertainty about the tax law, that uncertainty has been resolved. The inherited IRA rules are settled. The only question is whether your plan accounts for them.
What the Garcias Did Next
Sofia and Miguel hired an estate planning attorney and a CPA who specialized in retirement account distributions. Over the course of 2025 and 2026, they mapped out the remaining eight years of their ten-year distribution windows, coordinating each year's withdrawal amount against their projected income, identifying lower-income years where they could pull forward larger distributions and stay within a favorable bracket. They could not undo the missed distributions of 2022 through 2024, but the IRS's self-correction procedures reduced their penalties significantly, and they emerged with a plan.
What they could not recover was the time and money spent navigating a problem that their father's estate planning attorney had not addressed. Carlos Garcia's estate plan was technically clean — proper beneficiary designations, no title problems, clear documentation. What it lacked was the one conversation that would have made all the difference: what happens to this money, under current law, when your children inherit it, and what should we do about that now?
A retirement account is not simply a savings vehicle. It is a tax-deferred arrangement between you, the IRS, and whoever inherits it next. The terms of that arrangement changed in 2020, and the enforcement of those terms began in earnest in 2025. Planning for that reality — Roth conversions, coordinated distributions, clear communication with heirs — is not a luxury. For most Texas families with significant retirement savings, it is the difference between a thoughtful inheritance and an expensive surprise.
At WG Law, our estate planning attorneys work with families throughout McKinney, Frisco, Plano, Allen, and the greater DFW area to build estate plans that account for the current inherited IRA rules — not the rules that existed ten years ago. If you have retirement accounts you plan to leave to your children, we should talk before the rules talk to them first. Contact us to schedule a consultation.
This article is for general informational purposes only and does not constitute legal advice. Tax laws and IRS regulations change frequently; individual circumstances vary. Consult a qualified Texas attorney and a CPA for advice specific to your situation.