The 10-Year Rule
Under the SECURE Act (effective 2020) and clarified by SECURE 2.0 (2022), most non-spouse beneficiaries of inherited IRAs must withdraw the entire account balance within 10 years of the original owner's death. The clock runs to December 31 of the 10th year following death.
Concrete example: dad dies in 2026 with $500K Traditional IRA. Daughter (age 35) inherits as a non-spouse beneficiary. She has until December 31, 2036 to withdraw the entire balance. Each withdrawal is ordinary income, taxed at her marginal rate.
The strategic question: WHEN to withdraw within the 10-year window. The default 'wait until year 10' strategy concentrates all the income in one year, potentially pushing the beneficiary into the highest tax brackets. Spreading withdrawals across the 10 years smooths the tax impact.
Updated guidance under SECURE 2.0: if the original owner had already started RMDs (was 73+ at death), the beneficiary must take annual RMDs during years 1-9, with the remainder by year 10. If the owner died before starting RMDs (under 73), no annual RMDs are required during years 1-9 — the beneficiary just needs to empty the account by end of year 10.
The IRS waived missed-RMD penalties for inherited IRAs through 2024 due to the complexity of these rules. Penalties are expected to apply normally starting 2025 onward.
Eligible Designated Beneficiaries (Stretch Still Applies)
Five categories of beneficiaries are exempt from the 10-year rule and can still 'stretch' withdrawals over their lifetime:
1. Surviving spouses: can roll inherited IRA into their own IRA (most flexible option), or treat as inherited IRA. As own IRA, normal RMD rules apply at owner's age 73. As inherited IRA, special spousal rules apply.
2. Minor children of the deceased (under age 21): can stretch until age 21, then 10-year rule kicks in. So a 10-year-old beneficiary has until they turn 31 (21 + 10 years) to fully empty the account. This is rare in practice but valuable for those it applies to.
3. Disabled or chronically ill beneficiaries: can stretch over their lifetime. Must meet specific IRS criteria for disability or chronic illness (Section 7702B definitions).
4. Beneficiaries less than 10 years younger than the deceased: can stretch over their own lifetime. Common scenario: sibling of similar age inheriting from a sibling.
5. Certain trusts (See-through trusts that meet specific requirements): can stretch using the oldest beneficiary's life expectancy. Most simple trusts don't qualify; this requires careful drafting.
Spousal Strategies
Surviving spouse has the most options of any beneficiary. Choosing the right approach can save tens of thousands.
Option 1: Roll inherited IRA into own IRA (spouse rollover). Most flexible. Treat as if the spouse owned it from the start. Normal RMD rules apply when spouse turns 73. No 10-year rule.
Option 2: Keep as inherited IRA. RMDs based on spouse's life expectancy starting at deceased spouse's age 73 (or current year if older). Allows penalty-free withdrawals before age 59½ (no 10% early withdrawal penalty for inherited IRAs).
Strategic choice: if surviving spouse is under 59½ and needs access to the funds, keep as inherited IRA (no 10% penalty). If over 59½ or doesn't need access, roll into own IRA for maximum flexibility and the longest tax-deferred growth.
Spousal example: 50-year-old widow inherits $400K Traditional IRA. If she rolls into her own IRA, withdrawals before 59½ face 10% penalty. If she keeps as inherited IRA, she can withdraw any amount any time penalty-free (just ordinary income tax). Smart move: keep as inherited IRA until 59½, then roll over to own IRA.
Strategy: Spreading Withdrawals Across 10 Years
The default 'do nothing until year 10' approach is almost always suboptimal. Spreading withdrawals can dramatically reduce total tax across the 10-year period.
Concrete example: $1M inherited IRA, beneficiary already in 22% bracket. Withdrawing all $1M in year 10 pushes her into the 35% bracket for the year. Federal tax: roughly $300K+ on that single year's withdrawal. Total tax over 10 years: ~$300K.
Alternative: withdraw $100K/year for 10 years. Each year, she stays in the 24% bracket. Annual tax: ~$24K. Total over 10 years: $240K. Savings: $60K from spreading.
Even better: withdraw more in low-income years and less in high-income years. If she has a sabbatical year planned for year 5, withdraw $200K in year 5 (still in 22-24% bracket due to no other income) and $90K in years where she's earning $200K. Total tax could drop to $200K — saving $100K vs. the year-10 approach.
Strategic insight: the 10-year rule forces a decision but doesn't dictate the schedule. Plan withdrawals to fill specific brackets without spilling into higher brackets each year.
Inherited Roth IRAs
Inherited Roth IRAs follow the same 10-year rule (for non-spouse, non-eligible beneficiaries) but withdrawals are tax-free. This makes the timing question different.
For Roth IRAs, the optimal strategy is usually the OPPOSITE of Traditional: wait until year 10 to maximize tax-free growth. Withdraw $0 for 9 years, take the entire balance in year 10. The full balance grew tax-free during the 10 years, providing maximum benefit.
But: if the beneficiary needs the cash sooner, withdrawing earlier is fine. There's no tax cost to early withdrawal of inherited Roth, just opportunity cost of forgoing further tax-free growth.
Inherited Roth IRA holding period: the 5-year rule for tax-free withdrawals continues from the original owner's first contribution. So if grandfather opened a Roth IRA in 2018, the 5-year clock satisfied as of 2023. Granddaughter inheriting in 2026 doesn't restart the clock — she can withdraw earnings tax-free immediately.
Strategic move: for inheritance planning, prioritize Roth IRA over Traditional IRA. The 10-year rule is much less burdensome for tax-free Roth than for fully taxable Traditional. Pre-death Roth conversions move assets from Traditional (where heirs face the 10-year tax bomb) to Roth (where the 10-year rule is essentially benign).
Trust Beneficiary Complications
If the beneficiary is a trust (not an individual), special rules apply that can dramatically accelerate distribution requirements. Most trusts cause the 5-year rule to apply (faster than the 10-year rule).
See-through trusts: if the trust meets specific IRS requirements (irrevocable at owner's death, all beneficiaries identifiable, qualifies as 'designated beneficiary'), the trust is 'looked through' to the underlying beneficiaries for stretch purposes.
Conduit trusts: distributions from the IRA to the trust must be passed through to the beneficiary. Provides cleaner tax treatment but limits trust's flexibility.
Accumulation trusts: trust can hold IRA distributions, leading to compressed trust tax brackets (37% rate kicks in at $15,200 for trusts vs. $640K+ for individuals). Often a tax disaster unless distributions are passed through.
Practical implication: if you're naming a trust as IRA beneficiary, work with an estate planning attorney to ensure proper drafting. The wrong trust structure can accelerate distributions and dramatically increase tax. Many people who set up trusts decades ago haven't updated them post-SECURE Act and have suboptimal results.