Inherited IRA Ten-Year Rule

Before 2020, non-spouse beneficiaries of IRAs could “stretch” distributions over their lifetimes, keeping the account tax-deferred for decades. The SECURE Act 2.0 (effective January 2024) upended that strategy: now most non-spouse heirs must empty an inherited IRA within ten years of the account holder’s death, though they have flexibility on when during those ten years they take the money. This rule fundamentally changed retirement and estate planning for millions of families.

The pre-SECURE landscape: the stretch

For decades, a non-spouse beneficiary (child, grandchild, or unrelated person) who inherited an IRA could spread distributions over their own life expectancy. If a 30-year-old inherited a $1 million IRA, they could take withdrawals over 50+ years, paying income tax only on each year’s distribution while the remainder compounded tax-deferred.

This “stretch IRA” strategy was extraordinarily powerful. A 60-year-old with 30 more years of life expectancy could inherit a $1 million IRA, leave it invested, and eventually pass a much larger account to their own heirs—all while paying tax only on actual distributions. High-net-worth families built entire plans around the stretch.

Congress viewed this as too generous a tax deferral for people who didn’t earn the money, so the SECURE Act (2019) and its successor, SECURE 2.0 (2023), closed the loophole.

The ten-year window: mechanics

If the original IRA owner died in 2024, all beneficiaries must withdraw the entire inherited account balance—both principal and earnings—by December 31, 2034. There’s no flexibility on the deadline; missing it triggers a 25% penalty on the shortfall (reduced from 50% under SECURE 2.0).

Within those ten years, the beneficiary can withdraw the money however and whenever they wish. Take it all in year one. Take it all in year ten. Split it evenly. The IRS doesn’t care, provided the account is empty by the deadline.

This flexibility is the silver lining for many: you’re no longer forced into annual distributions based on life expectancy. A young heir can let the account grow for nine years tax-deferred, then take a lump sum in year ten. An older heir might take it all immediately if they need the money.

“Eligible designated beneficiaries” and annual RMDs

There’s a catch for certain heirs: eligible designated beneficiaries (EDBs) must still take annual required minimum distributions during the ten-year period, in addition to emptying the account by year ten.

EDBs include:

• Spouses (though they can roll the account and treat it as their own, so this is usually moot).
• Minor children of the account owner (until they reach majority, then the ten-year rule applies).
• Disabled or chronically ill beneficiaries.
• Beneficiaries not more than 10 years younger than the deceased.

For non-EDB heirs (typically healthy adult children, grandchildren, or unrelated persons), the ten-year rule applies without annual RMD requirements. They can defer all withdrawals until year ten if they wish.

Roth IRAs and inherited IRAs

The ten-year rule applies to inherited Roth IRAs as well, but with a major tax advantage: distributions are tax-free. If you inherit a $500,000 Roth IRA and withdraw it all in year ten, you owe zero income tax. The same distribution from a traditional IRA would be fully taxable.

For Roth IRAs, the ten-year rule becomes less of a tax burden and more of an account-sequencing issue. Beneficiaries often leave inherited Roths untouched for nine years (growing tax-free), then distribute in year ten, avoiding higher tax brackets from lumpy distributions.

The “gap” and state law complications

The SECURE Act created a peculiar gap: distributions taken between death and the ten-year anniversary are not subject to RMDs (for non-EDB heirs), but the money in the account during those years may still be subject to state income tax or other rules depending on where the beneficiary lives. Some states ignore federal RMD-exemption rules, so beneficiaries should consult a tax professional about their state’s specific stance.

Additionally, some beneficiaries may not realize the deadline exists and could accidentally miss it, triggering penalties. Setting a calendar reminder or working with a tax advisor is essential.

Impact on estate planning

The ten-year rule has reshaped retirement and estate planning. High-net-worth individuals can no longer rely on leaving large IRAs to children who will stretch distributions over 50 years. Instead, planners now recommend:

• Roth conversions: Converting traditional IRAs to Roth IRAs during your lifetime ensures that inherited distributions are tax-free to heirs, softening the blow of the ten-year deadline.
• Charitable giving: Using qualified charitable distributions or bequeathing IRAs to charities (who owe no tax) rather than heirs.
• Conduit accounts: Some beneficiaries use separate “conduit” inherited IRAs to compartmentalize distributions and manage tax brackets more carefully.
• Insurance: Some families use life insurance to offset the tax burden on heirs during the ten-year depletion period.

Exceptions and special cases

Surviving spouses are entirely exempt from the ten-year rule. A spouse can roll an inherited IRA into their own account, treat it as if they owned it all along, and take RMDs as if they were the original owner. No ten-year deadline applies.

Deaths before 2020: The ten-year rule applies only to account holders who died on or after January 1, 2020. If your parent died in 2018, you’re still under the old stretch rules.

Some 401(k)s and employer plans: While the ten-year rule applies to inherited IRAs, some 401(k)s and employer plans have different provisions. Always check your specific plan’s language with the plan administrator.

State inheritance tax considerations

A handful of states impose inheritance tax on bequests to non-spouse beneficiaries. The ten-year rule doesn’t affect inheritance tax liability; it’s still owed even if the IRA is emptied quickly. However, state income tax is affected by the distribution schedule, so beneficiaries in high-tax states should plan distributions strategically to avoid bunching income in a single year.

Planning for inherited IRAs today

If you’re expecting to inherit an IRA or have already inherited one, understand your precise deadline. Ask the custodian or a tax advisor to confirm the death date and calculate the ten-year anniversary explicitly. Mark it on your calendar.

For inherited Roth IRAs, the ten-year rule is less onerous because distributions are tax-free, but you should still plan the withdrawal schedule to manage your own income-sensitive calculations (such as Medicare premiums or Social Security taxation).

If you’re a parent or grandparent planning your own IRA for heirs, consider Roth conversions now, or discuss life insurance strategies with your estate planner. The days of the stretch IRA are gone, but thoughtful planning can still minimize the tax hit on your heirs.

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