When Must an IRA Be Completely Distributed?

An Individual Retirement Arrangement, or IRA, is a savings tool that offers significant tax advantages. These accounts, including Traditional, SEP, and SIMPLE IRAs, allow investments to grow on a tax-deferred basis, meaning taxes are not paid on the investment gains each year. This tax deferral is a primary benefit, but it is not indefinite, as federal regulations establish specific timelines for when the money must be withdrawn.

These distribution rules are mandatory requirements that differ depending on whether the original account owner is still alive or has passed away. For the owner, the rules ensure the government eventually receives tax revenue from the deferred growth. After the owner’s death, a separate set of rules dictates how beneficiaries must handle the inherited funds, ensuring the tax-advantaged status does not continue for generations.

Distribution Rules for the Original IRA Owner

The core principle for the original owner of a traditional IRA is the Required Minimum Distribution, or RMD. An RMD is a mandated amount that the account owner must withdraw annually from their tax-deferred retirement accounts. The purpose of this rule is to prevent individuals from using their IRAs to accumulate wealth indefinitely without ever paying taxes on the growth. The withdrawals are treated as taxable income in the year they are taken.

The timeline for these mandatory withdrawals is determined by the owner’s age. Under the SECURE 2.0 Act, an individual must begin taking RMDs by their Required Beginning Date (RBD). For individuals born between 1951 and 1959, the age to start RMDs is 73. For those born in 1960 or later, the age trigger will increase to 75.

The first RMD must be taken by April 1 of the year following the year the owner turns the trigger age. All subsequent annual RMDs must be completed by December 31 of each year. Delaying the first RMD until the April 1 deadline of the following year results in taking two distributions in that single tax year. This can have significant tax implications by pushing the individual into a higher income tax bracket.

A significant exception to these lifetime distribution rules applies to Roth IRAs. The original owner of a Roth IRA is not required to take any distributions during their lifetime. This allows the funds to continue growing tax-free for the owner’s entire life. The mandatory distribution rules only come into effect after the original owner has passed away and the account is transferred to a beneficiary.

Distribution Rules for IRA Beneficiaries

When an IRA owner dies, the rules for distributing the remaining funds become more complex and depend on who inherits the account. The SECURE Act of 2019 changed these rules for most beneficiaries, establishing the “10-year rule.” This rule mandates that for most non-spouse beneficiaries, the entire balance of the inherited IRA must be fully distributed by December 31 of the 10th year following the year of the original owner’s death.

This 10-year requirement applies to “designated beneficiaries,” which includes most adult children, grandchildren, or other relatives. The application of this rule depends on when the original owner died. If the owner died before their own Required Beginning Date (RBD), the beneficiary can take distributions in any amount during the 10-year window, as long as the account is empty by the deadline.

However, if the owner died on or after their RBD, the beneficiary must not only empty the account within 10 years but also take annual RMDs for years one through nine. Due to widespread confusion over this requirement, the IRS has waived penalties for missed RMDs for 2021 through 2024. For those affected, this relief means the annual RMD requirement begins in 2025.

Surviving Spouses

Surviving spouses who inherit an IRA are granted the most flexibility and are not immediately bound by the 10-year rule. A spousal beneficiary has several options. The first is to treat the inherited IRA as their own by rolling the assets into their own new or existing IRA. Once this is done, the surviving spouse becomes the new owner, and RMDs are based on their own age.

Another option is to transfer the assets into a specially designated inherited IRA and remain a beneficiary, which can allow the spouse to delay distributions until the deceased spouse would have reached RMD age. A third option, introduced in 2024, allows a surviving spouse to elect to be treated as the deceased spouse for RMD purposes. This lets the survivor delay RMDs until the deceased would have been required to take them and use a more favorable life expectancy table for calculations.

Minor Children of the Owner

Minor children of the original account owner are classified as “Eligible Designated Beneficiaries” (EDBs), which provides a temporary exception to the 10-year rule. An EDB who is a minor can take distributions from the inherited IRA based on their own single life expectancy. This allows the distributions to be “stretched” over a longer period, minimizing the annual tax impact.

This special treatment is temporary. Once the child reaches the age of majority, which federal regulations define as age 21 for this purpose, the 10-year rule is triggered. The beneficiary must then withdraw the entire remaining balance of the inherited IRA by the end of the 10th year after they turned 21.

Disabled or Chronically Ill Individuals & Individuals Not More Than 10 Years Younger

The SECURE Act also created EDB status for beneficiaries who are disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner. These individuals are exempt from the 10-year rule and can take distributions over their own life expectancy, a provision often called the “stretch” IRA. This allows for smaller annual withdrawals compared to the 10-year rule.

To qualify as disabled or chronically ill for this purpose, specific legal and medical criteria must be met, and documentation may need to be provided to the plan administrator. The ability to stretch distributions results in a lower annual tax burden and allows the inherited funds to last longer, acknowledging the unique financial circumstances these individuals may face.

Penalties for Failure to Distribute

Failing to take a Required Minimum Distribution by the deadline results in a financial penalty from the Internal Revenue Service. The consequence for not withdrawing the correct amount is a federal excise tax on the shortfall. This penalty is designed to enforce compliance with the distribution rules.

The SECURE 2.0 Act reduced the severity of this penalty. Previously, the excise tax was 50% of the amount that should have been withdrawn but was not. The law lowered this rate to 25% for most situations.

The law provides a further incentive for prompt correction. If the account owner withdraws the required amount and files the necessary paperwork within a “correction window,” the penalty is reduced from 25% to 10%. This window is generally two years from the end of the year the RMD was missed.

To correct the failure and request a penalty reduction or waiver, the individual must file IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.” On this form, the taxpayer reports the shortfall and can request a waiver by providing a reasonable cause for the error. The SECURE 2.0 Act also established a statute of limitations for the IRS to assess these penalties, which is three years if Form 5329 is filed and six years if it is not.