The Inherited IRA 10-Year Rule refers to a provision that governs how beneficiaries must withdraw funds from an inherited Individual Retirement Account (IRA) after the original account holder’s passing. This rule was introduced as part of the SECURE Act (Setting Every Community Up for Retirement Enhancement) that came into effect on January 1, 2020.
Prior to the SECURE Act, non-spouse beneficiaries inheriting an IRA had the option to “stretch” distributions over their lifetimes, allowing for gradual withdrawals based on their life expectancy. However, the 10-Year Rule changed this for most beneficiaries.
Under this rule:
- Non-Spouse Beneficiaries: Most non-spouse beneficiaries who inherit an IRA after January 1, 2020, are required to withdraw the entire IRA balance within 10 years of the original account owner’s death.
- Distribution Flexibility: Beneficiaries have flexibility within the 10-year period to decide when and how much to withdraw, as long as the entire balance is depleted by the end of the 10th year.
- No Annual Required Minimum Distributions (RMDs): Unlike the previous rules, the 10-Year Rule doesn’t necessitate annual required minimum distributions (RMDs). Beneficiaries can take distributions in any proportion or timeframe within the 10-year window, allowing for strategic tax planning.
There are exceptions to the 10-Year Rule:
- Eligible Designated Beneficiaries: Certain beneficiaries such as surviving spouses, minor children (until they reach the age of majority), disabled individuals, chronically ill individuals, and beneficiaries not more than ten years younger than the deceased IRA owner might still have the option to take distributions over their life expectancy instead of the 10-year period.
- Inherited IRAs before January 1, 2020: If you inherited an IRA before this date, you might still be subject to the previous rules, which allowed for stretching distributions over your life expectancy.
Understanding the Inherited IRA 10-Year Rule is crucial for beneficiaries as it impacts withdrawal strategies, tax implications, and estate planning. Consult with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt. He can provide personalized guidance based on individual circumstances and goals.