Inherited IRAs and the 10-Year Rule: The Distribution Plan That Avoids a Tax Spike

Before 2020, a child who inherited a parent's IRA could stretch withdrawals over their own life expectancy, often forty years or more, and let most of the account keep compounding tax-deferred. The SECURE Act ended that for most beneficiaries. Now the account has to be emptied within ten years, and the income lands in the beneficiary's own brackets, often right in the middle of their highest-earning decade. The rule itself is simple. Planning around it isn't.

Who the 10-year rule applies to

Anyone who inherits an IRA or 401(k) from someone who died after December 31, 2019, and who isn't an "eligible designated beneficiary." That's most adult children, grandchildren, siblings, friends, and trusts that don't qualify for special treatment.

The account must be fully distributed by December 31 of the tenth year following the year of death. Inherit in 2026 and you have until the end of 2036.

The annual RMD requirement inside the ten years

After several years of confusion and IRS relief, the final regulations settled it. If the original owner had already reached their required beginning date (73, or 75 for those born in 1960 or later), the beneficiary has to take annual required minimum distributions in years one through nine, based on the beneficiary's life expectancy, and then empty the account in year ten. Miss one of those annual distributions and there's a 25% excise tax, reduced to 10% if corrected promptly.

If the original owner died before reaching RMD age, there are no annual requirements. The only rule is that the account is empty by the end of year ten.

Either way, the annual minimums are small next to the balance. The real question is how much to take beyond them.

Why waiting until year ten is usually wrong

The instinct is to leave the money growing tax-deferred as long as possible and take it all in year ten. For a large account, that's about the worst thing you can do: one year with $500,000 or $1 million of ordinary income, taxed at 35% or 37% federal, plus the 3.8% surtax pushed onto your other investment income, plus a Medicare surcharge two years later if you're on Medicare.

For most beneficiaries, the better approach is to spread the distributions across the ten years so each year's income stays in the lowest bracket you can manage. On a $600,000 inherited IRA, that's roughly $60,000 a year plus growth, which for a mid-career professional might mean staying in the 24% bracket instead of jumping to 35%.

Better still: weight the withdrawals toward the years when your own income is lowest. A sabbatical, a year between jobs, the first years of retirement, a year with big deductions. The account is a ten-year window of flexible income, and the plan is to fill the cheap years first.

Coordinating with everything else

The inherited IRA doesn't sit by itself. The distributions bump into the beneficiary's other decisions.

• Their own 401(k). Higher inherited income makes their own pre-tax deferrals more valuable; maxing the 401(k) in inheritance years offsets part of the income.
• Roth conversions. A beneficiary who was planning their own Roth conversions should generally pause them during the ten years. The inherited distributions are already filling the brackets.
• Charitable giving. A beneficiary over 70½ can make qualified charitable distributions from an inherited IRA, which satisfy the RMDs without any income. Younger beneficiaries who give can bunch deductions into the high-income years.
• Capital gains. The inherited income stacks under any capital gains and pushes them into higher gains brackets. Gains from other sources belong in years with lower inherited withdrawals.
• Medicare. A beneficiary on Medicare, or within two years of it, should watch the IRMAA thresholds as closely as the income tax brackets.

The eligible designated beneficiaries

Five categories keep something closer to the old rules.

Surviving spouses can roll the account into their own IRA and treat it as their own, delaying distributions until their own RMD age, or keep it as an inherited IRA and take distributions over their life expectancy. A younger spouse who needs the money before 59½ often keeps it inherited to sidestep the early withdrawal penalty.

Minor children of the decedent use life expectancy until age 21, then the 10-year clock starts.

Disabled and chronically ill beneficiaries can stretch over their life expectancy, and a properly drafted trust for them can preserve that treatment.

Beneficiaries not more than ten years younger than the decedent, such as a sibling or a partner of similar age, can also use their life expectancy.

Inherited Roth IRAs

A Roth IRA passed to a non-spouse beneficiary is also subject to the 10-year rule, but with no annual RMDs (the original owner never had a required beginning date) and no income tax on the withdrawals. So the strategy flips: leave the Roth alone until the end of year ten to squeeze out the most tax-free growth, then take everything. This asymmetry, tax-deferred accounts spread early and Roth accounts held late, is a strong reason for parents to convert during their lifetimes. Our guide to Roth versus traditional accounts gets into it.

Trusts as beneficiaries

A trust named as IRA beneficiary must be drafted to "see through" to the individual beneficiaries, and even then the 10-year rule generally applies. Older trusts written with "conduit" provisions for the stretch era can force annual distributions of only the RMD for nine years and then a full payout in year ten, which is exactly the spike you're trying to avoid. If you have a trust named on an IRA, have an attorney confirm it still works under the current rules. Our guide to beneficiary designations covers the naming decisions.

For the original owner: planning ahead

The 10-year rule is a strong argument for reducing the traditional IRA during your lifetime, while your own brackets are lower than your children's are likely to be, and leaving Roth assets, taxable assets with a step-up in basis, and life insurance to family while pointing the traditional IRA at charity where there's charitable intent. That allocation is one of the most valuable estate planning decisions available, and it's made entirely on beneficiary forms and through lifetime conversions. No attorney required for most of it.

Frequently asked questions

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.