On July 18, 2024, the IRS finalized new rules that change how most beneficiaries inherit retirement accounts like IRAs and 401(k)s. These regulations now require most non-spouse beneficiaries to withdraw all funds within 10 years of the original account holder’s death and, in many cases, take annual Required Minimum Distributions (RMDs) during that period. This guide breaks down exactly what these changes mean for you.
What is the New 10-Year Rule for Inherited IRAs?
The biggest change for inherited retirement accounts is the 10-year rule, established by the SECURE Act and finalized in 2024. This rule mandates that most designated beneficiaries must completely empty the inherited retirement account by the end of the 10th year following the year of the original owner’s death. This is a significant shift from the old “stretch IRA” rules, which allowed many beneficiaries to take distributions over their own lifetimes.
Who is Affected by the New Annual RMD and 10-Year Payout Rule?
These rules apply to beneficiaries who inherited a retirement account in 2020 or later. The most significant impact is on non-spouse beneficiaries such as children, grandchildren, siblings, or other relatives and friends, especially if the original account holder had already started taking their own RMDs.
When Annual Withdrawals Are Required Within the 10 Years
The IRS has clarified a crucial point that caused confusion for years: If the original account owner died after they were required to start taking RMDs (generally age 73), you must take annual RMDs in years one through nine. You then must withdraw the remaining balance by the end of year 10. These annual RMDs are calculated based on your own life expectancy.
When You Can Wait Until the 10th Year
There’s a key exception: If the original account owner died before their required beginning date for RMDs, the beneficiary is not required to take annual distributions. In this scenario, you have the flexibility to withdraw funds on any schedule you choose, as long as the entire account is emptied by the end of the 10th year.
Rules for Spouses and Other “Eligible Designated Beneficiaries”
Not everyone is subject to the 10-year rule. A special category called “Eligible Designated Beneficiaries” can still take distributions over their lifetime. This group includes:
- Surviving Spouses: Spouses have the most flexibility, often choosing to roll the inherited IRA into their own.
- Minor Children: The 10-year clock doesn’t start until they reach the age of majority.
- Disabled or Chronically Ill Individuals
- Beneficiaries Not More Than 10 Years Younger Than the Deceased
How Do These Rules Affect Inherited Roth IRAs?
Inherited Roth IRAs also fall under the 10-year rule for most non-spouse beneficiaries. However, the news is better here. Since withdrawals from a Roth IRA are generally tax-free, you can let the funds grow tax-free for the full 10 years and withdraw the entire balance in the final year without facing a large tax bill.
IRS Penalty Waivers and What You Need to Do in 2025
Recognizing the confusion these new rules caused, the IRS has waived penalties for missed RMDs from inherited accounts for the years 2021 through 2024. However, this grace period is over. Beneficiaries who are required to take annual distributions must begin doing so in 2025 to avoid a steep 25% penalty on the amount that should have been withdrawn. Your 2025 RMD will be calculated based on your life expectancy and does not need to make up for missed withdrawals from prior years.
Strategic Planning for Your Inherited Account
Because withdrawals from traditional IRAs and 401(k)s are taxable, strategic planning is essential. A “balloon distribution” in the final year can push you into a higher tax bracket. It’s crucial to evaluate your financial situation and consider spreading out withdrawals to manage the tax impact. Consulting with a tax professional can help you create an optimal strategy under this complex new guidance.
