Navigating the 10-Year Rule for Inherited IRAs: A Comprehensive Guide

With an inherited IRA, you might be required to distribute all of the account’s assets within a given number of years, or you might be required to take annual distributions regardless of your age when you open the account. In certain situations, you might be required to do both. These guidelines are specific to inherited IRAs and do not apply if you have simply transferred another IRA to your own IRA.

This advice also applies in cases where the IRA account holder passed away after 2019 and the SECURE Act’s regulations are applicable. Additional details are available in our Inherited IRA Brochure, which complies with the Secure Act.

You can read our Inherited IRA Brochure, which covers circumstances before the SECURE Act, to find out about distribution options if the account holder passed away before 2020 and is therefore exempt from the Act’s changes.

Additionally, kindly take note that the options below are only available to those who are listed as beneficiaries on the deceased person’s IRA account. Should you find yourself the beneficiary of an estate, you ought to speak with the executor or trustee of the estate.

Depending on when your spouse passed away, you may be able to inherit a spouse’s Traditional, Rollover, SEP, or SIMPLE IRA. This will depend on when your spouse’s required minimum distributions (RMDs) began. When someone inherits an IRA from a spouse, they typically move the money to their own IRA.

Note: An RMD must be deducted from the account by December 31st of the year the original account holder passed away if they were required to do so but did not in the year of death.

Here are your options if your spouse, the account holder, passed away before the start date of the required minimum distribution (RMD):

Anytime, but withdrawals made prior to the age of 59½ will be subject to a penalty.

By December 31st of the year in which the account holder would have turned 73, distributions must start.

Anytime up to December 31, the tenth year following the year the account holder passed away, after which all assets must be distributed in full.

In the event that your spouse—the account holder—had already reached the age at which they were required to start taking RMDs (73 and above):

Anytime, but withdrawals made prior to the age of 59½ will be subject to a penalty.

As soon as possible after the original account holder’s death, but no later than December 31st of that year, you must start taking an annual RMD over your life expectancy.

Note: An RMD must be deducted from the account by December 31st of the year the original account holder passed away if they did not take one in the year of death.

Inheriting an IRA can be a bittersweet experience. While it offers a financial windfall, it also comes with tax implications and distribution requirements. Understanding the 10-year rule for inherited IRAs is crucial for maximizing your financial benefits and minimizing tax burdens.

This guide will delve into the intricacies of the 10-year rule, exploring its origins, exceptions, and implications for various beneficiary types. We’ll also provide insights on how to navigate this rule effectively and optimize your inherited IRA distribution strategy.

The 10-Year Rule Explained

The 10-year rule, introduced by the SECURE Act of 2019, mandates that most beneficiaries must distribute or withdraw the entire balance of an inherited IRA within 10 years of the original owner’s death. This rule applies to designated beneficiaries, who are individuals or see-through trusts named as beneficiaries on the IRA account.

Exceptions to the 10-Year Rule

While the 10-year rule applies to most designated beneficiaries, certain exceptions exist. These exceptions allow eligible designated beneficiaries to stretch out their distributions over their own lifetimes, potentially reducing their tax burden.

Eligible Designated Beneficiaries

Eligible designated beneficiaries include:

  • Spouses: Surviving spouses can choose to treat the inherited IRA as their own, allowing them to take distributions based on their own life expectancy or roll the funds into their own IRA.
  • Minor Children: Minor children can receive distributions based on their own life expectancy, but once they reach adulthood, the 10-year rule applies.
  • Disabled or Chronically Ill Individuals: Individuals who are disabled or chronically ill can also use their own life expectancy for distributions.
  • Beneficiaries Not More Than 10 Years Younger Than the Original Owner: Beneficiaries who are not more than 10 years younger than the original owner can use their own life expectancy for distributions.

Implications for Different Beneficiary Types

The 10-year rule has varying implications for different beneficiary types:

  • Designated Beneficiaries: Designated beneficiaries who are not eligible for an exception must follow the 10-year rule, meaning they must withdraw the entire IRA balance within 10 years.
  • Eligible Designated Beneficiaries: Eligible designated beneficiaries can stretch out their distributions over their own lifetimes, potentially reducing their tax burden.
  • Non-Designated Beneficiaries: Non-designated beneficiaries, such as charities or estates, must typically withdraw the entire IRA balance within 5 years of the original owner’s death.

Navigating the 10-Year Rule Effectively

To navigate the 10-year rule effectively, consider the following tips:

  • Understand Your Beneficiary Status: Determine whether you are a designated beneficiary or an eligible designated beneficiary to understand your distribution options.
  • Consult a Tax Advisor: Seek guidance from a tax advisor to understand the tax implications of your inherited IRA and develop a distribution strategy that minimizes your tax burden.
  • Consider Your Financial Needs: Evaluate your financial needs and goals to determine the appropriate distribution pace for your inherited IRA.
  • Utilize Available Resources: Leverage online calculators and resources provided by financial institutions to calculate your RMDs and track your distributions.

The 10-year rule for inherited IRAs can be complex, but understanding its nuances and exceptions can help you maximize your financial benefits and minimize tax burdens. By carefully planning your distribution strategy and seeking professional guidance, you can effectively navigate this rule and ensure a secure financial future.

Additional Resources:

  • Vanguard: Inherited IRAs: RMD rules for IRA beneficiaries
  • SmartAsset: How the 10-Year RMD Rules Work for Inherited IRAs

Remember, the 10-year rule is a significant factor in managing inherited IRAs. By understanding its implications and taking proactive steps, you can ensure a smooth and financially advantageous distribution process.

Roth IRA: Spouse inherits

Opening an Inherited IRA is one of your options if you are the spouse of someone who is inheriting a Roth IRA.

Account type:

You move the funds into a new or existing Roth IRA for yourself.

Money is available:

Generally speaking, earnings are taxed at any time up until the age of 59½ and the completion of the five-year holding period.

Other considerations:

  • Only available if the spouse is the sole beneficiary.
  • The same distribution guidelines that would have applied if the Roth IRA had been yours in the first place will apply to you; early withdrawal penalties typically still apply.
  • You may designate your own IRA beneficiary.

Account type:

The assets are moved into your name-held Inherited Roth IRA.

Money is available:

RMDs must be taken, and you may choose to delay distributions until the later of:

  • When the decedent would have attained age 73, or
  • 12/31 of the year following the year of death.

Other considerations:

  • Distributions are spread over the beneficiarys single life expectancy.
  • If there are multiple beneficiaries, distributions will be made according to the life expectancy of the oldest beneficiary unless separate accounts are established by December 31 of the year following the year of death in order to use your own single life expectancy.
  • If the five-year holding period has been fulfilled, distributions may be taken without being taxed; otherwise, only earnings are subject to taxation.
  • You will not incur the 10% early withdrawal penalty.
  • Undistributed assets can continue growing tax-free.
  • You may designate your own beneficiary.

Account type:

The assets are moved into your name-held Inherited Roth IRA.

Money is available:

Anytime up to December 31, the tenth year following the year the account holder passed away, after which all assets must be distributed in full.

Other considerations:

  • During that time, distributions are allowed (as long as the five-year holding period has been fulfilled); otherwise, only earnings are subject to taxation.
  • You will not incur the 10% early withdrawal penalty.
  • Unallocated assets have a ten-year tax-free growth period.
  • You may designate your own beneficiary.

Account type:

None. All assets in the Roth IRA are distributed to you.

Money is available:

Other considerations:

Earnings are taxable if the account is under five years old when the account holder passes away.

Depending on whether you are a designated beneficiary or an eligible designated beneficiary, there are different withdrawal guidelines if you are an individual who inherited an IRA from someone other than your spouse. Additionally, different guidelines apply if the beneficiary is a non-individual, such as an estate, trust, or other entity.

what is the 10 year rule on inherited ira

Eligible Designated Beneficiaries (that are not the spouse) include:

  • Minor children of the original account holder (decedent)
  • Those who are chronically ill
  • Those who are permanently disabled
  • Individuals who are not older than the initial account holder by more than ten years (i e. – a 60-year-old sibling or friend of the account holder who was 69 years old.

If any of the aforementioned conditions apply to you, your distribution requirements can be found below in the section titled “Eligible Designated Beneficiary options (other than a spouse)”.

In the event that the account holder passed away after 2019 and you do not fit the qualifications to be named an Eligible Designated Beneficiary, you will be named a Designated Beneficiary and will need to:

  • By the end of the tenth year following the year the account holder passed away, all assets must be fully distributed.
  • You will also need to continue taking RMDs for the ten years if the account owner met the requirements to begin taking them before they passed away.

Note: An RMD must be deducted from the account by December 31st of the year the original account holder passed away if they were required to do so but did not in the year of death.

Inherited IRA – IRS Change to 10 Year Rule

FAQ

Do inherited IRAs have to be distributed in 10 years?

Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). An RMD may be required in years 1-9 when the decedent had already begun taking RMDs.

What is the IRS guidance on 10-year inherited IRA?

For defined contribution plan participants or IRA owners who die after December 31, 2019, (with a delayed effective date for certain collectively bargained plans), the entire balance of the deceased participant’s account must be distributed within ten years.

How long can money stay in an inherited IRA?

You transfer the assets into an Inherited IRA held in your name. Money is available: At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed.

What is an example of a 10-year inherited IRA?

Once the child reaches the age of 21, she will become subject to the 10-year rule and must distribute the remaining assets within the next 10 years. For example, Tony is a 40-year-old single dad who has named his 10-year-old daughter, Samantha, as the sole beneficiary of his Traditional IRA.

What is the inherited IRA 10 year rule?

The inherited IRA 10-year rule refers to how assets in an IRA are handled when an IRA owner dies and the account is passed on to the named beneficiary. For some beneficiaries, including non-spouses, all the funds must be withdrawn within 10 years of the previous owner’s passing. Spouses who inherit an IRA have other options to consider.

What is the 10 year IRA rule?

The 10-year rule requires that all assets in the inherited IRA must be fully withdrawn by the end of the 10th year following the original IRA owner’s death. (If the death occurred in 2019 or earlier, the 10-year rule was a five-year rule.)

How long do you need to empty an inherited IRA?

You can opt to take all the money as a lump sum, set up required minimum distributions (RMDs) to flow to you over 10 years, or take irregular distributions. That being, said, you usually need to empty an inherited IRA within 10 years. There are exceptions to this rule, which will be explored below.

Can a designated beneficiary take a 10 year IRA distribution?

Designated beneficiaries follow the 10-year rule unless they’re eligible for an exception. Options for distributions vary for eligible designated beneficiaries. Surviving spouses creating an inherited IRA may be able to use the original account holder’s RMD age to begin taking RMDs based on their own life expectancy.

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