Inheriting an IRA: The Ten-Year Rule and What It Means for Taxes
Most non-spouse beneficiaries must empty an inherited IRA within ten years, and many must also take annual distributions along the way. Every dollar from a traditional IRA is ordinary income, so the pace of withdrawals is the whole game.
Inheriting an IRA can feel like a windfall. Before making plans, the beneficiary needs to understand that the tax rules for an inherited account are different from those for any other inheritance, and that a misstep means either a surprise tax bill or a missed opportunity.
Traditional or Roth
Every withdrawal from an inherited traditional IRA is ordinary income to the beneficiary in the year received, added on top of the beneficiary's wages and other income. Distributions from an inherited Roth IRA are tax free if the account had been open for at least five years when the owner died; if not, the earnings portion can be taxable until the five years run, though contributions always come out first and tax free.1 Either way, there is no 10 percent early distribution penalty on withdrawals from an inherited account, whatever the beneficiary's age.2
The ten year rule
For owners who died after 2019, most non spouse beneficiaries must withdraw the entire account by December 31 of the tenth year after the year of death.3 The final regulations issued in 2024 added the piece many beneficiaries missed: if the owner had already reached the age at which his own distributions were required, the beneficiary must also take annual distributions in years one through nine, based on the beneficiary's life expectancy, and then empty the account in year ten.4 If the owner died before his required beginning date, no annual distributions are required and the beneficiary may take the money at any pace, so long as the account is empty by the end of year ten.
The exceptions
Eligible designated beneficiaries may still stretch distributions over their own life expectancy: a surviving spouse, the owner's minor child until age 21, a disabled or chronically ill beneficiary, and anyone not more than ten years younger than the owner.5 A surviving spouse has the further option of rolling the account into her own IRA and treating it as hers, which defers distributions until her own required beginning date.6
Smart moves for a beneficiary
- Plan the pace. Ten years of equal withdrawals usually beats one large withdrawal in year ten, which can push the beneficiary into the top bracket. A beneficiary who expects a low income year, a sabbatical or retirement inside the window should take more then.
- Watch the state. Some states tax IRA distributions in full, some exempt part of retirement income, and some have no income tax. A move during the ten years can change the answer.
- Coordinate with the trustee if a trust is the beneficiary. A trust that qualifies as a see through trust takes the beneficiaries' status; one that does not may face a five year payout.
- Do not miss the annual distributions. The 25 percent excise tax on a missed required distribution applies to inherited accounts too.7
For the owner who is still planning
An owner who expects to leave a large traditional IRA to children in their peak earning years should consider Roth conversions during his own lifetime, especially in low income years, so that the children inherit an account that pays out tax free over the ten years. Beneficiary designations should be reviewed after every birth, death, marriage and divorce, because the designation on file, not the will, controls who inherits the account.
Inherited IRAs come with their own rules. Know the category of beneficiary, know whether annual distributions are required, plan the pace, and bring the tax advisor into the conversation in the year of death rather than the year the account must be emptied.
Notes
- I.R.C. sections 408(d)(1) and 408A(d)(2). ↩
- I.R.C. section 72(t)(2)(A)(ii). ↩
- I.R.C. section 401(a)(9)(H), added by the SECURE Act, Pub. L. 116-94, Div. O, section 401 (Dec. 20, 2019). ↩
- Treas. Reg. section 1.401(a)(9)-5(d)(1)(ii), T.D. 10001 (July 19, 2024). The Service waived the excise tax for missed annual distributions in 2021 through 2024 in Notice 2024-35; the requirement applies from 2025. ↩
- I.R.C. section 401(a)(9)(E)(ii); Treas. Reg. section 1.401(a)(9)-4(e). A minor child's ten year period begins at 21. ↩
- I.R.C. section 408(d)(3)(C)(ii). ↩
- I.R.C. section 4974(a). ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.