Inherited IRA 10-Year Rule: Who Qualifies for an Exception?
If you inherit an IRA, one of the first things you may hear is that you have 10 years to empty the account. For many beneficiaries, that’s an important rule to understand.
But what if the rule you thought applied to you didn’t?
Just imagine you’re 68 years old and your 67-year-old sister passes away and leaves you her Roth IRA. You’ve heard about the 10-year rule, so you assume you know what happens next.
Except there’s one detail you probably wouldn’t expect to matter:
You’re older than your sister.
Believe it or not, that could change the distribution options available to you. And it’s a good example of why, when you inherit an IRA, it can be important to understand which rules apply before you start taking money from the account.
Key Takeaways
- Many non-spouse beneficiaries are subject to a 10-year rule for inherited IRAs, but there are exceptions.
- Certain people qualify as eligible designated beneficiaries and may have different distribution options.
- One lesser-known category includes someone who is not more than 10 years younger than the IRA owner.
- Taking distributions without understanding your options could affect your taxes, Medicare premiums, future growth, or other parts of your retirement plan.
- Before taking money from an inherited IRA, find out which rules actually apply to your situation.
Does Every Inherited IRA Have a 10-Year Rule?
The SECURE Act changed the way many inherited retirement accounts are distributed. For many beneficiaries who inherit an IRA from someone who died after 2019, the account must be fully distributed by the end of the 10th year following the original owner’s death.
There are exceptions, however. Current inherited IRA rules recognize a group of people known as eligible designated beneficiaries, or EDBs. That’s a technical term you don’t need to memorize, but the distinction is important because these beneficiaries may have different distribution options.
Eligible designated beneficiaries can include a surviving spouse, a minor child of the IRA owner, someone who is disabled or chronically ill, or someone who is not more than 10 years younger than the IRA owner. Surviving spouses also have additional options when inheriting an IRA, which we cover in more detail in our guide to spouse-inherited IRA options.
That last category is the one that brings us back to our sibling example.
Inherited an IRA From a Sibling? Your Age Could Matter
Remember our 68-year-old who inherits a Roth IRA from her 67-year-old sister? Because she’s older than her sister, she meets the age requirement for the “not more than 10 years younger” eligible designated beneficiary category.
As an eligible designated beneficiary, she may have the option to take distributions based on life expectancy rather than simply following the 10-year rule.
Now consider someone who is 50 years old and inherits an IRA from a 75-year-old parent. That beneficiary is 25 years younger, so they would not qualify under this particular age-based exception.
Both people inherited an IRA, and both are non-spouse beneficiaries. Yet the same distribution rule may not apply to both of them.
That’s the part worth remembering. Hearing about the 10-year rule doesn’t necessarily tell you what your inherited IRA options are. Who left you the IRA, your age, the type of account, and other circumstances can all affect what happens next.
What Happens if You Get the Inherited IRA Rules Wrong?
Suppose our beneficiary assumes she has to follow the 10-year rule and starts taking distributions from the account. Later, she learns that she qualified as an eligible designated beneficiary and may have had another option.
She may not have done anything wrong by taking the distribution, but she made the decision without knowing all of her choices. Depending on the type of IRA and her individual circumstances, that decision could affect taxes, future growth, Medicare premiums, or other parts of her retirement plan.
Taxes May Be Part of the Picture
Distributions from an inherited traditional IRA are generally taxable as ordinary income. Taking a large inherited IRA distribution during a year when you already have income from other sources could increase your taxable income and affect your overall tax situation.
That doesn’t mean taking a larger distribution is necessarily the wrong decision. It means taxes are one of the pieces worth considering before deciding when and how much to withdraw.
Medicare Premiums Could Be Affected, Too
For retirees on Medicare, taxable income can have another effect. Medicare uses income to determine whether someone pays an income-related monthly adjustment amount, commonly known as IRMAA, for Medicare Part B and Part D.
A taxable inherited IRA distribution could increase your income enough to affect Medicare premiums in a future year, depending on your overall income and the applicable thresholds. That’s another reason an inherited IRA distribution may be worth considering alongside the rest of your retirement income rather than as a decision on its own.
You Could Miss a Distribution You Were Required to Take
The opposite situation can create problems, too. Someone may assume they don’t need to take money from an inherited IRA and later discover that an annual required minimum distribution applied to their situation.
Missing a required RMD can result in an IRS excise tax. Under current federal law, the tax is generally 25% of the amount that should have been withdrawn and may be reduced to 10% when certain correction requirements are met. Relief
may also be available in certain circumstances.
Or You Could Give Up an Option You Didn’t Know You Had
Sometimes there isn’t a penalty or an unexpected tax bill. The consequence may simply be learning afterward that another option was available.
That may be the easiest lesson to remember from all of these rules:
Before you start taking money from an inherited IRA, make sure you understand the options available to you.
Does the 10-Year Rule Apply to an Inherited Roth IRA?
Our sibling example involves a Roth IRA, so there’s one more distinction worth understanding. Roth IRA owners generally aren’t required to take RMDs from their own Roth IRAs during their lifetime, but beneficiary distribution rules apply after the owner dies.
For many non-spouse beneficiaries, that can mean the inherited Roth must be emptied within 10 years. An eligible designated beneficiary, however, may qualify to take distributions based on life expectancy instead.
The tax treatment is also different from a traditional IRA because qualified Roth distributions are generally tax-free. There are additional rules that can affect inherited Roth IRAs, but for our purposes, the important point is simply that the type of IRA you inherit is another piece of the puzzle.
How Could an Inherited IRA Fit Into Your Retirement Plan?
Once you know which rules apply, you can start asking how the inherited account fits with everything else you’re already doing.
Maybe you’re still working. Perhaps you recently retired and haven’t started Social Security. You could already be taking RMDs from your own retirement accounts, or you may be on Medicare and paying close attention to your taxable income from year to year.
An inherited IRA becomes another piece of that picture. Depending on the account, when and how much you withdraw could interact with your taxable income, Medicare premiums, other retirement distributions, and the amount of time assets remain in a tax-advantaged account.
This is also a good example of why we look at retirement planning across five interconnected areas: income, investments, taxes, healthcare, and legacy planning. A decision involving one area can sometimes affect several of the others. An inherited IRA may seem like a single account decision, but the distributions you take could affect your taxes, Medicare costs, income strategy, investments, and ultimately what you may leave behind.
There isn’t one distribution strategy that makes sense for everyone. Instead of looking only at how quickly you can or must take money from the inherited account, it can be helpful to consider how those distributions fit into the retirement plan you already have.
What If You’re the Person Leaving the IRA?
You may have never inherited an IRA yourself. But if you’re approaching retirement or already retired, there’s another side of this conversation that may apply to you.
Think about the IRA you’ve spent 20, 30, or even 40 years building. Someday, a child, sibling, or another person you care about may inherit what remains, and they may find themselves trying to answer many of these same questions.
How quickly do they need to take the money? Will they owe taxes? Do they have another option? Which rules apply to them?
How would you feel if someone you care about had to make those decisions without understanding the options available to them?
Beneficiary planning can involve more than putting the right names on an IRA beneficiary form. It can also mean periodically reviewing whom you’ve named, thinking about what they may eventually inherit, and helping your family know
where to turn when those decisions need to be made.
The good news is, those are conversations you can start having now.
Three Things to Remember About an Inherited IRA
Inherited IRA rules can get complicated, but you don’t need to memorize IRS terminology or distribution tables to take away something useful from this conversation.
- Who you inherited the IRA from matters.
A spouse, sibling, parent, or another beneficiary may have different options depending on the circumstances.
- Your age and the type of account can matter, too.
Our sibling example is a good reminder that details you may not expect can change the rules.
3. Understand your options before you take money out.
Once you know which rules apply, you can consider the inherited IRA alongside your taxes, Medicare, income needs, investments, and the rest of your retirement plan.
Frequently Asked Questions About the Inherited IRA 10-Year Rule
Who Qualifies as an Eligible Designated Beneficiary?
Under current inherited IRA rules, eligible designated beneficiaries can include a surviving spouse, a minor child of the IRA owner, a disabled individual, a chronically ill individual, or someone who is not more than 10 years younger than the IRA owner.
Additional requirements and definitions apply to these categories, so beneficiary status should be evaluated based on the individual circumstances.
Can a Sibling Qualify as an Eligible Designated Beneficiary?
Yes, depending on the circumstances. A sibling who is not more than 10 years younger than the IRA owner may qualify under the age-based eligible designated beneficiary category.
Being a sibling by itself does not create this exception. The age difference is what matters for this particular category.
Do I Have to Take an RMD Every Year During the Inherited IRA 10-Year Period?
It depends on the circumstances. In certain situations, annual distributions are required during the 10-year period in addition to fully distributing the account by the end of year 10. Other inherited IRA situations are treated differently.
Does an Inherited Roth IRA Have a 10-Year Rule?
It can. Many non-spouse beneficiaries are subject to the 10-year rule for inherited Roth IRAs, while an eligible designated beneficiary may qualify for life-expectancy distributions instead.
What Happens if I Miss an Inherited IRA RMD?
A missed RMD can result in an excise tax. Under current federal law, the tax is generally 25% of the amount that should have been distributed and may be reduced to 10% when certain correction requirements are met. Relief may also be available in certain circumstances.
Before You Make a Decision About an Inherited IRA
If there’s one thing to remember from all of this, it’s that the inherited IRA rule you’ve heard about may not necessarily be the rule that applies to you.
If you’ve recently inherited an IRA, understanding your options before taking distributions can help you see how that account fits alongside your taxes, Medicare, income needs, and the rest of your retirement plan.
And if you’re thinking about this from the other side — wondering what your children, siblings, or other loved ones may eventually inherit from you — these questions matter there, too. Someday, someone you care about may be sitting down with your retirement account and trying to figure out what comes next.
Would they understand their options and know where to turn before making a decision?
If you’ve inherited an IRA or have questions about what your own beneficiaries may someday inherit, let’s talk about it. At Richmond Brothers, we can help you look at these decisions as part of your complete retirement plan, including how they may affect your income, investments, taxes, healthcare, and the legacy you want to leave.
Have a question about an inherited IRA or your own beneficiary plan? Start a conversation with our team.
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