The 10-Year Rule for Beneficiary IRAs and Associated Strategies

by Clark Stone, CFP®, ChFC®, CLU®

The 10-year rule for beneficiary Individual Retirement Accounts (IRAs) is a key regulation governing the distribution of inherited retirement accounts. Introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, this rule replaced the “stretch IRA” strategy, fundamentally altering how non-spouse beneficiaries must manage inherited IRAs. This legislation would be revised again in 2022 with the SECURE Act 2.0. In the Summer of 2024, there were further clarifications that will begin taking place on January 1, 2025.

Under the 10-year rule, non-spouse beneficiaries (and a few other categories referred to as eligible designated beneficiaries), who inherit an IRA or a qualified retirement plan after January 1, 2020 must fully distribute the account’s assets by December 31 of the 10th year following the original owner’s death. This applies to both traditional and Roth IRAs as well as 401(k) accounts.

Eligible Designated Beneficiaries

• Spouses
• Individuals not more than 10 years younger than the retirement plan or IRA owner
• Minor children of the retirement plan or IRA owner only (note: after they reach age 21, the account must be depleted within 10 years)
• Disabled Individuals
• Chronically ill individuals

Unlike the rules prior to this legislation, which allowed beneficiaries to “stretch” distributions over their life expectancy, the 10-year rule imposes a finite timeframe. The goal is to accelerate the withdrawal of funds and generate the tax revenue from traditional IRAs and similar tax-deferred accounts. Consequently, the beneficiary of a retirement account may have to pay more tax on the withdrawals of these funds since they have to be taken over a relatively short period of time. Further, if the account is large and the beneficiary is still earning a nice income associated with their own career, managing these distributions in a tax efficient manner can be tricky.

Strategies to help minimize the tax burden – for current IRA owners

Roth Conversion

Although a Roth IRA will still have to be taken over a 10-year timeframe to a non-eligible beneficiary, the withdrawals will be tax-free. A current IRA owner can work with a Financial Advisor to convert all or a portion of their traditional IRA to a Roth IRA before their death. Taxes will be owed at the time of conversion but it may be possible to utilize a lower tax bracket of a retired individual instead of bequeathing it to an income earning beneficiary who will potentially need to add the proceeds on top of their own income. This strategy will work best prior to the time when the account owner begins taking their required minimum distributions (currently age 73) but it can still be utilized once RMDs begin with some careful attention.

Accelerated Withdrawals

Similar to the Roth conversion strategy, an IRA owner can take non-required distributions and simply reinvest the proceeds in an investment account that is not tax-qualified, pay down any remaining debt or make the large purchase they have been wanting to make. This strategy can be effective when choosing to delay the start of social security and bridge the gap between income earning years and the time when social security begins.

Life Insurance

There are more creative strategies that may work in the right situations. Utilizing life insurance falls into this category. For a healthy individual who is confident they want a certain amount of their estate to go to a person or an institution after they pass, they can use accelerated distributions from their retirement account to purchase life insurance with an income tax free death benefit.

Considerations once an IRA has been inherited

As stated, if you inherited an IRA in the year 2020 or later and are a non-eligible beneficiary, you will need to withdraw the funds over the following 10 years. However it is important to understand whether the deceased account owner was already required to take their own distributions from the account at the time of their death.

• If the deceased account owner was already required to take distributions in the year they passed, then you will need to take annual distributions in years 1-9 with a final distribution in year 10. The amount of the required distribution is generally based on the beneficiary’s life expectancy. 
• If the deceased account owner was not already required to take distributions in the year they passed, then you will not need to take annual distributions in years 1-9. You will simply be required to fully withdrawal the funds by year 10 in whatever increments best suited to your needs. *In most cases, the IRS has waived the requirement to take distributions for beneficiaries in this category through 2024 due to late clarification on this rule but it is likely that this requirement will be enforced diligently starting in 2025.

If you are the beneficiary of an inherited IRA received in 2020 or since, it is very important that you develop a well thought out gameplan on the timing of your distributions. A seasoned Financial Planner can help you weigh your options and make the most out of this very valuable asset. Furthermore, legislation on this topic continues to be fluid so it is important to stay connected to your Advisor. 

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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