Navigating Inherited IRA Rules—What You Need to Know for Tax Planning

An inherited individual retirement account (IRA) can provide significant financial advantages and opportunities to those lucky enough to receive one. But it comes with rules that require close attention and important decision-making.

The 10-year rule calls for certain inherited IRA beneficiaries to deplete their IRA accounts by the end of the 10th year after the original account holder’s death. The previous “stretch” IRA, which allowed beneficiaries to withdraw money from these accounts over a longer period of time, no longer applies.

Some beneficiaries may have to take required minimum distributions (RMDs) while others may not.

So if you’ve got just a few years left to empty your inherited IRA, it’s time to plan your withdrawals so that you stay in compliance with the rule, manage your corresponding tax obligations, and avoid penalties for either taking out too little or missing the deadline completely.

Key Takeaways

• The SECURE Act’s 10-year rule requires that certain inherited IRA accounts be depleted within 10 years.
• Beneficiaries of accounts whose original holders passed away in 2020 or later and who had begun taking RMDs must take RMDs based on their life expectancy through year nine.
• Beneficiaries not required to take RMDs can withdraw funds according to their own 10-year schedule.
• You can always withdraw more than your RMD.
• The 10-year rule does not apply to spouses, minor children, disabled or chronically ill beneficiaries, or individuals more than ten years younger than the decedent.

The 10-Year Rule

Rules for inherited IRAs were established by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

The act significantly changed how withdrawals from inherited retirement accounts are handled.

Certain beneficiaries must deplete their accounts by the end of the 10th year after the year in which the original account holder died. Some of those people must take RMDs based on their life expectancy for the first nine years.

Of course, you can take larger annual withdrawals or a lump sum distribution.

Whether or not you have to take RMDs depends on:

• When the account holder died
• If the original account owner died before or after their required RMD start date
• The beneficiary’s relationship to the account holder (spouse or minor child)
• Whether the beneficiary is permanently disabled, chronically ill, or not more than 10 years younger than the account holder

According to Katherine Fox, CFP, CAP, and founder of Sunnybranch Wealth, “Under the 10-year rule, not all beneficiaries will need to take an RMD every year. Beneficiaries who inherit [an account] from an account owner who had to take RMDs before death will need to continue taking RMDs each year.”

“Beneficiaries who inherit from an account holder who was not yet subject to RMDs (as of 2025, someone less than age 73) will not be required to take a distribution each year, ” said Fox.

In fact, they don’t have to take yearly withdrawals at all. They can take them whenever they wish, just as long as the account is empty by the end of the 10th year.

Exceptions

While the 10-year rule applies to most beneficiaries, there are exceptions. For example, spouses who inherit IRAs can treat the account as their own and continue making contributions or defer distributions until they reach the age for RMDs.

Minor children, permanently disabled or chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the decedent are also exempt from this rule.

“This group composes ‘eligible designated beneficiaries,’ who are able to stretch their IRA distributions over their single life expectancy rather than fully emptying an inherited IRA account within 10 years after the account holder’s death,” Fox explained.

Important

The 10-year account depletion rule applies to anyone who inherited an IRA from an account holder who died in 2020 or later. If the account holder died before starting RMDs, you don’t have to take RMDs. If they started withdrawals and you are not an eligible designated beneficiary, you must take RMDs annually.

What to Do As the 10-Year Deadline Approaches

As of 2025, individuals who inherited IRAs when the SECURE Act took effect have five years left to empty their accounts.

As such, it’s essential to evaluate how much money you have left in your account, plan what you’ll do to empty it by the end of year 10, and manage the amount you withdraw for tax purposes.

Having to liquidate an account that’s been growing tax deferred for so long can be hard. But taking out small amounts annually (instead of a single big amount at the end) can simplify your task and still keep money working for you in the tax-advantaged account.

It also means you’ll face smaller tax bites over time instead of one big one after year 10. And you can reinvest your distributions immediately to keep your inheritance working to grow your wealth.

You might also want to consider current tax laws and potential changes that could increase tax rates.

For example, the lower tax rates that resulted from the Tax Cuts and Jobs Act of 2017 expire at the end of 2025, unless Congress acts to extend them. Withdrawing more money now so that you possibly pay less in taxes could make sense.

“If beneficiaries realize they are approaching the 10-year deadline but haven’t fully liquidated the account, the best thing they can do is start taking withdrawals. Ideally, these withdrawals would be spread over multiple tax years to avoid realizing the full amount of your inherited IRA as taxable income in a single year,” Fox recommended.

If you’re required to take RMDs but are concerned about having too much money left in your account by the deadline, just withdraw larger amounts than the RMD calls for.

Remember, RMDs are the minimum amount of money that you must withdraw. You can withdraw any amount above that if you prefer.

Lump Sum vs. Periodic Withdrawals

When deciding between a lump sum distribution and taking money out periodically, beneficiaries should weigh the tax implications.

A lump sum can push you into a higher tax bracket, as the entire amount will be taxed as ordinary income in the year it is taken. Taking withdrawals over several years can allow for a more manageable annual tax bill.

If you have to take RMDs, note that you’ll owe a 25% penalty on any portion of that amount that you fail to withdraw. If resolved within two years, the penalty can be reduced by 10%. It also can be waived depending on the reason why the RMD wasn’t taken.

In addition to the tax implications, beneficiaries should consider their financial needs. If they require immediate cash or want to invest the funds elsewhere, a lump sum may be the right choice.

If they prefer a steady income or wish to minimize taxes, taking distributions gradually over time may be the better option.

Whatever you choose, just be sure to deplete your account by the 10-year deadline.

The Bottom Line

The 10-year rule for inherited IRAs requires that certain beneficiaries empty their accounts by the end of the tenth year after the original account holder’s death.

Before your deadline looms, create a plan and start taking the necessary steps. Don’t hesitate to consult a financial planner or advisor who can help you comply with the rule and avoid costly mistakes.