Inherited an IRA? The 10-Year Rule’s Annual RMD Trap Catches More Beneficiaries Than You Might Think

Inheriting a retirement account often arrives tangled up with grief, and the tax rules attached to it are not intuitive. Many beneficiaries assume they have a full decade to leave the money alone and simply empty the account before the ten-year mark. For many inherited IRAs, that assumption is wrong — and getting it wrong can create a real tax penalty, not just a missed planning opportunity.

The Basic Rule, and the Part People Miss

Under the SECURE Act framework, most non-spouse individual beneficiaries who inherit an IRA from someone who died after 2019 must fully distribute the account within ten years of the original owner’s death. That much is fairly well known.

What trips people up is a second layer: for an inherited traditional IRA, if the original owner died on or after the owner’s required beginning date for required minimum distributions, commonly called RMDs, a non-eligible designated beneficiary generally cannot simply wait until year ten. Annual beneficiary RMDs are generally required in years one through nine, and whatever remains must be fully distributed by the end of year ten.

This distinction matters. The relevant question is not merely whether the original owner had actually been taking RMDs before death. The technical question is whether the original owner died on or after the required beginning date — the point at which the owner was required to begin lifetime RMDs.

Inherited Roth IRAs work differently. Because Roth IRA owners are not subject to lifetime RMDs, the owner is treated as having died before the required beginning date for these purposes. As a result, most non-eligible designated beneficiaries of inherited Roth IRAs generally are not required to take annual withdrawals in years one through nine, although the account still must be fully distributed by the end of year ten.

The distinction between a traditional inherited IRA and an inherited Roth IRA is exactly the kind of detail that can get lost when beneficiaries are handling an estate under stress, which is precisely when it matters most.

What It Costs to Get Wrong

The excise tax for a missed required distribution is generally 25% of the amount that should have been withdrawn but was not. If the shortfall is corrected within the applicable correction window, the tax may be reduced to 10%.

A further waiver may also be available where the shortfall was due to reasonable error and reasonable steps are being taken to correct it, but that relief must be affirmatively claimed. It is not automatic. For an account of any meaningful size, a missed annual RMD is not a rounding error.

Who May Avoid the Standard 10-Year Payout Rule

Not every beneficiary is subject to the standard ten-year payout rule in the same way. A category known as “eligible designated beneficiaries” may be able to use life expectancy distributions instead.

Eligible designated beneficiaries generally include:

• surviving spouses;

• minor children of the original account owner;

• beneficiaries who are disabled;

• beneficiaries who are chronically ill; and

• beneficiaries who are not more than ten years younger than the original account owner.

Special limits apply. For example, the minor-child category applies only to a minor child of the original account owner, not to every minor beneficiary. In addition, a minor child’s life expectancy treatment generally lasts only until the child reaches the applicable age of majority, after which a ten-year payout period begins.

Surviving spouses also have special options that other beneficiaries do not, including the potential ability to treat the IRA as their own. The correct approach depends on the type of beneficiary, the type of account, the original owner’s age and RMD status, and the elections available under the governing rules.

If an eligible designated beneficiary defaults to the ten-year approach when life expectancy treatment is available, the result may be faster-than-necessary withdrawals and accelerated income tax.

Why This Deserves Attention Now, Not Later

If an IRA was inherited in the last few years and no annual distributions have been taken because the beneficiary believed there was no obligation until year ten, the account should be reviewed carefully.

The IRS provided transition relief for certain missed annual beneficiary RMDs for 2021 through 2024 while the SECURE Act regulations were being finalized. That relief does not eliminate the ten-year distribution deadline, and it does not make future compliance optional.

A mid-year review of actual withdrawals against required withdrawals can be valuable, particularly if multiple tax years have passed since the account was inherited. The rules shifted as they were phased in, and it is common for beneficiaries — and even some financial institutions — to have applied the wrong standard during the transition period.

Practical Next Steps

For anyone who has recently inherited an IRA, the first questions are:

1. What type of account was inherited? Traditional IRAs and Roth IRAs are treated differently.

2. What type of beneficiary is involved? A surviving spouse, eligible designated beneficiary, non-eligible designated beneficiary, trust, estate, or charity may each be subject to different rules.

3. Did the original owner die before or after the required beginning date? For inherited traditional IRAs, this can determine whether annual RMDs are required during years one through nine.

4. What distributions have already been taken? The custodian’s distribution history should be compared against the beneficiary’s required withdrawal schedule.

5. Is there a shortfall? If a required distribution was missed, proactive correction may reduce or eliminate the applicable excise tax depending on the circumstances.

Inherited IRA planning is often less about one dramatic tax move and more about avoiding preventable mistakes. The ten-year rule is simple in name only. In practice, the annual RMD requirement can change the entire distribution strategy.

Disclaimer: This article is for general informational purposes only, does not constitute legal or tax advice, and does not create an attorney-client relationship.