What's the 10-year rule for inherited IRA?

If you are a beneficiary of an IRA, you can inherit the retirement assets without going through a probate process. Usually, you must be a named beneficiary to inherit the retirement assets of a deceased IRA account owner. Depending on your relationship with the deceased IRA account owner, you may be required to take a full distribution by the 10th year or spread distributions over your lifetime.

The 10-year rule for inherited IRA requires designated beneficiaries to take a full distribution by the 10th year following the death of the original account owner. The beneficiary can take distributions of any amount and any frequency during the 10 years, as long as they empty the inherited IRA by the end of the 10 years. The 10-year rule works if the original IRA owner died on December 31, 2019, or later.

IRA Rules for Non-Spouse Beneficiaries

The IRS rules for non-spousal beneficiaries changed with the enactment of the SECURE Act in 2019. Non-spouse beneficiaries may include adult children above 18, grandchildren, friends, and qualifying trusts.

Before the SECURE Act became law, any person who inherited an IRA could be allowed to spread distributions over their lifetime. However, this changed when the act became law, and only eligible designated beneficiaries like spouses and disabled or chronically-ill beneficiaries can spread distributions over their lifetime.

Under the SECURE Act, IRA owners who died after December 31, 2019, and had named someone else other than an eligible designated beneficiary as IRA beneficiary, these beneficiaries must withdraw the entire balance of the inherited IRA within 10-years following the account owner’s death.

If the inherited IRA is a traditional IRA, beneficiaries are required to pay federal income taxes and any applicable state taxes on any distributions taken during the 10-year period. However, for Roth IRAs, beneficiaries won’t pay any taxes on the distributions as it is a qualified distribution.

When Does the 10-Year Rule Start and End?

There are different arguments on when the 10-year rule starts and ends. The revised version of Publication 590-B provides that the 10-year period for inherited IRAs starts on the date of the IRA owner’s death, and ends on December 31 of the 10th year after the account owner’s death.

For example, if the original IRA account owner died on October 1, 2020, and the beneficiary is a daughter or son, it means the beneficiary must take the full distribution within 10-years after the account owner’s death. In this case, the 10-year period starts counting on October 1, 2020 and ends on December 31, 2030.

The beneficiary can take lump-sum distributions or take smaller distributions over the 10 years as long as she empties the inherited IRA by December 31 of the account owner's 10th anniversary. The full distribution must occur by December 31 even if the original account owner died in January, March, or any month of the year.

Five-year rule for Inherited IRAs

If the original account owner died before January 1, 2020, and he/she had not started taking the required minimum distributions, the beneficiary may choose to spread distributions over a five-year period following the account owner’s death. The five-year rule requires that beneficiaries must take a full distribution from the account by the end of the fifth year of the original account owner's death. The beneficiary has the freedom to decide how much to withdraw and at what frequency as long as they empty the inherited IRA by Dec 31 of the year containing the fifth anniversary.

Exemptions to the 10-year rule

Most 401(k) beneficiaries are subject to the 10-year rule for inherited IRAs, except for eligible designated beneficiaries. Beneficiaries who qualify as eligible designated beneficiaries are exempt from the 10-year rule, and have an option of spreading distributions over their lifetime.

Beneficiaries that are exempted from the 10-year rule may include:

Spouse

Spouses of the deceased IRA owner are not required to empty the account in 10 years. Rather, they have more options with the inherited IRA, and they can decide to rollover to their own IRA, spread distributions over their lifetime, or transfer the inherited assets to an inherited IRA.

Minor child

If the deceased IRA owner named a child who is below age 18 as a beneficiary, the child is exempted from the 10-year rule. However, when the child attains age 18, the 10-year rule kicks in, and he/she must take a full distribution by the 10th year after they attain the age of majority.

Disabled beneficiary

If the IRA account owner named a disabled individual as a beneficiary, the 10-year rule does not apply. The beneficiary can choose to stretch distributions over their lifetime. However, when they die, the 10-year rule takes effect, and the inherited IRA must be emptied by the tenth year of the beneficiary’s death.

Chronically ill beneficiary

Chronically ill beneficiaries are not required to take the full distribution within 10 years after the account owner’s death. Instead, they are allowed to stretch distributions over their lifetime. However, once they die, the 10-rule rule kicks in.

A beneficiary who is not 10 years younger than the deceased

These beneficiaries are often the brothers and sisters of the deceased IRA account owner, and they are not required to take a full distribution within 10 years. Rather, they can stretch distributions over their lifetime.