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Estate and Legacy

The 10-year rule for heirs: Draining inherited IRAs strategically

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How should heirs manage the 10-year rule for inherited IRAs?

The SECURE Act's 10-year rule requires most non-spouse beneficiaries to withdraw all funds from inherited IRAs by the end of the 10th calendar year after the original owner's death. However, the rule is more nuanced than it first appears. The account must be empty by year 10, but there are no required annual distributions in years 1–9 for most beneficiaries. This flexibility creates planning opportunities: a strategic heir can time withdrawals to minimize taxes, coordinate with their other income, and potentially transform a seemingly punitive rule into a manageable plan.

Understanding the 10-year rule's specifics—when withdrawals are required, how to calculate them, what triggers additional taxes, and how to coordinate with other financial goals—is essential for any heir. If you're a retiree planning your legacy, educating your heirs about these rules is one of the most valuable gifts you can give them. If you're an heir, understanding these rules helps you make smart decisions about inherited funds.

Quick definition: The 10-year rule requires non-spouse heirs to fully withdraw inherited IRA funds by December 31 of the 10th calendar year after the original owner's death—no distributions required in years 1–9 for most beneficiaries, but the account must be completely empty by year 10.

Key takeaways​

  • For most non-spouse beneficiaries, there is no required annual distribution in years 1–9; the only requirement is that the account be empty by the end of year 10.
  • A beneficiary can choose any withdrawal strategy: $0 for 9 years then all in year 10, equal amounts each year, or lumpy withdrawals timed to years when the beneficiary has lower income.
  • Beneficiaries who are "eligible designated beneficiaries" (surviving spouses, minor children, disabled or chronically ill individuals) may have different rules allowing them more time or flexibility.
  • The key to minimizing taxes is understanding the heir's tax bracket and income in each year, then coordinating IRA withdrawals to stay in lower brackets.
  • Beginning in 2025, some beneficiaries have an additional required minimum distribution (RMD) obligation, depending on the original owner's status at death.

The mechanics of the 10-year withdrawal​

The SECURE Act's 10-year deadline is stated simply: the inherited IRA must be fully distributed by December 31 of the calendar year that contains the 10th anniversary of the original owner's death.

Example 1: Sarah dies on June 15, 2025, leaving an inherited IRA to her son Mark. The 10th anniversary of Sarah's death is June 15, 2035. Mark must fully withdraw the inherited IRA by December 31, 2035. Mark can withdraw nothing in 2025–2034, then withdraw everything on December 20, 2035, and the requirement is satisfied.

Example 2: Robert dies on December 1, 2024, leaving an IRA to his daughter Jennifer. The 10th anniversary is December 1, 2034. Jennifer must fully withdraw by December 31, 2034. If Jennifer forgets and doesn't withdraw the final $50,000 until January 2, 2035, she has missed the deadline and may owe a 25% penalty tax on the remaining $50,000 (the penalty is technically $12,500).

The deadline is December 31 of year 10, not the anniversary date. This is important for planning.

Required vs. discretionary distributions: A critical distinction​

For most non-spouse beneficiaries, years 1–9 are discretionary—no withdrawal is required. This is different from the original owner's RMDs, which have strict annual requirements. However, there is an important exception:

If the original owner had already begun taking RMDs at the time of death, the beneficiary may be required to continue those RMDs in years 1–9 under the "applicable distribution period" rules. This is complex and depends on whether the original owner was past their RMD start date (age 73 as of the mid-2020s).

Example: Thomas dies at age 78 with a $600,000 IRA. He was already taking RMDs. His son Brandon inherits the IRA. Because Thomas was past his RMD age, Brandon must continue taking RMDs based on Thomas's remaining life expectancy (about 10 years). Brandon must take approximately $60,000 per year in years 1–10, and the account will be roughly depleted over the 10-year period. This is mandatory, not discretionary.

Contrast: Susan dies at age 65 with a $400,000 IRA. She had not yet started taking RMDs. Her daughter Lisa inherits the IRA. Because Susan had not begun RMDs, Lisa is not required to take any distributions in years 1–9. Lisa can defer all withdrawals until year 10, when the entire $400,000 must be withdrawn.

The distinction matters hugely for planning. If you're a retiree, delaying RMDs until the last allowable year (age 73) can mean your heirs inherit an account with no required distributions. If you've already begun RMDs, your heirs' withdrawal timeline is determined by your life expectancy.

Withdrawal options and tax impact​

Real-world withdrawal strategies​

Example 1: Aggressive deferral strategy. Michelle inherits a $250,000 traditional IRA at age 35. She is employed, earns $90,000 per year, and is in the 24% tax bracket. She decides to defer all withdrawals until year 10.

  • Years 1–9: Michelle withdraws $0 from the IRA. The IRA remains invested and grows (assume 7% annual return). By year 10, the IRA grows to approximately $466,000.
  • Year 10: Michelle must withdraw all $466,000. This large withdrawal pushes her income to $556,000 (her salary plus the IRA withdrawal), placing her in the 35% federal tax bracket. Federal tax on the $466,000 is about $163,000.
  • Net inheritance: $303,000 (after $163,000 in federal taxes, plus state taxes).

Example 2: Steady withdrawal strategy. Same scenario: Michelle inherits $250,000 at age 35. She decides to withdraw approximately $25,000 per year for 10 years.

  • Years 1–10: Michelle withdraws $25,000 per year. Assuming 7% growth, the account continues to grow as she withdraws. By year 10, the account is depleted.
  • Annual tax impact: Each $25,000 withdrawal adds to her $90,000 salary for a total of $115,000 taxable income, putting her in the 24% bracket. Federal tax on $25,000 is about $6,000 per year, or $60,000 total over 10 years.
  • Net inheritance: $190,000 (after $60,000 in federal taxes, plus state taxes).

Example 3: Flexible withdrawal strategy. Michelle inherits $250,000 at age 35. She plans strategically to withdraw larger amounts in years when her income is lower.

  • Year 3: Michelle has a job loss and is unemployed. She withdraws $80,000 from the IRA. With $0 other income, the withdrawal is taxed at 12%, resulting in $9,600 in federal tax.
  • Year 5: Michelle is back at her job earning $90,000. She withdraws $20,000 (total income $110,000, tax $6,600).
  • Year 7: Michelle is offered a sabbatical and takes unpaid leave. She withdraws $75,000 (with modest other income, tax around $9,000).
  • Years 1, 2, 4, 6, 8, 9: Michelle defers or takes small amounts to minimize tax.
  • Year 10: The remaining balance is withdrawn.
  • Total federal tax: approximately $45,000 (significantly less than the aggressive deferral strategy).
  • Net inheritance: $205,000+.

The flexible strategy requires foresight and coordination but can save tens of thousands in taxes.

Eligible designated beneficiaries and exceptions​

As mentioned in the previous article, eligible designated beneficiaries (EDBs) can have more favorable treatment:

Surviving spouse: Can treat the inherited IRA as their own, rolling it to a personal IRA and delaying distributions until age 73. This provides maximum flexibility and is the most advantageous inherited IRA treatment.

Minor child: A child under the age of majority (usually 18, or up to 26 depending on state) can stretch distributions until they reach the age of majority, then must deplete within 10 years after that. This gives the child extra time.

Disabled or chronically ill individual: A beneficiary who meets Social Security's disability definition or is chronically ill can stretch distributions over their lifetime instead of 10 years. This is a significant benefit for vulnerable heirs.

Non-more-than-10-years-younger: A beneficiary not more than 10 years younger than the original owner (e.g., a younger sibling, cousin) can stretch over their lifetime.

For non-EDBs (adult children, grandchildren, friends), the 10-year rule is mandatory with no stretching.

Required minimum distributions (RMDs) in years 1–9: The added complexity​

A wrinkle introduced in 2024 (effective 2025) adds further complexity: beginning in 2025, some non-spouse beneficiaries must begin taking annual RMDs in years 1–9, not just a lump sum by year 10.

The rules here are evolving and depend on whether the original owner had begun RMDs at death. If the original owner had NOT begun RMDs (died before age 73), most beneficiaries have no required annual distributions in years 1–9—only the year 10 requirement. If the original owner HAD begun RMDs, the beneficiary must continue RMDs in years 1–9 based on the original owner's remaining life expectancy.

As of 2025, the rules are still being clarified by the IRS, and tax professionals are monitoring for updates. The takeaway: consult a CPA when inheriting an IRA, as the rules are complex and rapidly evolving.

Practical steps for an heir receiving an inherited IRA​

  1. Verify the account name: Ensure the inherited IRA is titled correctly, such as "John Smith FBO (for benefit of) Mary Smith, Beneficiary" or "Mary Smith as Beneficiary of John Smith IRA." The titling matters for correct tax treatment.

  2. Determine your status: Are you a spouse (most favorable), an eligible designated beneficiary (more favorable), or a regular non-spouse beneficiary (10-year rule)? This determines your options.

  3. Understand the original owner's RMD status: Did the original owner have required minimum distributions? This determines whether you must take annual RMDs in years 1–9 or can defer until year 10.

  4. Consult a CPA: Tax planning is essential. A CPA can model withdrawal scenarios and help minimize your tax liability.

  5. Plan your withdrawals: Create a plan that coordinates IRA withdrawals with your other income, considers your life circumstances (job changes, sabbaticals, expected income dips), and minimizes taxes.

  6. Document your plan: Keep records of all withdrawals and the reasoning behind them. This is useful for tax filing and managing the account.

  7. Set a calendar reminder for year 10: The December 31 deadline of year 10 is unforgiving. Set a reminder months in advance to ensure the final withdrawal is completed on time.

Real-world examples​

Example A: James inherits his mother's $800,000 traditional IRA at age 45. James earns $150,000 per year and is in the 32% bracket. He consults his CPA, who models two scenarios:

  • Scenario 1 (defer to year 10): $800,000 inheritance taxed at 32% in one year = $256,000 in federal tax. Net: $544,000.
  • Scenario 2 (spread over 10 years, $80,000/year): Each year's income is $230,000, pushing into the 35% bracket. Total federal tax over 10 years ≈ $280,000. Net: $520,000.

Surprisingly, the lump-sum approach in year 10 is better because James is already in a high bracket—spreading doesn't reduce his marginal rate enough to justify the extra tax years. James decides to defer to year 10.

Example B: Sarah inherits her father's $500,000 Roth IRA at age 52. Because it's a Roth, there is no income tax on withdrawals—inherited Roth distributions are tax-free. Sarah's concern is simply cash flow and whether she needs the funds. She plans to withdraw $50,000 per year for 10 years, using the funds to supplement her income. The tax consequence is zero; the Roth is fully inherited tax-free.

Example C: Marcus inherits his grandfather's $1.2 million traditional IRA at age 25. Marcus is in the 12% bracket (entry-level job, $35,000 income). His CPA recommends strategic, larger withdrawals in years when his income is low:

  • Year 1: Marcus withdraws $300,000. With $35,000 other income, total is $335,000. Marcus's effective tax rate on the withdrawal is about 28% (he's pushed into higher brackets), resulting in ~$84,000 in federal tax.
  • Year 3: Marcus is promoted to a $65,000 salary but plans to leave in year 4 to start a business.
  • Year 4: Marcus's self-employment income is minimal while he ramps up. He withdraws $500,000. Total income is low, tax rate ~18%, tax ≈$90,000.
  • Years 5–10: Marcus is established with his business, earning well. He withdraws smaller amounts ($50,000–$100,000) to fill in the final requirement.
  • Total estimated federal tax: ~$280,000 over 10 years, or an effective rate of about 23%.

By timing withdrawals to align with life circumstances, Marcus minimizes the overall tax burden.

Common mistakes​

Mistake 1: Missing the year 10 deadline. This is catastrophic. If the heir hasn't fully withdrawn by December 31 of year 10, the remaining balance is subject to a 25% penalty tax (reduced to 10% if corrected within two years). Set a calendar reminder months in advance.

Mistake 2: Not understanding whether RMDs are required in years 1–9. If the original owner was past their RMD age, the heir must continue RMDs. Failing to do so triggers a 25% penalty. Consult a CPA to clarify.

Mistake 3: Withdrawing everything in year 10 without tax planning. A $600,000 withdrawal in a single year can push a typical heir into a 35%+ tax bracket, costing $180,000+ in taxes. Spreading withdrawals or timing them strategically can save tens of thousands.

Mistake 4: Failing to retitle the inherited IRA correctly. An inherited IRA must be titled in the heir's name and tracked separately from their own IRA contributions. Improper titling can lead to tax complications or RMD calculation errors.

Mistake 5: Combining inherited IRA with personal IRA. A non-spouse heir cannot roll an inherited IRA into a personal IRA. The accounts must be kept separate. Mixing them violates tax rules.

FAQ​

If I inherit multiple IRAs from the same person, are they combined for the 10-year rule?​

For the 10-year deadline, they are treated separately. However, for RMD calculations, they may be aggregated depending on circumstances. Consult a CPA to ensure correct treatment.

Can I inherit an inherited IRA from a beneficiary (e.g., if my mother inherited an IRA and then died)?​

Yes, but the rules become complex. The timing of the original owner's death, the relationship of the second beneficiary, and state law all matter. This is definitely a scenario requiring professional guidance.

What happens if the inherited IRA has a loss (negative investment returns)?​

The loss applies to the inherited account's value but doesn't reduce your income tax liability. You cannot deduct losses from inherited IRAs on your personal tax return. If the account value drops to $100,000, you must still withdraw the entire $100,000 by year 10.

If I inherit a Roth IRA, does the 10-year rule apply?​

Yes, the 10-year rule applies to inherited Roth IRAs as well. However, because Roth withdrawals are tax-free, there is no income tax consequence. The main concern is ensuring withdrawal by the deadline to avoid penalties.

Can I take a loan from an inherited IRA?​

No. IRAs do not permit loans. You can only withdraw (distribute) funds from an inherited IRA.

What if the original owner dies after their RMD was supposed to be taken?​

If the original owner died in year 3 but hadn't taken that year's RMD, the estate or heir may be responsible for taking that final RMD. This is complex and depends on state law. Discuss with a CPA or estate attorney.

Summary​

The 10-year rule requires non-spouse beneficiaries to fully withdraw inherited IRAs by December 31 of the 10th calendar year after the original owner's death. Although distributions are not required in years 1–9 for most beneficiaries, strategic withdrawal planning can significantly reduce taxes. A heir who withdraws $0 for 9 years and then $500,000 in year 10 might pay $180,000+ in taxes; the same heir who withdraws $50,000 per year might pay $60,000–$100,000, saving $80,000+. The key is understanding your tax bracket, timing withdrawals to years when your income is lower, and consulting a CPA to model scenarios. Eligible designated beneficiaries (spouses, minor children, disabled individuals) have more favorable options, but most adult heirs must adhere to the 10-year deadline and plan accordingly.

Next​

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