What Are Your IRA Beneficiary Distribution Options?

Inheriting an Individual Retirement Account (IRA) means navigating rules that dictate how you can access the funds. Recent legislative changes, including the SECURE Act of 2019 and the SECURE 2.0 Act of 2022, have altered the requirements for beneficiaries. The options available depend on your specific classification under these federal laws, which determines the path for taking distributions.

Determining Your Beneficiary Category

Your distribution options are dictated by your legal beneficiary category. The SECURE Act established three distinct types of beneficiaries, each with its own set of rules.

An Eligible Designated Beneficiary (EDB) is a specific type of individual who meets one of five precise criteria:

• The surviving spouse of the IRA owner.
• A minor child of the original account owner, who is treated as an EDB only until they reach age 21.
• An individual who is disabled or chronically ill, as defined by the Internal Revenue Code.
• An individual who is not more than 10 years younger than the deceased IRA owner.

A Designated Beneficiary (DB) is any individual who inherits the IRA but does not meet the specific criteria to be an EDB. This is a common category for non-spouse beneficiaries and includes adult children, grandchildren, or other relatives who are more than 10 years younger than the decedent.

The third category is the Non-Designated Beneficiary (NDB). This classification applies when the IRA is left to a non-person entity, such as the decedent’s estate, a charity, or certain types of trusts.

Distribution Rules for Eligible Designated Beneficiaries

Eligible Designated Beneficiaries (EDBs) are afforded the most flexibility in how they manage an inherited IRA. The options depend on the EDB’s relationship to the owner and whether the owner had started taking Required Minimum Distributions (RMDs). A surviving spouse has three primary pathways.

The first is the spousal rollover, where the spouse treats the inherited IRA as their own by moving the assets into their personal IRA. This allows the surviving spouse to consolidate accounts and base future RMDs on their own age, potentially delaying distributions.

Alternatively, a surviving spouse can treat the account as an inherited IRA. Under this choice, they can take distributions over their single life expectancy, a method often called the “stretch IRA.” This can be advantageous if the spouse is younger than 59½ and needs access to the funds, as distributions from an inherited IRA are not subject to the 10% early withdrawal penalty.

The third option for a surviving spouse is to use the 10-year rule. This requires the entire account balance to be withdrawn by December 31 of the 10th year following the original owner’s death.

Non-spouse EDBs, such as a disabled individual, generally have two choices. They can take distributions over their own single life expectancy, similar to the stretch option, or they can follow the 10-year rule. For minor children of the original owner, they follow the life expectancy method until they reach age 21. At that point, the 10-year rule is triggered, requiring the account to be fully distributed by the time they turn 31.

These choices are also influenced by whether the original owner died before or after their Required Beginning Date (RBD). The SECURE 2.0 Act set the RBD age to 73 for individuals who reach age 72 after December 31, 2022.

Distribution Rules for Designated Beneficiaries

For a Designated Beneficiary (DB), an individual who is not a spouse or does not otherwise qualify as an EDB, the rules are less flexible. The vast majority of these beneficiaries, such as adult children, are subject to a strict 10-year rule. This rule mandates that the entire balance of the inherited IRA must be distributed by December 31 of the 10th year following the year of the owner’s death.

For example, if the owner died in 2025, the beneficiary has until December 31, 2035, to withdraw all assets. A point of complexity is whether annual distributions are required during the 10-year period.

If the owner died before their Required Beginning Date (RBD), the beneficiary is not required to take any distributions until the final year of the 10-year window. However, if the original owner died on or after their RBD, proposed IRS regulations suggest the beneficiary must continue taking annual RMDs for years one through nine. These annual payments are based on the beneficiary’s own life expectancy, with the remaining balance being fully distributed in year 10.

Distribution Rules for Non-Designated Beneficiaries

When an IRA is inherited by a Non-Designated Beneficiary (NDB), such as the decedent’s estate or a charity, the distribution rules are rigid. The options are determined by whether the original IRA owner passed away before or after their Required Beginning Date (RBD).

If the account owner’s death occurs before their RBD, the NDB is subject to the 5-year rule. This rule requires the entire IRA to be fully distributed by December 31 of the year containing the fifth anniversary of the owner’s death. No annual distributions are required during this five-year period.

A different rule applies if the owner’s death happens on or after their RBD. In this case, the NDB must take distributions based on what would have been the decedent’s remaining single life expectancy. The distributions must begin in the year following the owner’s death and continue annually until the account is depleted.

Key Actions and Deadlines for Beneficiaries

Upon inheriting an IRA, a beneficiary must take specific steps to claim the assets. The first action is to establish a new, properly titled inherited IRA. The account title must clearly indicate that it is an inherited account, typically formatted as “[Decedent’s Name], Deceased, for the benefit of [Beneficiary’s Name], Beneficiary.” This specific titling is important to prevent an improper commingling of funds.

After establishing the account, the beneficiary may need to formally notify the IRA custodian of their chosen distribution method. The penalty for failing to take an RMD is 25% of the amount that should have been withdrawn, but the SECURE 2.0 Act reduces this to 10% if the beneficiary corrects the shortfall in a timely manner.

A beneficiary also has the option to refuse the inheritance through a qualified disclaimer. This must be done in writing within nine months from the date of the original owner’s death. To be valid, the beneficiary cannot have accepted or used any of the inherited funds prior to making the disclaimer.

If an IRA has multiple beneficiaries, they have until December 31 of the year following the owner’s death to split the account into separate inherited IRAs. This allows each beneficiary to use their own life expectancy for RMD calculations where applicable. For IRAs left to a trust, a September 30 deadline in the year after death is often used to determine the ultimate beneficiaries.