Distribution Rules When You Inherit an IRA

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With IRAs representing a significant portion of many investors’ wealth, both beneficiary planning and a clear understanding of IRA inheritance distribution rules are essential. The SECURE Act (2019) and SECURE 2.0 (2022) introduced major changes that affect how inherited IRAs are distributed—especially for non-spouse beneficiaries. Understanding these changes is critical for minimizing taxes and preserving wealth for future generations.

Why IRA Beneficiary Designations Matter

Unlike other assets, your IRA passes directly to the beneficiaries you name—regardless of what your will or trust says. That means your decisions have a direct impact on how and when heirs receive these assets—and how much may be lost to taxes. The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries, replacing it with a 10-year rule. SECURE 2.0 further changed required minimum distribution (RMD) ages and added flexibility for spouses.

The End of the Stretch IRA: A Compressed Timeline

Before 2020, most beneficiaries could stretch required minimum distributions (RMDs) over their entire life expectancy, using the IRS Single Life Table. This long-term deferral allowed younger beneficiaries to minimize annual tax burdens and maximize the IRA’s compounding potential.

The SECURE Act replaced this option for most non-spouse beneficiaries with a 10-year withdrawal rule. Now, the account must be emptied within 10 years—often increasing the beneficiary’s taxable income during peak earning years.

Example: A 45-year-old inheriting a $1 million IRA in 2025 must now withdraw the full balance by 2035. Even if spread evenly, that’s ~$100,000/year—versus $24,400/year under the former stretch rules. This change significantly compresses tax deferral and may push the heir into a higher tax bracket.

Vaultis Private Wealth – guiding clients through inherited IRA distribution and SECURE Act tax rules

Understanding Beneficiary Categories

The distribution rules depend on the type of beneficiary. The SECURE Act defines three main categories:

Eligible Designated Beneficiaries (EDBs)

These individuals can still stretch distributions over their life expectancy:

  • Surviving spouses – May roll the IRA into their own, delay RMDs until age 73, or use the deceased’s schedule

  • Minor children of the account owner – Stretch allowed until age 21, then 10-year rule applies

  • Disabled or chronically ill individuals – Stretch permitted with proper documentation

  • Individuals less than 10 years younger than the owner – Often siblings or close-in-age partners

Example: A 15-year-old inheriting an IRA can take distributions based on life expectancy until age 21, then must withdraw the remainder within the following 10 years.

Non-Eligible Designated Beneficiaries (Non-EDBs)

Most adult children, grandchildren, or unrelated individuals fall into this group. They must follow the 10-year rule, with specific requirements based on the IRA owner’s Required Beginning Date (RBD):

  • RBD: April 1 of the year following the year the IRA owner reaches age 73 (for individuals born between 1951 and 1959) or age 75 (for those born in 1960 or later), as stipulated by SECURE 2.0.

If the owner died before RBD:

  • No annual RMDs are required

  • Beneficiary can withdraw any amount any year, as long as the IRA is fully distributed by the end of year 10

  • Greater flexibility for tax planning

If the owner died on or after RBD:

  • Annual RMDs are required for years 1–9, based on the beneficiary’s life expectancy

  • Full distribution still required by the end of year 10

  • IRS waived penalties for missed RMDs between 2021–2024 due to confusion

  • Beginning in 2025, failing to take required minimum distributions (RMDs) may result in a 25% excise tax on the missed amount. However, if the oversight is corrected within two years, the penalty may be reduced to 10%, as outlined in SECURE 2.0.

Example: A 50-year-old inheriting an IRA from a parent who died after age 73 must take annual RMDs for 9 years and distribute the entire account by year 10. Strategic withdrawals—like taking more in lower-income years—can reduce overall tax impact.

Trusts as IRA Beneficiaries: Control Comes with Complexity

Trusts can provide valuable control and protection for beneficiaries, but they come with more complex tax treatment:

  • Most trusts must follow the 10-year rule, unless structured as a see-through trust with qualified individual beneficiaries

  • Non-see-through trusts are subject to even stricter rules

  • For best results, work with an advisor to ensure the trust meets IRS requirements and aligns with your planning goals

Strategic Tax Planning for Inherited IRAs

If you’ve inherited an IRA—or are planning your legacy—consider these strategies:

  • Time withdrawals strategically: Withdraw more in lower-income years to reduce total taxes

  • Maximize spousal rollover options: Spouses can often delay or reduce taxable distributions

  • Review designations regularly: Update beneficiaries after life events or tax law changes

  • Coordinate with trusts: Ensure language is SECURE Act-compliant if using trusts as beneficiaries

Take Action: Plan for the Future, Avoid Surprises

The most important step you can take today is to review your IRA beneficiary designations. This simple task is often overlooked—but critical to ensuring your wealth is transferred in a tax-efficient, intentional way.

The shift from the stretch IRA to the 10-year rule has major tax implications. IRA owners must regularly review and update beneficiary designations. Beneficiaries must understand their distribution rules to avoid penalties and missed opportunities.

If you’re an IRA owner, take time to ensure your beneficiary choices reflect your goals and family structure. If you’re inheriting an IRA, know your category and obligations under current law. Staying informed and working with a qualified advisor can help protect your wealth—and your legacy.

Frequently Asked Questions

What are the current rules for inherited IRA distributions?

Most non-spouse beneficiaries must fully distribute the inherited IRA within 10 years of the original owner’s death, due to changes introduced by the SECURE Act. Required minimum distributions (RMDs) may still apply within those 10 years, depending on the beneficiary type.

Do spouses follow the same 10-year rule for inherited IRAs?

No. A surviving spouse can treat an inherited IRA as their own, which typically allows for more flexible distribution options and may delay RMDs until age 73.

What happens if the original IRA owner was already taking RMDs?

If the IRA owner passed away after beginning RMDs, the non-spouse beneficiary may be required to continue those distributions annually within the 10-year window, depending on their relationship to the decedent.

Are trusts subject to the same 10-year distribution rule?

Generally yes. Most trusts that inherit IRAs are now subject to the 10-year rule. However, certain types of trusts — like “eligible designated beneficiary” (EDB) trusts for disabled or chronically ill individuals — may still qualify for stretch treatment.

What are the penalties for missing required IRA distributions?

Missing a required distribution can trigger a penalty of 25% of the amount that should have been withdrawn. Working with a financial advisor can help ensure compliance and avoid costly mistakes.

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.