What Are the New Rules for Inherited IRA Distributions?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 fundamentally altered the rules for inheriting an Individual Retirement Account (IRA). For many beneficiaries, this legislation replaced the long-standing practice of “stretching” distributions over a lifetime with a more accelerated timeline. Subsequent regulations from the Internal Revenue Service (IRS) have continued to shape these new requirements. Understanding this framework is important for managing an inherited account and its tax implications in compliance with federal law.

The 10-Year Rule for Most Non-Spouse Beneficiaries

The SECURE Act established the “10-year rule” as the default for most non-spouse individuals who inherit an IRA from someone who passed away after December 31, 2019. This rule mandates that the entire balance of the inherited IRA must be fully distributed by the end of the tenth calendar year following the year of the original account owner’s death. This rule applies to individuals classified as “designated beneficiaries,” which is a person named on the IRA’s beneficiary form.

The 10-year clock starts on January 1 of the year after the original owner’s death and ends on December 31 of the tenth year. A point of confusion has been whether annual withdrawals are required during the 10-year period, as the answer depends on the age of the original IRA owner when they died.

If the original IRA owner died before their Required Beginning Date (RBD), the beneficiary is not obligated to take any distributions during years one through nine. The RBD is the date an account owner must begin taking their own Required Minimum Distributions (RMDs), which is age 73 for individuals who had not yet turned 72 by the end of 2022. For these beneficiaries, the only requirement is that the entire account balance must be withdrawn by the deadline in the tenth year.

The situation changes if the original owner passed away on or after their RBD. In this scenario, the beneficiary must take annual RMDs for years one through nine, in addition to emptying the account by the end of the tenth year. These yearly payments are based on the beneficiary’s own life expectancy.

This annual distribution requirement caused widespread confusion, so the IRS waived penalties for missed RMDs for 2021 through 2024. However, enforcement of this rule is set to begin in 2025. This means that beneficiaries who inherited an IRA between 2020 and 2023 from someone who had already started RMDs must begin taking their annual distributions in 2025 to avoid penalties.

Exceptions for Eligible Designated Beneficiaries

While the 10-year rule is the new standard, the SECURE Act created exceptions for a group known as Eligible Designated Beneficiaries (EDBs). These individuals are exempt from the 10-year timeline and can instead take distributions over their own life expectancy, a method often called a “stretch IRA.” This option allows the funds to remain in the tax-advantaged account for a longer period.

To qualify as an EDB, a beneficiary must fall into one of the following categories:

• Minor Children of the Account Owner: A biological or adopted child of the IRA owner who has not yet reached the age of 21. These beneficiaries can take RMDs based on their own life expectancy until they turn 21, at which point the 10-year rule is triggered.
• Disabled Individuals: A beneficiary who is considered disabled under the strict definition in the Internal Revenue Code. This requires being unable to engage in any substantial gainful activity due to a medically determinable physical or mental impairment that is expected to result in death or be of long-continued duration.
• Chronically Ill Individuals: A beneficiary certified by a licensed health care practitioner as being unable to perform at least two activities of daily living for at least 90 days, or who requires substantial supervision due to severe cognitive impairment.
• Individuals Not More Than 10 Years Younger Than the Decedent: This category provides an exception for a beneficiary, such as a sibling or a partner who is not a spouse, who is not more than 10 years younger than the original account owner.

Special Distribution Options for Surviving Spouses

A surviving spouse who inherits an IRA is an Eligible Designated Beneficiary but is granted more flexibility than any other beneficiary type. The choice made can have long-term consequences for when distributions must begin and how the funds are taxed.

Spousal Rollover

A common choice is a spousal rollover, which allows the surviving spouse to move the assets from the inherited IRA directly into their own new or existing IRA. Once rolled over, the funds are treated as the surviving spouse’s own money. RMDs will be calculated based on the surviving spouse’s age and are not required to begin until the spouse reaches their own Required Beginning Date.

Inherited IRA

Alternatively, a surviving spouse can choose to remain a beneficiary by establishing an inherited IRA. This approach allows the spouse to take distributions over their own single life expectancy. A strategic advantage of this option is that if the deceased spouse was younger, the surviving spouse can delay taking any RMDs until the year the deceased spouse would have reached the age for starting their own RMDs.

Rules for Estates and Other Non-Person Beneficiaries

When an IRA owner does not name a person as a beneficiary, or names their own estate, these “non-designated beneficiaries” follow different rules that predate the SECURE Act. The specific rule that applies depends on whether the original account owner died before or after their Required Beginning Date (RBD).

Death Before RBD

If the owner passed away before their RBD, the account is subject to the “5-year rule.” This rule requires the entire IRA balance to be distributed by the end of the fifth calendar year following the year of death. No annual distributions are required; the full amount just needs to be withdrawn by the deadline.

Death On or After RBD

If the account owner died on or after their RBD, the non-designated beneficiary must take distributions based on the deceased owner’s remaining single life expectancy. These distributions must begin in the year after the owner’s death and continue annually until the account is depleted.

Establishing and Taking Distributions from an Inherited IRA

Once a beneficiary determines which distribution rule applies, they must contact the financial institution, or custodian, that holds the IRA. The custodian will require documents to process a beneficiary claim, most notably a certified copy of the death certificate and their own specific claim forms.

A necessary step in this process is the proper titling of the new account. A beneficiary cannot simply move the money into a standard IRA in their own name, unless they are a spouse executing a rollover. The account must be retitled as an inherited IRA, which looks something like: “John Smith IRA (Deceased January 15, 2025) for the benefit of Jane Smith, Beneficiary.” This titling preserves the tax-advantaged status of the account.

To move the funds, the beneficiary should request a direct trustee-to-trustee transfer from the deceased’s IRA to the newly established inherited IRA. This prevents the money from being paid out directly to the beneficiary, which could be a taxable distribution. Once the inherited IRA is funded, the beneficiary can begin requesting withdrawals according to the applicable rules, making sure to consider tax withholding on each distribution.