What Is the Beneficiary IRA 10-Year Rule?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 altered the rules for inheriting an Individual Retirement Account (IRA). The law introduced the 10-year rule, which requires most non-spouse beneficiaries to withdraw all assets from an inherited IRA within a decade of the original owner’s death. This provision replaced the previous “stretch IRA” rules that allowed beneficiaries to take distributions over their lifetimes.

Determining Applicability of the Rule

The SECURE Act created distinct categories of beneficiaries, which determines the rules they must follow. A group known as Eligible Designated Beneficiaries (EDBs) is exempt from the 10-year rule and can instead take distributions over their own life expectancy. This classification includes five specific types of individuals:

• The surviving spouse of the account owner
• Minor children of the owner
• Individuals who are disabled or chronically ill
• Any beneficiary who is not more than 10 years younger than the decedent

A special provision applies to minor children who qualify as EDBs. They can take life expectancy payments, but the 10-year clock starts once they reach the age of 21. Surviving spouses have the most flexibility, with the option to treat the inherited IRA as their own, which allows them to delay distributions until they reach the age for their own Required Minimum Distributions (RMDs).

The 10-year rule primarily targets Designated Beneficiaries. This category includes most non-spouse individuals who inherit an IRA but do not meet the criteria to be an EDB, such as adult children or grandchildren. For these individuals, the 10-year liquidation requirement is mandatory.

A third category, Non-Designated Beneficiaries, exists for entities that are not individuals, such as estates or charities. These beneficiaries often face more restrictive timelines, like a 5-year rule, particularly if the original IRA owner had not yet begun taking RMDs.

Required Withdrawals Under the 10-Year Rule

For a beneficiary subject to the 10-year rule, the inherited IRA must be completely empty by December 31st of the 10th year following the year the original owner died. If an account owner passed away in 2025, the beneficiary has until December 31, 2035, to liquidate the account.

Whether annual withdrawals are required during this 10-year period depends on the original account owner’s age at death. The deciding factor is if the owner died before or after their Required Beginning Date (RBD), which is the date they had to start taking their own RMDs.

If the original owner died before their RBD, the beneficiary is not required to take annual RMDs during years one through nine. This allows the beneficiary to take distributions periodically, in a lump sum, or wait until the final year to withdraw the entire balance.

If the original owner died on or after their RBD, the beneficiary must take annual RMDs for years one through nine, in addition to emptying the account by the deadline. These annual RMDs are calculated based on the beneficiary’s life expectancy. Due to confusion around this requirement, the IRS has waived penalties on missed annual distributions for 2024 and prior years.

Tax Consequences of Withdrawals

The timing of withdrawals from an inherited IRA has tax implications. When funds are distributed from a traditional IRA, the amount is considered taxable income at the beneficiary’s ordinary income tax rate for that year.

This makes the timing of distributions a part of financial planning. A beneficiary in a high tax bracket might spread withdrawals over several years to avoid being pushed into a higher bracket. Another beneficiary might delay larger distributions until a year with lower anticipated income to minimize the tax impact.

For those who inherit a Roth IRA, the consequences are more favorable. Qualified distributions from an inherited Roth IRA are received free of federal income tax. The 10-year rule still applies, but the withdrawals do not add to the beneficiary’s taxable income.

For a distribution from an inherited Roth IRA to be qualified, the original account must have been established for at least five years before any withdrawal is made. This holding period is measured from when the original owner first opened any Roth IRA.

Penalties for Non-Compliance

Failing to follow the withdrawal requirements for an inherited IRA results in a financial penalty. The IRS imposes a 25% excise tax on the amount that should have been withdrawn but was not. This applies to any missed annual RMD or any balance remaining after the 10-year deadline.

The penalty can be reduced from 25% to 10% if the beneficiary withdraws the required amount within a specific correction window. This window generally ends on the last day of the second year following the year the RMD was missed.

A beneficiary can also request a full penalty waiver from the IRS. This is done by filing IRS Form 5329 and attaching a letter explaining that the failure to withdraw was due to a reasonable error and that steps are being taken to fix it.