Inherited IRAs: New rules for beneficiaries

Key takeaways

• The SECURE Act of 2019 fundamentally changed inherited IRA rules for most non-spouse beneficiaries. Congress eliminated the stretch IRA strategy primarily to accelerate tax collection on inherited retirement assets, which the Joint Committee on Taxation estimated would raise $15.7 billion in federal revenue over a decade, per the Congressional Research Service.
• Most non-spouse beneficiaries must now empty an inherited IRA within 10 years. The entire account balance must be distributed by December 31 of the 10th year following the account owner’s death, per IRS final regulations effective January 1, 2025.
• Whether annual withdrawals are required during those 10 years depends on when the original owner died. If the owner died on or after their required beginning date, beneficiaries must take annual distributions over the 10 years, not just at the end.
• Surviving spouses have significantly more flexibility than other beneficiaries. A spouse can treat an inherited IRA as their own, delaying required minimum distributions until April 1 of the year following the year they turn 73.
• The penalty for missing a required distribution is 25 per cent of the amount not taken. That penalty drops to 10 per cent if the shortfall is corrected within two years, per IRS guidance.

Inheriting an IRA used to be straightforward. A non-spouse beneficiary could spread withdrawals over their own lifetime, letting the account grow with minimal annual disruption. That approach, known as the stretch IRA, is now gone for most people. The Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act, was signed into law in December 2019 and took effect on January 1, 2020.

Congress passed the law, in part, to close what it characterized as a tax-deferral advantage that disproportionately benefited high-net-worth estates. Under the prior rules, inherited IRA assets could compound tax-deferred across generations. The Joint Committee on Taxation estimated that eliminating the stretch IRA would raise approximately $15.7 billion in federal revenue between 2020 and 2029, per the Congressional Research Service analysis of the legislation.

The IRS issued final regulations on July 18, 2024, clarifying how these rules apply. Those regulations took effect for distribution calendar years beginning January 1, 2025. Understanding the new framework requires knowing which beneficiary category applies to a given situation. The rules differ substantially depending on the relationship to the deceased account owner.

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Spouse vs. non-spouse beneficiaries

The most important distinction in the inherited IRA rules is between a surviving spouse and everyone else. A surviving spouse who inherits an IRA has two distinct options, each with different implications. They have two options: Option 1 is that the surviving spouse gains ownership of the account. Option 2 is that the surviving spouse remains the beneficiary. Within option 1, they can choose to roll it into their own IRA or keep it separate, but treat it as their own.

Let’s break that down further.

The first option is to roll the inherited funds into the spouse’s own IRA or elect to treat the inherited account as their own. Under either approach, the account becomes the spouse’s own for all purposes. Required minimum distributions, or RMDs, do not begin until April 1 of the year following the year they turn 73, per IRS Publication 590-B. This preserves the account’s tax-deferred growth for as long as possible and is generally the approach that maximizes long-term value for a surviving spouse who does not need immediate access to the funds.

The second option is to remain as a named beneficiary of the inherited IRA rather than taking ownership. RMDs under this approach are also tied to the surviving spouse’s own life expectancy and follow the same age-73 trigger as Option 1. 

The meaningful distinction between the two options is not when distributions must begin, but rather access before age 59½. A surviving spouse who has not yet reached that age and needs access to the funds can take distributions from an inherited IRA without the 10 percent early withdrawal penalty that would apply to their own account, per IRS Publication 590-B. Once a spouse rolls the funds into their own IRA, that exception no longer applies. The choice between these paths depends heavily on age, immediate financial needs, and long-term planning goals.

One important practical note on ex-spouses: IRA beneficiary designations are contractual and override a will or divorce decree. If an account owner dies without updating a beneficiary designation after divorce, the former spouse named on the form will generally receive the account under federal IRS rules, regardless of what a divorce agreement states, per IRS Publication 590-B. This can be true even if they remarry.

A former spouse who inherits this way is treated as a non-spouse beneficiary, an entirely different category from a surviving spouse, and is not eligible to roll the account into their own IRA. Rather than having RMDs tied to their own life expectancy, they are subject to the “10-year rule” (explained below), which requires the entire account to be emptied within a decade regardless of age. Account owners who divorce should update beneficiary designations without delay, per the IRS Retirement Topics Divorce page.

Non-spouse beneficiaries fall into two categories under the SECURE Act. The first is eligible designated beneficiaries, or EDBs. This group includes the surviving spouse of the deceased account holder, a minor child of the deceased account owner, a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the original owner, per the IRS. That last category covers people such as a sibling, a close friend, or a domestic partner who is within 10 years of the deceased’s age. It does not apply to younger adult children or grandchildren. EDBs can still take distributions stretched over their own life expectancy. However, minor children must switch to the 10-year rule once they reach age 21, which the IRS final regulations set as the uniform age of majority for this purpose, regardless of state law. The second category is everyone else, referred to as non-eligible designated beneficiaries, who are subject to the 10-year rule.

The 10-year rule

Suppose a parent dies at age 71. Because age 71 is before the required beginning date, no annual RMDs are imposed on the inheriting adult child. The child, as a non-eligible designated beneficiary, may take distributions in any pattern and simply must empty the account by December 31 of the 10th year after the parent’s death. 

Now suppose the same parent died at age 75, after their required beginning date. The adult child must take an annual RMD in each of the years one through nine, calculated each year by dividing the prior December 31 account balance by the applicable life expectancy factor from the IRS Single Life Expectancy Table. The full remaining balance must then be distributed by December 31 of year 10. The total amount distributed is the same in both scenarios, but the timing and the annual tax exposure are structured differently.

Why is this the case? Thank the 10-year rule.

The 10-year rule requires non-eligible designated beneficiaries to fully distribute the inherited IRA by December 31 of the 10th year following the year of the account owner’s death, per IRS final regulations. The rule applies to accounts inherited from owners who died after December 31, 2019.

How distributions must be taken during those 10 years depends on one key variable: whether the original owner had already reached their required beginning date, or RBD, at the time of death. The RBD is the latest date by which an IRA owner must take their first required minimum distribution during their lifetime, specifically April 1 of the year following the year the account owner turns 73.

If the owner died before reaching the RBD, the beneficiary has full flexibility. Distributions can be taken in any amount, in any year, as long as the account is fully depleted by the 10-year deadline. The beneficiary could take nothing for nine years and withdraw the full balance in year 10, or spread distributions however they choose.

If the owner died on or after the RBD, the calculus changes entirely. Beneficiaries subject to the 10-year rule must also take annual RMDs in each of the first nine years of the 10 years. Those RMDs are calculated based on the beneficiary’s own life expectancy. The remaining balance must be fully distributed by the end of year 10.

Go Further: When the original account owner died on or after their required beginning date, beneficiaries subject to the 10-year rule must take annual distributions throughout the first nine years. A single withdrawal at the end of the period is not sufficient. The annual amount is calculated using the beneficiary’s own life expectancy, drawn from the Single Life Expectancy Table published by the IRS in Publication 590-B. That calculation divides the prior December 31 account balance by the applicable life expectancy factor, which is determined in the first year using the IRS Single Life Expectancy Table and then reduced by one in each subsequent year. The full remaining balance must then be distributed by December 31 of the 10th year.

RMDs for inherited accounts

For beneficiaries who inherit a traditional IRA, distributions are generally taxable as ordinary income in the year received, per the IRS. The account grows tax-deferred while funds remain inside. Each distribution adds to the beneficiary’s taxable income for that year. For higher-earning beneficiaries, large withdrawals concentrated in a single year can push income into a higher tax bracket.

Inherited Roth IRA distributions follow the same 10-year rule structure, but with a meaningful difference. Qualified distributions from an inherited Roth IRA are generally tax-free, provided the original account was at least five years old at the time of distribution, per IRS Publication 590-B. That tax-free treatment changes the timing strategy for inherited Roth accounts compared to traditional ones, since no tax cost attaches to delaying withdrawals. For readers who want background on Roth IRA rules more broadly, the companion article in this series, “What is a Roth conversion? A beginner’s guide,” covers the Roth structure in detail.

The penalty for failing to take a required distribution from an inherited account is significant. The IRS imposes a 25 percent excise tax on the amount that should have been withdrawn but was not. That penalty is reduced to 10 percent if the shortfall is corrected within two years.

So, for instance, if a beneficiary was required to take $10,000 in a given year and did not, the IRS can impose a $2,500 excise tax. If the beneficiary takes the missed distribution and files a corrected return within two years, that penalty falls to $1,000. The correction is made by filing Form 5329 with an explanatory letter, per IRS RMD FAQs.

Beneficiaries subject to annual RMDs during the 10 years, specifically those whose original owner died on or after their required beginning date, were not subject to penalties for missed distributions during 2021 through 2024 under IRS Notices 2022-53, 2023-54, and 2024-35. That relief has ended. The rules apply in full beginning with distribution calendar years starting January 1, 2025, per IRS final regulations.

How a financial advisor can help

The rules governing inherited IRAs involve multiple variables simultaneously: the beneficiary’s category, the original owner’s age at death, the account type, the distribution timeline, and the tax consequences of each withdrawal decision. A qualified financial advisor or tax professional with experience in retirement accounts can help beneficiaries understand which rules apply to their specific situation and model the tax impact of different distribution strategies across the 10-year window. That analysis is particularly relevant for higher-earning beneficiaries, for whom the timing of withdrawals can materially affect annual tax liability.

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FAQs

Does the 10-year rule apply to Roth IRAs inherited from a non-spouse? 

Yes. Inherited Roth IRAs are subject to the same 10-year rule structure as inherited traditional IRAs for non-eligible designated beneficiaries. The distinction is in the tax treatment: qualified distributions from an inherited Roth IRA are generally tax-free, making the timing of withdrawals less urgent from a tax perspective. The account must still be fully depleted by December 31 of the 10th year following the original owner’s death, per IRS Publication 590-B.

What happens if an inherited IRA is not fully distributed within the 10 years? 

Any amount remaining in the account at the end of the 10 years is treated as a missed RMD. The IRS imposes a 25 per cent excise tax on the amount not distributed as required. If the shortfall is corrected within two years, the penalty is reduced to 10 per cent. Beneficiaries can request a penalty waiver by filing Form 5329 with an explanatory letter, per IRS RMD FAQs.

Can a non-spouse beneficiary roll an inherited IRA into their own IRA? 

No. Non-spouse beneficiaries cannot roll an inherited IRA into their own retirement account. That option is available only to surviving spouses. Non-spouse beneficiaries must keep the assets in a properly titled inherited IRA and take distributions according to the applicable rules for their beneficiary category, per the IRS Retirement Topics Beneficiary page.

Glossary

• Eligible designated beneficiary (EDB). A category of beneficiary established by the SECURE Act that includes the surviving spouse of the deceased account holder, a minor child of the deceased, a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the original account owner. EDBs may take distributions stretched over their own life expectancy rather than being subject to the 10-year rule.
• Inherited Roth IRA. A Roth IRA received by a beneficiary following the death of the original account owner. Qualified distributions are generally tax-free, provided the original account was at least five years old. The 10-year rule applies to non-eligible designated beneficiaries.
• Required beginning date (RBD). The latest date by which an IRA owner must take their first required minimum distribution during their lifetime. Under current law, the RBD is April 1 of the year following the year the account owner turns 73. Whether the original owner had reached the RBD at death determines whether annual RMDs are required during the 10 years.
• Required minimum distribution (RMD). The minimum amount that must be withdrawn from a tax-advantaged retirement account each year, calculated by dividing the prior December 31 account balance by a life expectancy factor from IRS tables in Publication 590-B.
• SECURE Act. The Setting Every Community Up for Retirement Enhancement Act was signed into law in December 2019 and became effective January 1, 2020. The law made significant changes to inherited IRA rules, including eliminating the stretch IRA strategy for most non-spouse beneficiaries and introducing the 10-year rule. Congress estimated the change would raise approximately $15.7 billion in federal revenue over a decade.
• SECURE 2.0 Act. Legislation was passed in December 2022 that built on the original SECURE Act. Key changes included raising the required beginning date for RMDs from age 72 to 73, effective January 1, 2023, and reducing the penalty for missed RMDs from 50 per cent to 25 per cent, further reduced to 10 per cent if corrected within two years.
• Stretch IRA. A distribution strategy, available before the SECURE Act, that allowed non-spouse beneficiaries to take required minimum distributions from an inherited IRA spread over their own life expectancy. The strategy is no longer available for most non-spouse beneficiaries who inherit accounts from owners who died after December 31, 2019.
• Surviving spouse. The spouse of a deceased IRA owner who has the option to treat an inherited IRA as their own, delaying required minimum distributions until April 1 of the year following the year they turn 73, or to remain as a named beneficiary and take life-expectancy distributions without the 10 per cent early withdrawal penalty that would apply to their own account.
• 10-year rule. The requirement, introduced by the SECURE Act, that non-eligible designated beneficiaries fully distribute an inherited IRA by December 31 of the 10th year following the account owner’s death. If the original owner died on or after their required beginning date, annual RMDs are also required during the first nine years of the 10 years.
• Traditional IRA. A tax-advantaged individual retirement account in which contributions may be tax-deductible and distributions are generally taxed as ordinary income. Inherited traditional IRA distributions add to the beneficiary’s taxable income in the year received.

Sources

• IRS – Retirement Topics: Beneficiary: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary
• IRS – Publication 590-B, Distributions from Individual Retirement Arrangements: https://www.irs.gov/publications/p590b
• IRS – Retirement Plan and IRA Required Minimum Distributions FAQs: https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
• IRS – Retirement Topics: Required Minimum Distributions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
• IRS – Required Minimum Distributions for IRA Beneficiaries: https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
• IRS – Retirement Topics: Divorce: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-divorce
• IRS – Internal Revenue Bulletin 2024-33 (Final RMD Regulations): https://www.irs.gov/irb/2024-33_IRB
• IRS – Notice 2022-53: https://www.irs.gov/pub/irs-drop/n-22-53.pdf
• IRS – Notice 2023-54: https://www.irs.gov/pub/irs-drop/n-23-54.pdf
• IRS – Notice 2024-35: https://www.irs.gov/pub/irs-drop/n-24-35.pdf
• Congressional Research Service – Inherited or “Stretch” Individual Retirement Accounts (IRAs) and the SECURE Act (IF11328): https://www.congress.gov/crs-product/IF11328

Disclaimer: Steady Retire and MediaFeed are providers of educational content and information. This article is intended for informational and illustrative purposes only and does not constitute financial, legal, tax, or investment advice. The information provided does not create a professional-client relationship and should not be used as a substitute for consultation with a qualified financial advisor, tax professional, or attorney. While we strive to provide accurate and up-to-date information, rules and regulations regarding retirement are subject to change. Always consult with a certified professional regarding your specific financial situation.

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