A 70-Year-Old With $1.2 Million in an IRA and $2,600 a Month in Social Security Wants to Leave It All to Her Two Kids. The 10-Year Rule Would Hand the IRS About $280,000. Here’s How Taking $60,000 a Year Herself Keeps $108,000 of That in the Family.

A 70-year-old widow has $1.2 million in a traditional IRA, collects $2,600 a month in Social Security, and owns her house outright. She has not touched the IRA. Her plan is the one most retirees in her position have: live on Social Security, leave the account alone, and let her two kids split it when she is gone.

It is a generous plan, and the IRS likes it even more than her kids will. The money in that IRA has never been taxed. Someone pays income tax on every dollar of it eventually, and the rule that decides who pays, and at what rate, changed in 2020 and again in 2025. Under the current rule her kids would pay about $280,000. If she takes the money out herself, in her own bracket, and hands it to them while she is alive, the family keeps about $108,000 of that.

The rule that decides who pays

Before 2020 a child who inherited an IRA could stretch withdrawals over their own life expectancy, which for a 50-year-old meant 30-plus years of small, lightly taxed distributions. The SECURE Act ended that. A child, a grandchild, a sibling more than ten years younger, anyone who is not a spouse or a minor child or disabled, now has to empty an inherited IRA by the end of the tenth year after the owner’s death.

Final regulations the IRS issued in 2024, in force for 2025 and later, added the part that bites. If the owner had already reached the age where her own required minimum distributions begin, the heirs cannot sit on the account for nine years and take it all in year ten. They have to take a required distribution every year, based on their own life expectancy, and then clear out whatever is left by year ten. Our retiree was born in 1956, so her RMDs start at 73. If she dies any time after that, her kids are on the annual schedule from the first year.

Either way, $1.2 million comes out of that account within a decade of her death, and it lands on top of whatever her kids are earning at the time.

What that looks like on her kids’ returns

Say she lives to 85. Her son and daughter are in their mid-50s by then, both married, both near the top of their careers. Give each household $190,000 of taxable income, which in 2026 terms sits in the 22% bracket, about $21,000 below the line where 24% starts at $211,400 for a joint return.

Each kid inherits $600,000. Spread over ten years, that is $60,000 a year each, before any growth inside the account. The first $21,400 of it is taxed at 22% and the remaining $38,600 at 24%. That is $13,972 of federal tax a year per kid, 23.3 cents on every dollar.

Over ten years, two kids, that is $279,440 to the IRS. If either of them lets the balance build and takes a big piece in year ten, the top of that withdrawal reaches the 32% bracket, which starts at $403,550 on a joint return, and the bill goes up from there. State income tax, in the 41 states that have one, comes on top.

What the same money costs her

Now run it the other way. She starts taking $60,000 a year from the IRA at 70.

Her Social Security is $31,200 a year. With no other income, none of it is taxable and she owes nothing. The withdrawal changes that. The IRS adds half her Social Security to the $60,000, gets $75,600 of what it calls provisional income, and because that is above $34,000, 85% of her benefit, $26,520, becomes taxable. Her adjusted gross income is $86,520.

Against that she gets the 2026 standard deduction of $16,100, the $2,050 addition for being over 65, and most of the new $6,000 senior deduction. That deduction shrinks by 6 cents for every dollar of income above $75,000, so at $86,520 it is $5,309 instead of $6,000. Her deductions total $23,459 and her taxable income is $63,061.

The tax on that is $1,240 on the first $12,400, $4,560 on the next $38,000 at 12%, and $2,785 on the last $12,661 at 22%. Total: $8,585. That is 14.3 cents on each of the $60,000 she took out, against the 23.3 cents her kids would pay.

Twenty years of that, from 70 to 90, empties the $1.2 million at a cost of about $171,700. Her kids would have paid $279,440 for the same dollars. The difference, $107,700, stays in the family.

Three things make the gap real rather than theoretical. She is in the 12% and 22% brackets and her kids are in 22% and 24%. She has $23,459 of deductions that otherwise go unused every year the IRA sits untouched. And from 73 she has to take $45,283 a year anyway, because the IRS sets the withdrawal on a $1.2 million balance at that age, so the choice is really whether the first three years of withdrawals happen or not, and whether the later ones run a little larger than the minimum.

Giving it away without a form

After tax she has about $51,400 a year from the withdrawal. Social Security covers her living costs. She can give each kid $19,000 a year, the 2026 annual exclusion, with no gift tax return and no tax of any kind. Her kids receive it tax free; gifts are never income to the person who gets them. That is $38,000 a year moving to the next generation at her 14.3% rate instead of their 23.3%.

If she wants to give more than $19,000 to either kid in a year, she can. The only consequence is a Form 709 to report it, and the excess counts against her lifetime exemption, which the 2025 tax law set at $15 million per person for 2026. No tax is due unless her lifetime gifts and estate pass that figure.

Grandchildren change the math again. A 529 plan accepts five years of exclusion gifts at once, $95,000 per grandchild, and the money grows and comes out tax free for college.

When leaving it alone is right

There are retirees for whom the account should stay shut. If you expect to need the money yourself for long-term care, the IRA is your safest reserve and a withdrawal only moves tax forward. If your kids are in lower brackets than you are, which happens when a child is retired or between jobs, the inheritance route costs less. And if you want control, a gift is final in a way a beneficiary form is not.

There is also an argument from the account’s growth. With the 10-year Treasury at 4.90%, according to Treasury data for Nov 4, a balance you leave alone compounds untaxed. But compounding does not change the rate the money is taxed at when it finally comes out. It only makes the pile bigger, and a bigger pile taken over ten years pushes your kids further up the brackets, not down. That is the mistake in the default plan: it treats an untaxed account as if it were already the family’s money.

The bottom line

A $1.2 million IRA left to two children under the 10-year rule costs the family about $280,000 in federal tax at the kids’ rates. A 70-year-old on $2,600 a month in Social Security can take $60,000 a year from the same account at 14.3 cents on the dollar, give each child $19,000 with no paperwork, and keep about $108,000 of that tax inside the family. From 73 she has to take $45,283 a year regardless. If you are the one holding the account, the only question is whether the dollars go out at your rate or at your kids’.

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