Inheriting an IRA from a parent, spouse, or other loved one can be a significant financial event, and the tax rules governing how you must take distributions have changed dramatically in recent years. The SECURE Act of 2019 and its successor, SECURE 2.0, overhauled the required minimum distribution rules for inherited IRAs, eliminating the popular stretch IRA strategy for most beneficiaries and replacing it with a mandatory 10-year distribution window. The IRS finalized its regulations on July 18, 2024, and those rules are now in full effect for distributions in 2025 and beyond.
Understanding how these rules apply to your situation is critical for minimizing the tax hit and preserving as much of the inherited wealth as possible. At Q3 Advisors, we work with clients who have inherited large IRA balances and need a clear strategy for navigating the new rules.
What Changed Under SECURE 2.0 for Inherited IRAs?
Before the SECURE Act took effect in 2020, most non-spouse beneficiaries could stretch required minimum distributions from an inherited IRA over their own life expectancy. This stretch strategy allowed a younger beneficiary to take small annual distributions over 30 or 40 years, keeping the bulk of the account invested and tax-deferred for decades.
The SECURE Act eliminated the stretch for most beneficiaries and imposed a new rule: the inherited IRA must be fully distributed within 10 years of the original owner’s death. SECURE 2.0, enacted in late 2022, clarified important details about how annual RMDs apply within that 10-year window. After several years of proposed guidance and a series of penalty waivers (IRS Notices 2022-53, 2023-54, and 2024-35), the IRS issued final regulations on July 18, 2024. Those final regulations took effect for distribution calendar years beginning in 2025, so beneficiaries who delayed taking annual distributions during the waiver period now face a hard deadline.
Talk With Craig Wear's Team
Craig has helped IRA millionaires save over $1 million each in unnecessary taxes. Find out if a Roth conversion strategy fits your retirement, with no sales pressure and no product pitch.
Who Must Follow the 10-Year Rule?
The 10-year rule applies to most non-spouse beneficiaries who inherited an IRA after December 31, 2019. This includes adult children, grandchildren, siblings, and other individuals who do not qualify for one of the exceptions described below. The rule applies to both traditional and Roth inherited IRAs.
Under the 10-year rule, the entire balance of the inherited IRA must be distributed by December 31 of the year that is 10 years after the original account owner’s death. Importantly, the 10-year clock starts the year after death and was not extended by the 2021–2024 waivers. A beneficiary who inherited from a parent who died in 2020 must still empty the account by December 31, 2030, even though annual RMDs were waived for some of those years. The waivers excused the missed annual distributions; they did not extend the outer deadline. For context on how the original account owner’s own RMD rules worked, see our guide on Roth vs. traditional IRA.
Eligible Designated Beneficiaries: Exceptions to the 10-Year Rule
Certain beneficiaries are classified as Eligible Designated Beneficiaries (EDBs) and are still permitted to stretch distributions over their life expectancy rather than following the 10-year rule. The EDB categories are:
- Surviving spouses: A surviving spouse can roll the inherited IRA into their own IRA, name themselves as the account owner, and use standard RMD rules. Alternatively, they can treat the inherited IRA as their own or use the single life expectancy table for distributions.
- Minor children of the original owner: A minor child (not a grandchild) of the IRA owner can stretch distributions based on life expectancy until they reach the age of majority, which the final regulations set at 21 for this purpose. At that point, the 10-year clock begins.
- Disabled individuals: A beneficiary who is disabled as defined under Section 72(m)(7) of the tax code can use life expectancy distributions.
- Chronically ill individuals: Similar to the disability exception, a chronically ill beneficiary can stretch distributions.
- Beneficiaries not more than 10 years younger than the original owner: A sibling or friend close in age to the original owner may qualify to use life expectancy distributions rather than the 10-year rule.
Annual RMDs Within the 10-Year Window: The Critical Clarification
One of the most confusing aspects of the post-SECURE 2.0 inherited IRA rules involves whether annual RMDs are required within the 10-year window. The final regulations issued in July 2024 settled the question, and the answer depends on whether the original account owner had already begun taking RMDs at the time of their death.
If the original account owner died before their required beginning date (the date by which they were required to start taking RMDs), the non-spouse beneficiary subject to the 10-year rule can take distributions in any amount, in any year, as long as the account is empty by December 31 of year 10. No annual minimum is required. This often makes a single lump-sum distribution in year 10 the wrong choice, but it is a legal one.
If the original account owner died on or after their required beginning date, meaning they had already started taking RMDs, the non-spouse beneficiary subject to the 10-year rule must take annual RMDs in years 1 through 9 (based on the beneficiary’s own single life expectancy) and then distribute whatever remains by the end of year 10. The IRS waived the penalty for missed annual RMDs from 2021 through 2024 (Notices 2022-53, 2023-54, and 2024-35), but those waivers expired, and the final regulations are now in effect. Beneficiaries who skipped distributions during the waiver years do not have to make them up, but they do have to start taking annual RMDs in 2025 and continue through year 9, then empty the account in year 10.
There is also a separate “year of death” rule worth knowing: if the original owner had begun RMDs but died before completing the RMD for the year of death, the beneficiary is responsible for taking that final RMD by the end of the year of death (with limited automatic extensions in the final regs).
Tax Planning Strategies for Inherited IRA Distributions
Because the 10-year rule compresses what was previously a decades-long distribution into a single decade, many beneficiaries face a significant tax burden. A thoughtful distribution strategy can minimize the impact.
- Spread distributions evenly: Taking equal distributions over all 10 years avoids pushing your taxable income into a higher bracket in any single year. This is often the most tax-efficient approach for beneficiaries with stable income.
- Accelerate distributions in low-income years: If you have years within the 10-year window when your income will be lower, such as before Social Security begins or before other retirement income kicks in, front-load your distributions in those years to take advantage of lower tax rates.
- Coordinate with your own income: If you are a working adult who inherits an IRA during peak earning years, your marginal tax rate on those distributions could be 32%, 35%, or higher. Delay distributions to years when your income is lower if the 10-year rule permits it (i.e., if the original owner had not yet started RMDs).
- Review IRMAA implications: Inherited IRA distributions increase your taxable income and can trigger or increase Medicare IRMAA surcharges. If you are already on Medicare or approaching enrollment, factor IRMAA thresholds into your distribution timing. Our guide on how Roth conversions impact Medicare premiums covers those thresholds in detail.
For Original IRA Owners: The 10-Year Rule Strengthens the Case for Roth Conversions
The 10-year rule is the single most important reason for IRA owners with significant pre-tax balances to seriously consider a multi-year Roth conversion strategy during their own lifetime. Three points matter:
- Heirs typically face higher tax rates than the original owner. Most beneficiaries inherit during their peak earning years, when their marginal rate is 32% or higher. A retired parent in the 22% or 24% bracket who converts now is effectively “buying” the tax bill at a lower rate so the heir doesn’t pay it at a higher one.
- The 10-year compression amplifies the bracket problem. A $1.5 million traditional IRA spread over a beneficiary’s lifetime under the old rules might never have pushed them into a higher bracket. The same balance compressed into 10 years almost certainly will.
- Inherited Roth IRAs solve the problem. Roth conversions executed during the owner’s lifetime move assets into a bucket that passes to heirs tax-free (assuming the 5-year holding period is satisfied). The 10-year rule still applies, but distributions are not taxable.
For most clients with substantial pre-tax IRA balances and adult children as beneficiaries, the Roth conversion math changed permanently when the SECURE Act eliminated the stretch. Our overview of Roth conversion services, legacy Roth conversion planning, and multi-year Roth conversion strategy explains how this works as a legacy planning strategy. For more on how RMDs and conversions interact during the owner’s lifetime, see critical insights on Roth conversions and RMDs.
Inherited Roth IRA Rules
Inherited Roth IRAs are also subject to the 10-year rule for most non-spouse beneficiaries, with the same EDB exceptions. However, because qualified Roth IRA distributions are tax-free, the tax planning calculus is different. There is no tax cost to waiting until year 10 to take a lump sum from an inherited Roth IRA, since the distribution is tax-free regardless of timing — assuming the 5-year holding period is satisfied.
The critical question for inherited Roth IRAs is whether the original Roth IRA was held for at least five years before the owner’s death (counting from January 1 of the year of the owner’s first Roth contribution or conversion). If the five-year holding period was met, all distributions from the inherited Roth IRA are completely tax-free, even within the 10-year window. If it was not met, withdrawals of original contributions and conversion principal are still tax-free at any time, but earnings are subject to ordinary income tax until the holding period is completed.
Frequently Asked Questions
What happens if I don’t take required distributions from my inherited IRA?
Failing to take required minimum distributions from an inherited IRA results in a 25% excise tax on the amount that should have been distributed. Under SECURE 2.0, this penalty was reduced from 50% to 25%, and it can be further reduced to 10% if the missed distribution is corrected within a two-year window. The IRS waived penalties for missed annual RMDs from inherited IRAs from 2021 through 2024 (Notices 2022-53, 2023-54, and 2024-35), but those waivers have expired and the final regulations are now in effect for 2025 and beyond.
Can I roll an inherited IRA into my own IRA?
Only surviving spouses can roll an inherited IRA into their own IRA. All other beneficiaries must keep the assets in a properly titled inherited IRA and follow the applicable distribution rules. If a non-spouse beneficiary takes a distribution from an inherited IRA, it cannot be rolled over and is immediately taxable.
Do the 10-year rules apply to 401(k) accounts inherited from a deceased employer plan participant?
Yes. The 10-year rule and EDB exceptions apply to inherited 401(k), 403(b), and other qualified retirement plans as well. However, some employer plans do not permit beneficiaries to take distributions over the full 10-year period and may require a lump sum. If you inherit an employer plan account, rolling it into an inherited IRA typically gives you more distribution flexibility.
Did the 2021–2024 RMD waivers extend the 10-year window?
No. The 10-year clock starts the year after the original owner’s death and was not extended by the IRS penalty waivers. The waivers excused beneficiaries from having to take annual RMDs for years 2021 through 2024 (and from making them up later), but the outer deadline by which the entire account must be distributed remains 10 years from the year of death. A beneficiary who inherited from someone who died in 2020 must empty the account by December 31, 2030, even if they took no distributions during the waiver years.
Are there strategies to reduce income tax on inherited IRA distributions?
Yes. Charitable strategies can be powerful, particularly for beneficiaries who do not need all the inherited funds for living expenses. A charitable remainder trust can receive an inherited IRA distribution and provide income to you over many years, with a portion going to charity at the end. Coordinating distributions with charitable giving via qualified charitable distributions is another tool when applicable. Working with a fiduciary advisor who understands both the tax rules and your overall financial picture is essential for maximizing your outcome.
Work With a CFP Who Understands Inherited IRA Planning
The rules surrounding inherited IRAs are among the most complex in the retirement planning landscape, and the stakes are high. A poorly timed distribution or a misunderstanding of the annual RMD requirements can result in unnecessary taxes and penalties. Q3 Advisors, led by Craig Wear, CFP®, helps both IRA owners planning for legacy and beneficiaries navigating inherited account distributions. We build strategies that minimize taxes across the full distribution window.
Call us at (720) 730-5650 or schedule a consultation to discuss your inherited IRA situation and develop a tax-efficient distribution plan.
