Essential Inherited IRA Rules: Beyond 10 Years

If you receive an inherited individual retirement account (IRA), you typically must deplete the entire plan within 10 years. But while some people delay withdrawals for as long as possible to enjoy tax-free growth, others have to take required minimum distributions (RMDs) each year.

The IRS has clear guidelines for who can wait until the 10th year to take distributions and who must make annual withdrawals. Here’s what you need to know.

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Why ‘10-year rule’ isn’t always simple

The SECURE Act set the requirement that an inherited IRA must be completely emptied after 10 years in most cases, but there is some nuance about how frequently you must withdraw.

The key question centers around how old the original holder was before passing away. If the original owner reached the age where they had to take out required minimum distributions, then the recipient of the inherited IRA must also withdraw some funds from the account each year.

If the original IRA owner did not reach the age where they had to make required minimum distributions, you could wait until the last day of the 10th year before withdrawing the entire amount. This scenario gives you more flexibility, but if you have a traditional IRA, you may still want to withdraw some money each year to spread out the tax impact.

There are some exceptions to the rule, including for surviving spouses who inherit an IRA.

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When annual inherited-IRA RMDs are required

RMDs are the minimum amounts of money someone must withdraw from a retirement account once they hit a certain age — typically, age 73. The IRS’ Single Life Expectancy Table determines IRA RMDs, even for inherited plans, but they can vary depending on circumstances. Generally, RMDs are required on inherited IRAs if the owner had already started taking RMDs before they died.

Regardless of whether RMDs apply, the plan typically needs to be depleted by the end of the 10th year after the owner’s death. Roth IRA owners don’t need to take RMDs during their lifetimes, but someone who inherits a Roth IRA may need to take RMDs.

Exceptions, taxes and the cost of getting the rule wrong

There are exceptions for surviving spouses, minor children of the deceased owner, beneficiaries with a disability or who are chronically ill beneficiaries, and people who are no more than 10 years younger.

RMDs may still be required, but beneficiaries with this exception may be able to stretch the distributions across their lifetime. RMDs will be based on the beneficiary’s age, which can greatly reduce the required distribution. A surviving spouse can roll the inherited IRA into their own IRA to avoid the 10-year RMDs in general. However, some of these same spouses may have to take out RMDs from their own plans, depending on their age.

It’s important to stay on top of RMDs, and that’s not just because it allows you to spread the tax bill over multiple years instead of being hit with a big expense. If you miss a required RMD, it can trigger an excise tax of up to 25%. This excise tax can be reduced to 10% if you correct the error within two years.

You should review the original IRA owner’s year of death, beneficiary status and whether the owner had reached their required beginning date for RMDs before choosing a withdrawal strategy.

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