Article Highlights:

• First, Who Inherited the IRA?
• Surviving Spouse Options
• Eligible Designated Beneficiaries
• Everyone Else: The 10-Year Rule
• Does the Original Owner’s RMD Status Matter?
• What if There Are Multiple Beneficiaries?
• What Are the Tax Penalties if Required Distributions Are Missed?
• Penalty Waiver for RMD Uncertainty
• Practical Examples
• What Taxpayers Should Do Now
• Common Mistakes to Avoid
• Bottom Line

If you inherited a Traditional IRA after 2019, the rules are not always what people expect. The SECURE Act changed the way many inherited retirement accounts must be paid out, and now who inherited the account and whether the original owner had already started required minimum distributions, or RMDs, controls. In some cases, a surviving spouse still has the most flexibility. In other cases, the money must come out within 10 years. And in a few special situations, the beneficiary may still use life-expectancy-based payouts instead of the 10-year rule.

Regardless of how the inherited distribution is determined, payouts from Traditional IRAs are taxable to the beneficiary.

This article explains the main rules in plain language so you can understand what may apply to your situation.

FIRST, WHO INHERITED THE IRA?

The biggest factor is the type of beneficiary. There are generally three buckets to think about:

• Surviving Spouse
  
  
• Eligible Designated Beneficiary
  
  
• Other Beneficiary

An eligible designated beneficiary is someone in one of the following special protected categories:

• a disabled individual,
  
  
• a chronically ill individual,
  
  
• a person who is not more than 10 years younger than the IRA owner, or
  
  
• the IRA owner’s minor child.

An eligible designated beneficiary may take distributions over the longer of their own life expectancy or the employee's remaining life expectancy or follow the 10-year rule (if the account owner died before reaching their required beginning date).

If you do not fit into one of those special categories, you are usually in the “other beneficiary” group, and the 10-year rule generally applies.

SURVIVING SPOUSE OPTIONS

If you inherited the IRA from your spouse and you are the sole beneficiary of the IRA, you have more choices than most other beneficiaries. A surviving spouse can generally:

1. Treat the IRA as his or her own (taking distributions based on the surviving spouse’s age),
   
   
2. Keep it as an inherited IRA (with distributions starting for the year the deceased spouse would have reached RMD age), or
   
   
3. Roll eligible amounts into the spouse’s own IRA under the normal rollover and distribution rules.

Treating the IRA as your own is often the most flexible option. If you do that, the account becomes part of your own retirement planning, and future distributions follow the rules that apply to you.

If you keep it as an inherited IRA instead, you may be able to manage the timing of distributions differently. That can sometimes be useful, depending on your age, income, and tax situation.

A surviving spouse also has special flexibility if the deceased spouse had already started RMDs. The spouse may continue distributions under the inherited IRA rules or may choose ownership treatment, depending on the facts.

ELIGIBLE DESIGNATED BENEFICIARIES

Some beneficiaries are allowed to use more favorable rules than the standard 10-year rule described below. These are called eligible designated beneficiaries.

• Disabled individuals - A disabled person who inherits an IRA may qualify for special treatment. This can allow distributions to be spread out more favorably than under the standard 10-year rule.
  
  
• Chronically ill individuals - A chronically ill beneficiary can also qualify for the special eligible designated beneficiary rules.
  
  
• Individuals not more than 10 years younger than the owner - If you inherited the IRA and you are close in age to the person who died — specifically, not more than 10 years younger — you may also qualify as an eligible designated beneficiary.
  
  
• The owner’s minor child - A minor child of the IRA owner is also treated as an eligible designated beneficiary. This is an important exception, but it has limits. The favorable treatment generally applies while the child is still a minor. After the child reaches age 21, the account usually becomes subject to the 10-year rule for the remaining balance.
  
  

EVERYONE ELSE: THE 10-YEAR RULE

If you are not a surviving spouse and do not qualify as an eligible designated beneficiary, the inherited IRA is generally subject to the 10-year rule. That means the entire account must be distributed by the end of the 10th year after the year of death.

For example, if the IRA owner died in 2020, the inherited IRA generally must be emptied by the end of 2030.

A lot of taxpayers are surprised by this rule because it is different from the older “stretch IRA” approach many people had heard about. For many beneficiaries, the stretch is no longer available.

DOES THE ORIGINAL OWNER’S RMD STATUS MATTER?  

Yes, very much. You need to know whether the IRA owner died:

• Before the beginning date for RMDs, or
  
  
• After RMDs had already begun

That fact can affect the distribution timing and the rules that apply to the inherited account.

If the owner died before RMDs began: If the owner died before starting required distributions, the inherited IRA may still be subject to the SECURE Act rules (i.e., eligible for a life-expectancy payout or drain the account in 5 years), but the starting point can be different than when the owner had already begun taking RMDs. The beneficiary status still controls the payout method.

If the owner died after RMDs began: If the owner died after the RMD beginning date, distributions may need to be handled differently. Inherited IRA rules still apply, but the account may already have been in distribution status before death. For the year of the owner’s death, if the account owner hadn’t taken their RMD before passing away, the RMD that the owner would have been required to make must still be distributed.

In simple terms: before or after RMDs began is not a minor detail. It can change the way the inherited IRA is administered.

WHAT IF THERE ARE MULTIPLE BENEFICIARIES?

Sometimes an IRA has more than one beneficiary. In that case, it may be important to separate the account into distinct shares by the required deadline so each beneficiary can be treated separately. When that happens properly, each beneficiary can be treated as the sole beneficiary of his or her share.

This matters because one beneficiary may qualify for a more favorable payout rule while another does not.

WHAT ARE THE TAX PENALTIES IF REQUIRED DISTRIBUTIONS ARE MISSED?

Normally, if a required distribution is missed, the IRS can impose an excise tax penalty of 10% or 25% of the required but undistributed amount. For inherited IRAs, this can be especially confusing because the distribution rules changed and then the IRS issued transition relief for some years.

That is why many taxpayers were worried about whether they needed to take annual withdrawals from inherited IRAs during the transition period. The rules were not always clear, and many people were unsure whether a yearly distribution was required or whether they could wait until the end of the 10-year period.

PENALTY WAIVER FOR RMD UNCERTAINTY

The good news is that the IRS has provided penalty relief for certain missed RMDs during the years when the inherited IRA rules were in flux. In plain English, for certain taxpayers affected by this uncertainty, the IRS has said it will not impose the RMD penalty for the missed required distributions in those years.

That relief has covered the period of uncertainty for 2021 through 2024.

So, if you inherited an IRA and were unsure whether you had to take a distribution in one of those years, you may have been protected from the penalty.

That does not mean the distribution itself was never required in every case. It means the IRS provided penalty relief for affected taxpayers because the rules were unsettled.

PRACTICAL EXAMPLES

Here are a few simple examples.

Example 1: Surviving spouse - Maria inherits her husband’s IRA. As the surviving spouse and sole beneficiary of the IRA, she may be able to treat the IRA as her own or keep it as an inherited IRA. That gives her flexibility in how and when to take money out.

Example 2: Disabled adult child - James inherits his mother’s IRA and is disabled. He may qualify as an eligible designated beneficiary, which can give him better payout options than the standard 10-year rule.

Example 3: Adult child who does not qualify as an eligible designated beneficiary - Tina inherits her father’s IRA and is an adult child, but she does not qualify as disabled, chronically ill, or as another eligible designated beneficiary. She will usually be subject to the 10-year rule and must empty the inherited IRA by the end of the 10th year after her father’s death.

Example 4: Minor child - Evan inherits his father’s IRA while still a minor. He may qualify for special treatment as the owner’s minor child, but once he reaches adulthood the remaining account is usually subject to the 10-year rule.

WHAT TAXPAYERS SHOULD DO TO ENSURE PROPER TREATMENT OF AN INHERITED IRA

If you inherited a Traditional IRA after 2019, here are the most important steps:

1. Identify the beneficiary type
   
• Spouse
• Eligible designated beneficiary
• Another beneficiary
  
  
2. Determine when the owner died
• before RMDs began, or
• after RMDs began
  
  
3. Find out whether annual distributions were required
• especially for the years affected by the SECURE Act transition uncertainty
  
  
4. Check whether penalty relief applies
• the IRS has provided relief for certain missed RMDs during the uncertainty period from 2021 through 2024
  
  
5. Keep good records
• inherited IRA rules can be technical, and records matter if the IRS ever asks questions

COMMON MISTAKES TO AVOID

A few mistakes come up often:

• Assuming all inherited IRAs now follow the same rule.
• Forgetting that a surviving spouse has special choices.
• Missing the difference between an eligible designated beneficiary and everyone else.
• Ignoring whether the owner had already started RMDs.
• Assuming a missed distribution automatically means a penalty applies, when relief may be available.

BOTTOM LINE

If you inherited a Traditional IRA after 2019, the SECURE Act changed the rules in a big way. A surviving spouse still has important options. Some beneficiaries, including disabled individuals, chronically ill individuals, individuals close in age to the deceased owner, and the deceased IRA owner’s minor child, may qualify for more favorable treatment as eligible designated beneficiaries. Everyone else is usually subject to the 10-year rule.

The date the owner died and whether RMDs had already started are also important. And if you were unsure whether you had to take an RMD during the transition years, the IRS has provided penalty relief for certain missed distributions during the uncertainty period.