Name Three Grandchildren in Their 20s Instead of Your Two Kids in Their 50s on a $1 Million IRA and the IRS Collects at 12% Instead of 35%. The 10-Year Clock Runs the Same Either Way

Two families can leave behind the same $1 million traditional IRA, face the same withdrawal deadline, and still send the IRS very different amounts. It all depends on one line on a beneficiary form.

Leave the account to two children in their peak-earning 50s, and every dollar they withdraw can be taxed at 35%. Leave it to three grandchildren in their 20s, and the same dollars can stay inside the 12% bracket. In the example below, that one change keeps $230,000 in the family.

Kids and Grandkids Face the Same 10-Year Deadline

Since the SECURE Act, most non-spouse heirs must empty an inherited IRA by December 31 of the year containing the 10th anniversary of the owner’s death. Per IRS Publication 590-B, an owner who died in 2025 leaves an account that must be fully distributed by December 31, 2035.

That rule covers any designated beneficiary who isn’t an “eligible designated beneficiary.” That short list includes surviving spouses and the owner’s minor children. Adult children and adult grandchildren both fall outside it, so the timer runs the same for each.

Under 26 U.S.C. § 408(d)(1), each withdrawal counts as gross income to whoever takes it. So the heir’s own tax bracket sets the price.

One $1 Million IRA Taxed at 35% Versus 12%

Assumptions: the owner dies in 2026, the account holds $1 million, investment growth is ignored to keep the math clean, each heir withdraws equally over 10 years, and 2026 federal brackets apply the whole time.

Path one: two children. Each inherits $50,000 a year of taxable withdrawals. Picture a composite child who files jointly and already reports $520,000 of household taxable income. For 2026, the 35% bracket for joint filers starts above $512,450, and the 37% rate doesn’t start until $768,700. Each withdrawal raises taxable income to $570,000, so every added dollar is taxed at 35%. This works out to $17,500 per child per year.

Path two: three grandchildren. Each grandchild, ages 24 to 28, inherits about $333,333 and withdraws about $33,333 a year. Each is single and earns $30,000. After the 2026 standard deduction of $16,100, taxable income is $13,900, already past the 10% bracket’s $12,400 ceiling. The withdrawal raises it to $47,233, still under the $50,400 line where 22% begins.

Households led by people under 40 hold just 6.5% of U.S. household net worth. Households led by 55-to-69-year-olds hold 41%, per Federal Reserve data for 2026 Q2. Lower incomes in the younger group are the whole advantage.

Fine Print That Can Cancel the Savings

The kiddie tax. Under 26 U.S.C. § 1(g)(2), the rule can reach a young adult over age 18 who is a full-time student under 24, earns no more than half of their own support, and has a living parent. Inherited IRA withdrawals count as unearned income, so they can be taxed at the parent’s rate. For a 21-year-old college senior, that could bring the 35% right back.

Annual withdrawals. If the owner had already begun mandatory yearly payouts, final regulations that apply beginning in 2025 generally require heirs to take yearly withdrawals in years one through nine as well. A missed one triggers a 25% excise tax on the amount not withdrawn.

Rising paychecks. A grandchild whose taxable income passes $50,400 pays 22% on everything above that line. State taxes also differ, so a grandchild in a no-income-tax state keeps more than a sibling in a high-tax one.

Three Moves That Lock In the Lower Bracket

1. Fix the beneficiary form. The IRA custodian pays whoever is named on the form, whatever the will says. List each grandchild by name and percentage.
2. Build in a disclaimer option. Name your children as primary beneficiaries and your grandchildren as contingent. A child can turn down their share in writing within 9 months under 26 U.S.C. § 2518(b), as long as they haven’t accepted any of its benefits. The money then passes to the grandchildren, and the children make that call with real numbers in hand.
3. Take more early. Grandchildren should take larger withdrawals while their incomes are low, filling the 12% bracket each year before promotions push them higher.

Naming the children still wins when they need the money, earn modest incomes themselves, or have kids who are still full-time students or not ready to handle a six-figure account. Considering those trade-offs is worth doing with a CPA or fiduciary advisor before you sign the form (most estate messes trace back to a outdated beneficiary or an untitled account, which is why we put the full cleanup checklist in a free estate guide).

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