Inheriting an IRA can feel like a windfall, and the account may be a significant addition to a family's finances. It also comes with deadlines and tax consequences that surprise many heirs. The central rule for most non-spouse beneficiaries is the 10-year rule, which was shaped by the SECURE Act of 2019 and clarified by final IRS regulations. Understanding it before the first withdrawal can prevent costly mistakes.
What the 10-Year Rule Says
For most beneficiaries who are not the owner's spouse, the inherited account must be fully emptied by the end of the tenth year after the owner's death. Before the SECURE Act, many heirs could stretch withdrawals over their own life expectancy, which allowed tax-deferred growth for decades. The 10-year rule shortened that window for most heirs.
The question that confused advisers for years was whether heirs had to take withdrawals each year within the 10-year period or could wait until the end. The IRS answered in final regulations posted July 18, 2024. Under them, whether annual distributions are required depends on the beneficiary type and on whether the original owner had already started required minimum distributions, known as RMDs.
- Owner had begun RMDs before death. The beneficiary must take annual withdrawals during the 10 years, at least as rapidly as the owner would have, and then empty the account by the end of year 10.
- Owner died before the RMD age. The beneficiary has more flexibility about timing within the 10 years, but the account still must be emptied by the end of that period.
A summary from Voya notes that the final rules apply starting in 2025 and that the IRS provided a grace period so that affected beneficiaries did not face penalties for missed distributions for 2021 through 2024.
Who Is Exempt
Some beneficiaries are called eligible designated beneficiaries, and they are generally not bound by the 10-year rule. They include:
- Surviving spouses
- Minor children of the account owner, until they reach age 21, at which point the 10-year clock starts
- Disabled or chronically ill individuals
- Beneficiaries who are no more than 10 years younger than the deceased
These beneficiaries can usually take distributions over their own life expectancy instead. A surviving spouse also has the option of treating the IRA as their own, which can change the timing of required withdrawals. The definitions have technical conditions, so documentation matters, particularly for disability and chronic illness.
The Tax Side
Inherited traditional IRA withdrawals are generally taxable as ordinary income to the beneficiary, in the year they are taken. That matters because a large account emptied in a single year can push an heir into a much higher tax bracket. Spreading withdrawals across the 10 years may reduce the bracket effect, but the best pattern depends on the heir's income, which can change over a decade.
Here is a hypothetical. An heir inherits a traditional IRA worth $300,000 with no required annual withdrawals. Taking everything in year 10 would add $300,000, plus any growth, to income in a single year. Spreading it evenly over ten years would add about $30,000 a year, plus growth. The tax difference could be considerable, though it depends on the heir's other income and the tax brackets in effect. The example is simplified to show the principle.
Roth IRAs are treated differently. Inherited Roth IRAs are generally subject to the 10-year payout, but qualified withdrawals are generally not taxed. Because the Roth owner is treated as having died before required distributions began, annual withdrawals are generally not required, though the account must be emptied by year 10. Heirs should confirm these details for their situation.
What Heirs Should Do First
- Do not take the money out or roll it into your own IRA. A non-spouse beneficiary generally cannot treat an inherited IRA as their own. The account is usually retitled as an inherited IRA, and funds may move by direct trustee-to-trustee transfer.
- Find the owner's date of birth and RMD status. This determines whether annual withdrawals are required.
- Identify your beneficiary category. It decides whether the 10-year rule applies.
- Check the year of death. Deadlines run from that date, and a missed required withdrawal can bring a penalty. Congress and the IRS have adjusted penalty rules, so current guidance should be checked.
- Update your own plan. The inherited balance, taxes and your own retirement goals should be considered together.
For Account Owners
Owners can reduce confusion by keeping beneficiary designations current, since designations on the account generally control over a will. They may also consider how an account would be taxed in heirs' hands, and whether Roth conversions fit their plans. A trust named as beneficiary adds complexity and calls for professional advice.
The rules in this area have changed several times in recent years, so the details are best confirmed with the IRS or a qualified tax professional before taking action.
This article is for informational and educational purposes only and should not be considered personalized financial, investment, or tax advice.
