Inherited IRA Rules: The 10-Year Rule Explained
Inheriting money is a blessing, but inheriting an IRA comes with a ticking time bomb attached. The “Stretch IRA”—which allowed beneficiaries to stretch withdrawals over their lifetime—is dead for most people. Under the SECURE Act 2.0, if you inherit an IRA (Roth or Traditional) from a parent, you likely face the **10-Year Rule**. You must empty the account entirely by December 31 of the 10th year following the death. Fail to do so? The IRS penalty is a brutal **25% excise tax**. Here is the legal playbook on how to navigate this maze without triggering an audit.
The clock is ticking: Most non-spouse beneficiaries have exactly 10 years to empty the account or face a 25% penalty.
1. Which Class Are You? (The Decision Tree)
The rules depend entirely on your relationship to the deceased. The IRS divides beneficiaries into two classes.
| Class Type | Who Fits Here? | The Rule |
|---|---|---|
| 1. Eligible Designated Beneficiary (EDB) |
• Spouse • Minor Child (until age 21) • Disabled / Chronically Ill • Individual not >10 years younger |
Lifetime Stretch. You can take RMDs based on YOUR life expectancy. (The old rule). |
| 2. Non-Eligible Designated Beneficiary |
• Adult Children (Age 21+) • Grandchildren • Friends / Siblings (>10 yrs younger) |
10-Year Rule. Account must be emptied by Dec 31 of the 10th year. |
2. Roth vs. Traditional: Two Different Strategies
If you are stuck with the 10-Year Rule, the type of IRA dictates your withdrawal strategy.
- Tax Status: Withdrawals are 100% Tax-Free.
- RMDs: None during the 10 years.
- Optimal Strategy: Wait until Year 10. Let the money grow tax-free for a full decade, then withdraw 100% at the very end.
- Tax Status: Withdrawals are Taxed as Ordinary Income.
- RMDs: Maybe (if owner died post-RMD age).
- Optimal Strategy: Smooth it out. Withdraw 10% each year to prevent a massive tax bill in Year 10 that pushes you into a higher bracket.
3. The “Ghost RMD” Rule
This is the most confusing part of the new law.
• The Rule: You must continue taking annual RMDs (based on your life expectancy) for Years 1–9, AND empty the account in Year 10.
• Why: The IRS rule is “distributions must continue at least as rapidly.” You cannot just wait until Year 10.
Exception: If they died before their RMD start date, you have zero RMDs in Years 1–9. You just need to empty it by Year 10.
4. Spousal Privilege: Treat It As Your Own
If you inherit from a spouse, you have a superpower called “Spousal Rollover.”
- Option A (Inherited IRA): Keep it as an inherited account. RMDs start when the deceased would have turned 73. (Good if you are younger than 59½ and need cash now penalty-free).
- Option B (Spousal Rollover): Move the funds into your OWN IRA. RMDs start when YOU turn 73. (Good for long-term tax deferral).