When a loved one passes away and leaves you a retirement account—such as an IRA or 401(k)—you inherit more than assets. You also take on the responsibility of distributing those funds in a way that complies with IRS rules while minimizing taxes and preserving as much value as possible. Because the rules for Required Minimum Distributions (RMDs) for non-spouse beneficiaries have changed significantly in recent years, it’s important to understand your options and obligations.
Old Rules (Pre-2020)
Before the SECURE Act (enacted at the end of 2019), most non-spouse beneficiaries could take distributions from an inherited IRA based on their own life expectancy. This “stretch IRA” approach allowed heirs to spread withdrawals—and the associated tax impact—over many years, often decades.
New Rules (Post-SECURE Act and IRS Clarifications)
Under the SECURE Act and final IRS regulations (generally effective for deaths on or after January 1, 2020), most non-spouse beneficiaries must withdraw the full balance of an inherited retirement account within 10 years of the original owner’s death (the “10-Year Rule”). How distributions must occur during that 10-year window depends on whether the original account owner had already begun taking RMDs.
Required Distributions Under the 10-Year Rule
If the decedent had not started RMDs
If the original owner died before their required beginning date, the 10-year clock begins the year after death, and you are not required to take annual RMDs during the interim. The only requirement is that the account be fully distributed by the end of year 10. This creates flexibility to:
- Delay distributions until needed (for example, in lower-income years).
- Take periodic withdrawals to manage taxable income.
- Distribute more (or even the full amount) earlier if it suits your tax situation.
If the decedent had begun RMDs
If the original owner had already reached RMD age and was taking distributions, then:
- You must take annual RMDs in years 1–9 (generally calculated using IRS life expectancy tables), and
- The account must still be fully distributed by the end of year 10.
This creates two requirements: yearly minimum withdrawals and a firm 10-year deadline. Missing required RMDs can trigger penalties, so careful planning matters.
Who isn’t subject to the 10-Year Rule? Eligible Designated Beneficiaries (EDBs)
Certain beneficiaries may still be allowed to take distributions over their life expectancy rather than under the 10-year rule, including:
- A surviving spouse (who may also have the option to treat the account as their own).
- A minor child of the account owner (until age 21, after which the 10-year rule generally applies).
- Individuals who are disabled or chronically ill.
- Beneficiaries who are not more than 10 years younger than the account owner.
Distribution Strategies: Lump Sum vs. Spreading Withdrawals
Even with the 10-year requirement, beneficiaries typically have choices in how to time withdrawals.
Strategy 1: Take a lump sum in year 10
Waiting until the final year can allow assets more time to grow tax-deferred. The tradeoff is that a large distribution in a single year may push you into a higher tax bracket and increase related costs (for example, higher Medicare premiums or a greater portion of Social Security benefits becoming taxable).
Strategy 2: Spread distributions over time
Taking periodic withdrawals—annually or in intentional “clusters”—can help smooth taxable income, avoid bracket spikes, and create more predictable cash flow. Many beneficiaries choose to take larger distributions in lower-income years (such as early retirement, a sabbatical, or a career transition) to reduce the overall tax hit.
Strategy 3: Follow annual RMDs (when required)
If the decedent had begun RMDs, annual RMDs in years 1–9 set your minimum distribution. You can always withdraw more. In practice, it may make sense to take slightly more than the minimum in years where your tax situation is favorable, reducing pressure to take a large distribution later.
Special Considerations
Roth IRAs
Inherited Roth IRAs are also generally subject to the 10-year rule for non-spouse beneficiaries. However, qualified withdrawals are tax-free if the Roth has satisfied the 5-year holding requirement. Even so, the account must still be fully distributed by the end of year 10.
Missed RMDs during transition years
The IRS provided temporary relief for certain missed RMDs while guidance was still being finalized. Going forward, penalties may apply, so it’s important to plan distributions carefully and begin on time when annual RMDs are required.
Conclusion
The move from “stretch IRAs” to the 10-year rule has changed the planning landscape for non-spouse beneficiaries—introducing new constraints, but also new strategy opportunities. While the 10-year deadline is firm, you often have meaningful flexibility in how and when to withdraw funds, provided you meet any annual RMD requirements and distribute the full balance by the deadline. With thoughtful, tax-aware planning, you can preserve more of the inherited account’s value and better align distributions with your broader financial goals.
Presented by Sumedha Malhotra, CFP® , CRPC®, CPWA®
