IRS Modifications to the 10 Year-Rule for Inherited IRAs

The IRS has modified the 10-year distribution rule for inherited IRAs starting in 2025. Before 2020, IRA owners could leave their accounts to their kids or grandkids, and heirs could stretch RMDs over their lifetime. In December of 2019, the SECURE Act imposed a new requirement that inherited IRAs would have to be depleted by the end of the 10th year of the original account owner’s date of death. There is now a new rule forcing inherited IRA owners to take an RMD every year within those ten years.

Eligible designated beneficiaries are exempt from this 10-year rule. This includes surviving spouses, minor children (until age 21), chronically ill or disabled individuals, and individuals who are not more than ten years younger than the decedent. Stretch IRAs are still allowed for this group of people and individuals who inherited IRAs before 2020. A surviving spouse can take the inherited IRA as his or her own.

A non-eligible designated beneficiary would include most non-spouses over ten years younger than the original account owner and aren’t minor children. These individuals are subject to a 10-year rule, meaning the entire inherited IRA has to be depleted within ten years of the original account owner’s date of death. Starting in 2025, particular non-eligible designated beneficiaries must take RMDs annually within that ten-year time frame. Whereas in the prior ruling you could wait until year ten to deplete the account. This new RMD requirement depends on whether the original IRA owner passed before or after his or her RMD beginning date.

If the original account owner passed before their RMD beginning date, then beneficiaries do not need to take annual payments. The account still needs to be fully withdrawn at the end of the ten years. Annual payouts are required if the original account owner passed on or after the RMD beginning date. If this is the case, beneficiaries must begin those RMDs the year after the original IRA owner passed. This means RMDs are paid to the beneficiary in years 1-9, with the remaining account value fully depleted by year 10. In this situation, RMDs are based on his or her life expectancy. The younger the beneficiary, the smaller the annual RMD amount. The beneficiary can always withdraw a more significant amount from the IRA to help with that tax liability at the end of year ten.

If you inherited an IRA where the original account owner was subject to RMDs, you will not be penalized if you didn’t take payments in 2021-2024. Of course, this refers to IRAs that were inherited after 2019. For example, suppose you inherited an IRA in 2023, and the original account owner was taking RMDs. In that case, the beneficiary must take only nine years of RMDs, starting with the first payout in 2025 and the last payout in 2033. Beneficiaries of Roth IRAs are also subject to the 10-year rule. However, inherited Roth IRAs are not required to take RMDs. They are also not taxed on distributions.

This is a very important rule change that inherited IRA account owners must be aware of. Missing an RMD can result in an excise tax until the amount that should have been withdrawn is taken. Working with your financial advisor and/or CPA is recommended to ensure you avoid any potential tax consequences. You don’t want to pay more in taxes than needed.