Inherited IRA Rules: 10-Year Rule, RMDs & Annuities

Recently, the I.R.S. made significant changes to the tax treatment of Individual Retirement Accounts. The SECURE Act and SECURE 2.0 changed several rules and regulations.

Now, inheriting an IRA or non-qualified annuity can create both an opportunity and a tax-planning challenge, especially if done incorrectly.

The rules governing inherited IRAs have changed significantly in recent years. What was once commonly called a Stretch IRA is no longer available to most non-spouse beneficiaries in its traditional form. While the rules regarding a Non-Qualified Stretch Annuity are more consumer- and tax-friendly.

When used properly,  new techniques can save families thousands of dollars in taxable income while also providing lifetime income to future generations.

Today, the amount you must withdraw—and when you must withdraw it—depends on several factors:

• Your relationship to the deceased IRA owner
• Whether you are a spouse or non-spouse beneficiary
• Whether you qualify as an Eligible Designated Beneficiary
• Whether the original IRA owner had begun required minimum distributions
• Whether you inherited a Traditional IRA, Roth IRA, or Non-Qualified Acct
• The year the original owner died

For many beneficiaries, the most important rule is now the 10-year inherited IRA rule. However, non-qualified stretch rules are very important too.

Understanding these rules before taking a distribution can help IRA and non-IRA beneficiaries alike avoid unnecessary taxes, missed RMDs, and irreversible mistakes.

An inherited IRA, sometimes called a beneficiary IRA, is an IRA established for someone who inherits an IRA or a retirement plan after the original owner’s death. If you inherit an IRA from someone other than your spouse, you generally cannot combine the inherited money with your own IRA.

Instead, the assets are generally maintained in an inherited IRA showing both the deceased owner’s name and the beneficiary’s name. However, a surviving spouse has considerably more flexibility and may be able to treat the IRA as his or her own. Children of the deceased have fewer options and less flexibility.

Yes—but only in limited circumstances.

Before the SECURE Act, many non-spouse beneficiaries could “stretch” required distributions from an inherited IRA over their own life expectancy. A younger beneficiary (child) might keep much of an inherited IRA growing tax-deferred for several years.

For deaths occurring after 2019, most non-spouse beneficiaries no longer receive that lifetime stretch. Instead, most are subject to the 10-year rule.

Certain beneficiaries known as Eligible Designated Beneficiaries, however, can still qualify for life-expectancy distributions. So while the term “Stretch IRA” still exists, the rules are less investor-friendly than they once were.

Most individual, non-spouse beneficiaries who inherit an IRA after 2019 must distribute the entire account by December 31st of the tenth year following the owner’s year of death.

For example: If an IRA owner dies in 2026 and the beneficiary is subject to the 10-year rule, the inherited IRA generally must be completely distributed by December 31, 2036. That does not necessarily mean you must withdraw exactly 10% per year, however.

The timing of distributions within those ten years depends partly on whether the original owner died before or after their required beginning date.

Owner Died Before RMDs Were Required

If the original IRA owner dies before their required beginning date and the beneficiary is subject to the 10-year rule, the beneficiary generally does not have to take an annual RMD during years 1 through 9. The account must be completely distributed by the end of year 10. That flexibility can create valuable tax-planning opportunities.

For example, a beneficiary might take larger distributions in years when:

• Employment income is temporarily lower
• They retire and income has decreased
• Investment losses offset taxable income
• They have unusually large deductions
• Their marginal income-tax rate drops

Waiting until year 10 to withdraw the entire IRA can be allowed in this situation, but it is not necessarily the best tax strategy. A very larger final distribution in year 10 might push someone’s income into a higher tax bracket.

When Annual RMDs Apply During The 10 Year Window

There is an important distinction when the original IRA owner dies on or after their required beginning date.

In many cases, a non-spouse beneficiary subject to the 10-year rule must:

1. Take required minimum distributions during the 10-year period, and
2. Empty the inherited IRA by the end of year 10.

This distinction has created considerable confusion because the SECURE Act’s 10-year language led many beneficiaries to believe that no distributions were required until year 10. These new rules still create confusion for those inheriting annuity IRAs, so it’s wise to speak with a qualified tax planner before committing to a strategy.

Current Required Minimum Distribution Ages

The old age-70½ RMD rule no longer applies to today’s newly eligible retirees.

For many current IRA owners, required minimum distributions begin at age 73.

Under SECURE 2.0, the applicable RMD age eventually increases to 75 for later-born individuals.

The original owner’s required beginning date matters greatly when determining how an inherited IRA must be distributed after death.

An Eligible Designated Beneficiary, or EDB, receives special treatment under inherited IRA rules.

Generally, the following individuals may qualify:

One of the most common misunderstandings involves children.

Adult Children Are Usually Not Eligible Designated Beneficiaries

Being the child of the IRA owner does not by itself create lifetime stretch treatment. The special exception applies to a minor child of the account owner.

Once the child reaches the applicable age—generally age 21 under the current rules—the 10-year distribution period begins. An adult son or daughter who inherits a parent’s IRA will generally be subject to the 10-year rule unless that person independently qualifies for another EDB exception, such as disability or chronic illness.

Inheriting an IRA From Your Spouse

A surviving spouse generally has the greatest flexibility.

Depending on the circumstances, a spouse may be able to:

• Treat the inherited IRA as their own
• Roll the assets into an IRA in their own name
• Keep the account as an inherited IRA
• Take distributions under beneficiary rules

Which choice is best can depend heavily on age. For example, someone who inherits an IRA from a spouse while under age 59½ may sometimes benefit from keeping the account as an inherited IRA rather than immediately treating it as their own.

Distributions from an inherited IRA generally are not subject to the 10% early-distribution penalty that can apply to distributions from a person’s own IRA before age 59½.

Later, converting the account to the surviving spouse’s own IRA may make sense. This is an area where seemingly small elections can have substantial long-term consequences. In general, avoiding taxes and taking advantage of the compounding growth annuities provide can increase the value of the account while limiting taxable distributions.

The type of IRA inherited is what matters most. Different accounts have different and sometimes consequential rules.

Inherited Traditional IRA

Distributions from a Traditional IRA are generally taxable to the beneficiary as ordinary income to the extent the IRA contains taxable funds. Unlike stocks or real estate, a Traditional IRA generally does not receive a stepped-up cost basis at death that eliminates the deferred income tax. This makes distribution timing especially important for large inherited IRAs.

A beneficiary earning $200,000 a year, for example, may view a $300,000 IRA distribution very differently than someone who has recently retired and has relatively little taxable income.

Inherited Roth IRA

Inherited Roth IRAs can also be subject to beneficiary distribution rules, including the 10-year rule. The major difference is taxation. Qualified Roth IRA distributions are generally income-tax-free.

For many non-spouse beneficiaries subject to the 10-year rule, an inherited Roth can therefore remain invested for much of the 10-year period before being distributed. The Roth five-year holding requirement should also be reviewed before assuming that every distribution of earnings is tax-free.

Do You Pay Taxes When You Inherit an IRA?

Simply being named the beneficiary does not generally cause the entire IRA to immediately become taxable. Taxation normally occurs as taxable amounts are distributed.

With a Traditional IRA, taxable distributions are generally included in the beneficiary’s ordinary income. That means inherited IRA withdrawals can affect more than just the tax paid directly on the distribution.

Additional income can potentially affect:

• Federal income-tax brackets
• State income taxes
• Medicare income-related premiums later in life
• Taxation of Social Security benefits
• Capital-gain tax rates
• Certain deductions and credits

An important question to ask at this stage might be:

“How should I distribute this inherited IRA while considering my overall tax situation?”

Should You Take an Inherited IRA as a Lump Sum?

A lump-sum withdrawal is generally possible, but it can create a large taxable event with a Traditional IRA.

Suppose someone inherits a $600,000 Traditional IRA. Taking the entire $600,000 in one tax year could add hundreds of thousands of dollars to taxable income. Depending on the beneficiary’s other income, spreading distributions across several tax years could potentially result in a very different tax outcome.

However, withdrawing slowly is not automatically better. If tax rates are expected to increase, the beneficiary expects much higher future income, or the account must ultimately be emptied in year 10, taking more income sooner might be appropriate.

Inherited IRA distribution planning should therefore be coordinated with an overall retirement and tax-income strategy.

In most circumstances, inherited IRA assets can be invested in an annuity while remaining subject to inherited IRA distribution requirements.

This can be attractive to beneficiaries who want some combination of:

• Principal protection
• Predictable interest
• Protection from market losses
• Guaranteed income options
• Simplified investment management

However, purchasing an annuity does not make the inherited IRA rules disappear. The annuity contract and payout structure must still accommodate the beneficiary’s applicable RMD and distribution deadlines.

A beneficiary subject to the 10-year rule generally cannot use an annuity contract to circumvent the requirement that the inherited IRA be distributed within the required period. This makes product selection especially important. Some insurance companies have built and designed products specifically for inherited IRA distributions. Working with a knowledgeable agent is important here.

Inherited IRA Annuity vs. Inherited Nonqualified Annuity

These two situations are often confused. An IRA annuity is an annuity contract owned inside a tax-qualified IRA.

A nonqualified annuity is generally purchased with after-tax money outside an IRA.

Their inheritance rules are different.

This distinction is important when considering a Non-qualified stretch annuity.

A non-qualified annuity can present an entirely different planning opportunity. When the owner of a deferred nonqualified annuity dies, a non-spouse beneficiary may have several payout options depending on the contract and insurer. (Spouses can usually continue a non-qualified annuity after the first spouse has passed.)

Instead of taking all taxable gain at once, certain new contracts may permit qualifying beneficiaries to receive distributions over a longer period, including certain life-expectancy or annuitization arrangements.

This can potentially spread taxable income over multiple years rather than creating one large taxable event. The availability and mechanics of these options vary by insurance carrier and contract.

That makes it important to review the existing annuity before requesting a lump-sum death benefit. Once funds are distributed, options that were available inside the contract may be lost.

Only a few insurance companies offer non-qualified stretch annuity accounts. They will have different investment options; it’s important to select the one that fits your long-term needs and goals. At our independent annuity brokerage, we work with several, including Oceanview Life, Nationwide Life, NY Life, Lincoln Financial, Midland, and North American Life, among others.

Inherited IRA decisions can affect taxes for many years. Before requesting a distribution, transferring an account, or selecting an annuity, it can be helpful to understand:

• Your beneficiary classification
• Your applicable distribution deadline
• Whether annual RMDs apply
• The tax consequences of different withdrawal schedules
• Whether an annuity can provide the guarantees or income you want while remaining compatible with inherited IRA rules

As an independent insurance brokerage, we help evaluate fixed and fixed-indexed annuity options for inherited IRA and Non-Qualified Stretch annuity assets when these accounts are appropriate.

We work with multiple insurance companies and can compare contract guarantees, liquidity provisions, interest-crediting options, and beneficiary requirements.

We do not provide individual tax or legal advice. IRA owners and beneficiaries should consult a qualified tax professional or attorney regarding their specific circumstances.