Inheriting an IRA? What Beneficiaries Need to Know  

Summary:

• The 10-year rule replaced the stretch IRA: Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA must fully distribute all assets from the account by December 31 of the 10th year following the owner’s death.
• Annual RMDs depend on the original owner’s age: If the deceased owner had already reached their required beginning date for distributions, the beneficiary must take annual Required Minimum Distributions (RMDs) during years 1 through 9, or face tax penalties of up to 25%.
• Exemptions and tax planning are critical: Certain “eligible designated beneficiaries” (such as spouses, minor children, and disabled individuals) are exempt from the 10-year rule, while those subject to it should strategically time withdrawals to prevent being pushed into a higher tax bracket.

If you inherit an IRA from someone other than a spouse, the rules for how and when you need to withdraw that money have changed significantly under the SECURE Act. The rules were not clarified fully until the IRS issued final regulations in 2024. If you aren’t sure where you stand, you are not alone; this is one of the most misunderstood areas of estate and retirement taxation we see.  

What is the inherited IRA 10-year rule?  

Before 2020, a non-spouse beneficiary could often stretch withdrawals from an inherited IRA over their own lifetime, sometimes for decades. This was known as a stretch IRA, allowing younger beneficiaries, such as grandchildren, to keep money growing tax-deferred for an exceedingly long time. 

The SECURE Act eliminated this option for most beneficiaries. Now, if you inherit an IRA, including a Roth IRA, from someone who died after 2019, you generally must fully distribute the account by December 31 of the 10th year following the year of their death.  

There’s no requirement to spread withdrawals evenly. There is flexibility as to how much to take out and when within the 10-year window, as long as the account is empty by the deadline. However, flexibility is somewhat limited. If there is no designated beneficiary, special rules apply that could require the IRA to be fully distributed within five years after death.   

When are annual RMDs required under the inherited IRA 10-year rule?   

The required minimum distribution (RMD) is calculated based on the age of the original owner at the time of death. The 10-year rule applies if there is a designated beneficiary, unless one of the exemptions below applies.  

• If the original owner had not yet reached their required beginning date, RMDs are not required. You can spread withdrawals however you choose, including waiting until year 10 to take everything, as long as the account is fully distributed by the deadline. 
• If the original owner died after their required beginning date, annual RMDs are required in years 1-9, with the balance being fully distributed at the end of year 10.  

Missing the required annual distribution carries a penalty of 25% of the amount you should have withdrawn, reduced to 10% if corrected in a timely manner. Given how easy it is to misunderstand which scenario applies to you, this is not a rule to guess at.   

Who is exempt from the 10-year rule?  

Five eligible designated beneficiary categories  

Not everyone is subject to the 10-year rule. The IRS calls certain beneficiaries eligible designated beneficiaries, and they can stretch distributions over their own life expectancy instead of following the 10-year timeline. Eligible designated beneficiaries include: 

• Surviving spouses, who have the most flexibility of any beneficiary and can choose from several options, including treating the inherited IRA as their own.  
• Minor children of the original account owner, until they reach the age of majority, at which point the 10-year rule begins to apply to the remaining balance.  
• Beneficiaries who are chronically ill, as defined by IRS criteria.  
• Beneficiaries who are disabled, as defined by IRS criteria. 
• Beneficiaries who are not more than 10 years younger than the original account owner, which can include certain siblings or other beneficiaries close in age to the decedent.  

How to choose an inherited IRA withdrawal strategy and manage your tax bracket  

For beneficiaries with flexibility in how they spread withdrawals, the decision is not just about compliance; it’s also about tax planning. Taking a large lump sum in a single year, particularly in year 10, can push you into a much higher tax bracket than if distributions are spread more evenly over several years. A withdrawal large enough to move you from a lower bracket into a much higher one, for example, could mean paying meaningfully more in tax on the same dollars than if distributions are made gradually. Spreading withdrawals more evenly across the available years, or staggering them based on your other income each year, can help you stay in a lower bracket overall. This kind of planning also benefits from looking at your full financial picture in the year of withdrawal.  

Do you have losses elsewhere that could offset some or all the income, or charitable giving plans that could provide an offsetting deduction?  Also remember that a higher income could affect other deductions, like medical and charitable contributions, and increase your Medicare premiums. Timing a withdrawal within your broader tax planning strategy often makes the difference between minimizing your tax liability and taking on more than necessary. 

Talk with your advisor before you touch an inherited IRA  

The biggest mistake we see is a beneficiary withdrawing funds from an inherited IRA before understanding their options. Once you take a distribution, you generally cannot undo it, and the money becomes part of your taxable income for the year, whether or not that was the most tax-efficient choice available to you. The rules are complicated and unique to your specific tax and financial situation. It is not a one-size-fits-all decision, and getting the sequencing right can affect how much of that inheritance you actually keep. If you have recently inherited an IRA, or expect to, talk with your CPA before taking any action, or contact us using the form below.