Inherited IRA 10-Year Rule Example and Guidelines

The inherited IRA 10-year rule can be a bit confusing, but it's actually quite straightforward once you understand it. You can inherit an IRA from a spouse or non-spouse, but the rules for each are slightly different.

For a non-spouse beneficiary, the 10-year rule applies, meaning you must take required minimum distributions (RMDs) from the inherited IRA within 10 years of the original account owner's death. This rule is in place to ensure the inherited assets are distributed within a reasonable timeframe.

If the original account owner was your spouse, you have more flexibility with an inherited IRA. You can choose to take RMDs based on your own life expectancy or the original account owner's life expectancy.

Inherited IRA rules can be complex, but understanding the basics can help you navigate the process. The SECURE Act of 2019 made significant changes to the rules affecting beneficiaries, including the introduction of the 10-year rule.

Under the 10-year rule, most nonspouse beneficiaries must deplete the inherited account by December 31 of the year containing the 10th anniversary of the account owner's death. This means that beneficiaries have a decade to distribute the inherited assets, but they must do so within that timeframe.

The type of IRA inherited also affects the distribution rules. If you inherit a traditional IRA, you may be able to take distributions over the life expectancy of the beneficiary, but this option is limited to beneficiaries who are not more than 10 years younger than the deceased. If you inherit a Roth IRA, you can take distributions at any time, but you'll need to pay taxes on the earnings if you take a lump sum distribution.

Here are the main withdrawal options for non-spousal beneficiaries:

It's essential to understand the tax implications of inheriting an IRA. The tax treatment depends on the type of IRA, the beneficiary, and the withdrawal method. Consult with a tax advisor or CPA to determine the best course of action for your specific situation.

The SECURE Act made significant changes to the rules on how qualified plan beneficiaries distribute their inherited assets. One major change is that most nonspouse beneficiaries can no longer "stretch" out distributions and taxation over their life expectancy.

Prior to the SECURE Act, nonspouse beneficiaries could take distributions based on their own life expectancy, but now they must deplete the inherited account by December 31 of the year containing the 10th anniversary of the account owner's death, commonly referred to as the 10-year rule.

The SECURE Act identifies three groups of beneficiaries: eligible designated beneficiaries, noneligible designated beneficiaries, and nonperson beneficiaries.

If you inherit a traditional IRA from someone other than your spouse, your withdrawal options depend on the decedent's age at death. If the person was under 72 years old when they died, you can open an inherited IRA using the life expectancy method, open an inherited IRA using the 10-year method, or take a lump sum distribution.

You can open an inherited IRA using the life expectancy method to stretch out the distributions and taxation over your life expectancy. However, this option is only available to eligible designated beneficiaries, which include minor children of the deceased account holder, chronically ill or disabled individuals, and individuals who are not more than 10 years younger than the account owner.

If the deceased was 72 years or older, your withdrawal options are limited to opening an inherited IRA using the life expectancy method or taking a lump sum distribution.

Here are the key withdrawal options for traditional IRAs inherited from a non-spouse:

To be considered a non-spouse eligible designated beneficiary, you must be one of the following:

The 10-year rule has its exceptions, and it's essential to understand who is exempt from this rule. Eligible designated beneficiaries, including the account owner's spouse, disabled or chronically ill individuals, minor children of the deceased account owner, and individuals who are not more than 10 years younger than the account owner, are not subject to the 10-year rule.

These beneficiaries can elect to take distributions over their full life expectancy, giving them more flexibility when it comes to managing their inherited retirement account. For example, the beneficiary of an account owner who died before the RBD could let the inherited account grow for 10 years and then take one large distribution in the tenth year.

Eligible designated beneficiaries who are minor children of the deceased account owner have a special scenario to consider. They can start taking life expectancy payments in the year following the year of death, but once they reach the age of 21, they become subject to the 10-year rule and must distribute the remaining assets within the next 10 years.

Here's a summary of the 10-year rule exceptions:

These exceptions offer more flexibility and options for beneficiaries, allowing them to manage their inherited retirement account in a way that suits their needs.

The IRS requires beneficiaries to take annual required minimum distributions (RMDs) from inherited IRAs. If the account owner had not started taking RMDs, the beneficiary is not required to take annual distributions under the 10-year rule.

A 25 percent penalty tax is levied on beneficiaries who fail to take an RMD on time. However, the IRS will not enforce the excess accumulation penalty tax for certain designated beneficiaries who did not take their life expectancy payments in 2021, 2022, or 2023.

For traditional IRAs, the beneficiary must continue taking RMDs annually in years one through nine after the death, before clearing out whatever's left by the end of year 10. This is sometimes referred to as the "at least as rapidly rule".

The 10-year rule applies to both traditional and Roth IRAs. If you don't make these mandatory annual withdrawals on time, the IRS can levy a penalty amounting to 25 percent of what you were supposed to take out.

Here are the key tax implications of the 10-year rule:

Beneficiaries should discuss their specific tax situation with a tax professional to determine the best strategy for their inherited IRA.

Eligible designated beneficiaries, which include the account owner's spouse, disabled or chronically ill individuals, minor children of the deceased account owner, and individuals who are not more than 10 years younger than the account owner, are subject to the 10-year rule. This rule requires them to deplete the inherited account by December 31 of the year containing the 10th anniversary of the account owner's death.

Non-spouse beneficiaries who inherit a traditional IRA from someone under age 72 can open an inherited IRA using the life expectancy method, the 10-year method, or take a lump sum distribution. If the deceased was 72 years of age or over, their withdrawal options are limited to opening an inherited IRA using the life expectancy method or taking a lump sum distribution.

The 10-year rule applies to non-spouse beneficiaries of account owners who died on or after their required beginning date (RBD). These beneficiaries must take life expectancy payments for the first nine years and a total distribution by December 31 of the year containing the 10th anniversary of the account owner's death.

Non-designated beneficiaries, which include entities such as trusts, estates, or charities, are subject to the 5-year rule and must distribute the inherited assets within five years if the original account owner died before their RBD.

The tax treatment of inherited IRAs depends on the type of IRA owned by the deceased and the type of beneficiary and withdrawal method selected. Beneficiaries should consult with their tax advisor or CPA to understand the specific tax implications of their inheritance.

Here are the key withdrawal options for non-spouse beneficiaries of traditional IRAs:

And here are the key withdrawal options for non-spouse beneficiaries of Roth IRAs:

You can inherit your spouse's Roth IRA, but there are specific rules to follow. If you're the sole beneficiary, you can transfer ownership of the IRA to yourself.

You can open an inherited Roth IRA using the life expectancy method, where RMDs will be mandatory. This means you'll have to take distributions from the account, but you can postpone them until a certain age.

The age you'll use is the later of two options: when your spouse would have turned 72, or the end of the year following their death. This gives you some flexibility in planning your distributions.

Alternatively, you can use the 10-year method, where the money will be available at any time until the end of the tenth year after your spouse's death. At that point, all the money must be distributed, but you won't incur the 10% early withdrawal penalty if the five-year holding period has been met.

A lump-sum distribution is also an option, but this means all assets will be distributed to you immediately.

Hope's situation is an example of how the 10-year rule can be enforced.

The proposed regulations require Hope to take the first RMD from the inherited IRA on or before December 31, 2022.

However, IRS Notice 2023-54 allows her to wait until 2024 to take the first RMD, which is a delayed effective date.

By not receiving a distribution in 2022, Hope lessened the distribution she'll need to take in 2031 to satisfy the 10-year rule.

The RMD amount is calculated using Table I in IRS Pub. 590-B, which is based on the beneficiary's life expectancy.

Hope's life expectancy in 2022, the year following her mother's death, was 22.0 years, corresponding to age 66 in the life expectancy column of Table I.

In 2023, her life expectancy decreased to 21.0 years, resulting in a lower RMD amount of $4,953.