Name Three Grandchildren in Their 20s Instead of Two Children in Their 50s on a $1 Million IRA, and the IRS Takes 12% Instead of 35% — The 10-Year Rule Stays the Same

The same $1 million IRA, the same IRS deadline, and a six-figure difference in the tax bill. One choice on a beneficiary form determines who pays more, and a rule affecting younger heirs can make the savings disappear.

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Two families can inherit the same $1 million traditional IRA, confront the same distribution deadline, and still owe the IRS very different amounts. The difference comes down to a single line on a beneficiary form.

Leave the account to two children in their highest-earning 50s, and each withdrawal can be taxed at 35%. Leave it to three grandchildren in their 20s, and the same dollars may stay within the 12% bracket. In the example below, that single change keeps $230,000 in the family.

Children and Grandchildren Share the Same 10-Year Deadline

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

That rule applies to any designated beneficiary who is not an “eligible designated beneficiary.” The limited group that qualifies includes surviving spouses and the owner’s minor children. Adult children and adult grandchildren are both outside that category, so the countdown works the same for each.

Under 26 U.S.C. § 408(d)(1), each withdrawal is counted as gross income to the person who takes it. That means the heir’s own tax bracket determines the cost.

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

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

Scenario one: two children. Each child receives $50,000 a year in taxable withdrawals. Imagine a composite child who files jointly and already reports $520,000 of household taxable income. For 2026, the 35% bracket for joint filers begins above $512,450, and the 37% rate does not start until $768,700. Each withdrawal lifts taxable income to $570,000, so every additional dollar is taxed at 35%. That comes to $17,500 per child each year.

Scenario two: three grandchildren. Each grandchild, ages 24 to 28, inherits about $333,333 and withdraws roughly $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 above the 10% bracket’s $12,400 ceiling. The withdrawal pushes it to $47,233, still below the $50,400 threshold where the 22% rate begins.

Households headed by people under 40 hold just 6.5% of U.S. household net worth. Households headed by people ages 55 to 69 hold 41%, according to Federal Reserve data for 2026 Q2. The younger group’s lower incomes create the entire advantage.

Fine Print That Can Eliminate the Benefit

The kiddie tax. Under 26 U.S.C. § 1(g)(2), the rule can apply to a young adult over 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 put the 35% rate back in play.

Annual withdrawals. If the owner had already started required yearly payouts, final regulations that apply beginning in 2025 generally require heirs to take annual withdrawals in years one through nine as well. Missing one can trigger a 25% excise tax on the amount not withdrawn.

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

Three Steps That Preserve the Lower Bracket

1. Update the beneficiary form. The IRA custodian pays the person named on the form, regardless of what the will says. List each grandchild by name and percentage.
2. Add a disclaimer option. Name your children as primary beneficiaries and your grandchildren as contingent beneficiaries. A child can refuse their share in writing within 9 months under 26 U.S.C. § 2518(b), provided they have not accepted any benefits. The money then passes to the grandchildren, and the children can decide with actual numbers in hand.
3. Withdraw more early. Grandchildren should take larger distributions while their incomes are lower, using up the 12% bracket before promotions move them into a higher one.

Naming the children can still make sense if they need the money, earn modest incomes themselves, or have children who are still full-time students or not ready to manage a six-figure account. Those trade-offs are worth reviewing with a CPA or fiduciary advisor before signing the form, since many estate problems trace back to an outdated beneficiary designation or an untitled account.