Distribution Rules When You Inherit an IRA

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With IRAs representing a significant portion of many investors’ wealth, both proper beneficiary planning and a clear understanding of distribution rules for heirs are vital. Changes under the SECURE Act (2019) and SECURE 2.0 (2022) have dramatically altered the rules for IRA beneficiaries, making it more important than ever to review your designations and understand their impact on your legacy.

Unlike other assets, your IRA passes directly to the beneficiaries you name—regardless of your will. This means your choices can have a profound effect on how and when your heirs receive these assets, and how much of your hard-earned savings is lost to taxes. The SECURE Act eliminated the popular "stretch IRA" for most non-spouse beneficiaries, replacing it with a 10-year withdrawal rule. SECURE 2.0 introduced further changes, especially for spouses and required minimum distribution (RMD) ages.

The Shift from Stretch IRAs

Before the SECURE Act took effect in 2020, all named beneficiaries could stretch IRA distributions over their entire life expectancy, using the IRS Single Life Table to calculate annual withdrawals. This allowed heirs, especially younger ones like children or grandchildren, to extend tax-deferred growth over decades, minimizing annual tax liabilities. The SECURE Act’s 10-year rule, which applies to most non-spouse, non-eligible beneficiaries, shortens this timeline, requiring full withdrawal within a decade. This change is often less advantageous, as it accelerates taxable distributions, potentially increasing your heirs’ tax burden and reducing the IRA’s long-term growth potential.

Example: Consider a 45-year-old who inherits a $1 million IRA from their late mother. Under pre-2020 rules, they could stretch distributions over their 41-year life expectancy, taking roughly $24,400 annually in the first year (based on the IRS Single Life Table), and spreading the tax burden over decades. Today, as a non-eligible beneficiary, they must withdraw the full $1 million within 10 years—potentially taking $100,000 annually if spread evenly. This significantly increases ordinary income during potential peak working years and may push them into higher tax brackets. The shift to a compressed 10-year timeline is the most significant change individuals must understand when inheriting an IRA, making careful tax planning essential to preserve wealth.

Understanding Beneficiary Categories

Eligible Designated Beneficiaries: More Flexibility, More Opportunity

Certain beneficiaries still enjoy the ability to stretch IRA distributions over their life expectancy, maximizing tax-deferred growth. These include:

  • Surviving spouses: Can roll the IRA into their own, delay RMDs until age 73, or use the deceased’s withdrawal schedule for added flexibility.

  • Minor children of the account owner: Can stretch distributions until age 21, then must follow the 10-year rule.

  • Disabled or chronically ill individuals: May stretch distributions over their lifetime, with proper documentation.

  • Individuals not more than 10 years younger than the account owner (often siblings or close-in-age partners) can also stretch distributions.

Example: If a 15-year-old inherits an IRA, they can take distributions based on their life expectancy until age 21, then have 10 more years to empty the account—allowing for extended tax deferral.

Non-Eligible Designated Beneficiaries: The 10-Year Rule and Required Beginning Date

Most other beneficiaries, such as adult children, grandchildren, or friends, fall under the 10-year rule. They must withdraw the entire IRA by the end of the 10th year following the owner’s death. Roth IRAs follow the same rule, though distributions are generally tax-free. The timing and structure of withdrawals depend on whether the original owner had reached their required beginning date (RBD):

  • Required Beginning Date (RBD): For most IRA owners, the RBD is April 1 of the year following the year they reach age 73 (age 75 for those turning 74 after December 31, 2032, per SECURE 2.0). This is the date by which RMDs must begin. The RBD matters because it determines whether beneficiaries must take annual minimum distributions or have more flexibility in timing withdrawals.

  • If the owner died before their RBD: Beneficiaries have flexibility to withdraw any amount at any time, as long as the account is empty by year 10. There are no annual minimums, so beneficiaries can time withdrawals for tax efficiency.

  • If the owner died on or after their RBD: Beneficiaries must take at least annual withdrawals in years 1–9, based on their single life expectancy, using the IRS Single Life Table, but can always withdraw more than the minimum required amount. The account must be fully distributed by the end of year 10. This ensures that distributions continue at least as rapidly as the owner was required to take them, but allows for larger withdrawals if desired. Due to confusion over these requirements, the IRS waived penalties for non-eligible beneficiaries missing annual withdrawals for post-RBD deaths from 2021 to 2024. Starting in 2025, compliance is mandatory, with penalties at 25% of the missed amount (or 10% if corrected within two years, per SECURE 2.0).

Example: An adult child inheriting an IRA from a parent who died at age 75 (after their RBD) must take annual withdrawals based on their single life expectancy, using the IRS Single Life Table, for nine years. They can take out more if needed, and must empty the account by year 10. Strategic timing of withdrawals—such as taking larger amounts in low-income years—can help minimize taxes.

Trusts as Beneficiaries: Control with Complexity

Naming a trust as your IRA beneficiary can provide control and protection, especially for minors or vulnerable heirs. However, most trusts must follow the 10-year rule unless structured as a "see-through" trust with eligible beneficiaries. Because trust rules are complex, it’s essential to work with an advisor to ensure your intentions are met and tax efficiency is preserved.

Strategic Tax Planning for IRA Beneficiaries

To make the most of your IRA legacy, consider these strategies:

  • Time withdrawals for tax efficiency: Especially for non-eligible beneficiaries, aligning withdrawals with low-income years can reduce taxes.

  • Maximize spousal rollovers: Spouses can often delay or minimize taxable distributions.

  • Review designations regularly: Life changes and evolving tax laws make periodic reviews essential.

The most important step you can take today is to review your IRA beneficiary designations. Many investors overlook this simple task, yet it is crucial for ensuring your assets pass according to your wishes and in the most tax-efficient manner possible. Regularly checking and updating your beneficiary forms—especially after major life events or changes in tax law—can help you avoid unintended consequences and protect your legacy for future generations.

Understanding the evolution of IRA beneficiary distribution rules is crucial for both account holders and those who may inherit these assets. The shift from the ‘stretch IRA’—which allowed beneficiaries to spread required minimum distributions (RMDs) over their life expectancy—to the current 10-year rule for most non-eligible beneficiaries has significant tax and planning implications. Today, both IRA owners and beneficiaries must be proactive: owners should regularly review and update beneficiary designations to ensure their wishes are met, while beneficiaries need to be aware of the distribution requirements and deadlines that now apply.

If you own an IRA, take time to confirm your beneficiary choices align with your goals and family circumstances. If you are inheriting an IRA, make sure you understand the rules that govern your withdrawals to avoid costly mistakes and maximize the value of your inheritance. Staying informed and seeking professional guidance can help both parties navigate these complex rules and make the most of the opportunities available under current law.


Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or investment advice. Individual circumstances vary, and tax laws are subject to change. Please consult with a qualified financial, tax, or legal advisor before making decisions regarding your IRA or beneficiary planning.