Eligible designated beneficiaries are exempt from the 10-year rule. This applies to beneficiaries who are surviving spouses or minor children (until age 21) of the deceased account owner, beneficiaries who are chronically ill or disabled, and beneficiaries who are not more than 10 years younger than the decedent.
At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. Other considerations: You are taxed on each distribution. You will not incur the 10% early withdrawal penalty.
It comes with several changes for inherited IRAs. First, if an IRA account holder dies on or after January 1, 2020, and you inherit their IRA, you'll now generally have 10 years after the account holder's death to withdraw all the money. Otherwise, you'll face a 50% penalty on any money remaining in the account.
This 10-year rule has an exception for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person or a person not more than ten years younger than the employee or IRA account owner.
Before the Secure Act of 2019, heirs could "stretch" inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes. But certain accounts inherited since 2020 are subject to the "10-year rule," meaning IRAs must be empty by the 10th year following the original account owner's death.
The 10 year rule covers any breach of use of land or buildings which has not been challenged by enforcement action for the period of at least 10 years.
Tax Planning Strategies for Inherited IRAs
One inherited IRA tax management tip is to avoid immediately withdrawing a single lump sum from the IRA. Instead, wait until RMDs are due, or, if you got the IRA from a non-spouse, stretch withdrawals over 10 years.
Spacing out distributions over 10-year period
A beneficiary may consider spacing out distributions over the ten-year period to benefit from tax-deferred appreciation while also managing taxes. If the beneficiary retires during those years, waiting to take distributions until then may lower the overall tax bill.
If you're at least age 59½ and your Roth IRA has been open for at least five years, you can withdraw money tax- and penalty-free. See Roth IRA withdrawal rules.
If multiple beneficiaries inherit an IRA, it's often a good idea to split it into separate accounts. “This way, each beneficiary can manage their own distributions according to their financial needs and the required rules,” Carlson said.
The IRS has waived RMD requirements from inherited IRAs for 2024. Here's how to decide whether you should take or skip the withdrawal.
Required minimum distributions (RMDs) are the minimum amount that you must withdraw from certain tax-advantaged retirement accounts. They begin at age 72 or 73, depending on your circumstances and continue indefinitely. There is, unfortunately, no age when RMDs stop.
Considerations for inherited IRAs received since 2020: Tax implications will depend on the type of account you've inherited. The IRA balance must be emptied within 10 years; this distribution period begins the year after the original account owner's death.
If you inherit a Roth IRA, you're free of taxes. But with a traditional IRA, any amount you withdraw is subject to ordinary income taxes. For estates subject to the estate tax, inheritors of an IRA will get an income-tax deduction for the estate taxes paid on the account.
The inherited IRA 10-year rule changed the way this type of account is handled when it passes from one account holder to another. It came into effect by way of the SECURE Act, which passed in December 2019 and became law as of Jan. 1, 2020.
These eligible beneficiaries are: Chronically ill or disabled nonspouse beneficiaries. Nonspouse beneficiaries not more than 10 years younger than the account owner who died. A minor child of the account owner (biological child or legally adopted) but only until that child reaches age 21.
Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.
The short answer is yes if you inherit the IRA from a spouse. But a rollover to your own IRA is not allowed if you inherit the IRA from anyone else.
Withdrawals from Inherited IRAs are subject to ordinary income tax. However, there are no penalties for early withdrawal, regardless of the beneficiary's age. If the original IRA was a Roth IRA, withdrawals are typically tax-free, provided the Roth IRA had been opened for at least five years before the owner's death.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
The primary disadvantage of naming a trust as beneficiary is that the retirement plan's assets will be subjected to required minimum distribution payouts, which are calculated based on the life expectancy of the oldest beneficiary.
Long story short, the four-year rule was replaced by a ten year rule on 25th April 2024. This means that moving forward, any works completed without the required planning permission will need to demonstrate ten years of continuous use rather than four - a far more arduous task.
Designated beneficiaries and the 10-year rule
The 10-year rule applies to the group of people now known as designated beneficiaries, defined as any individuals who don't qualify as EDBs. The group of beneficiaries most impacted by the 10-year rule are adult children inheriting an IRA from their parents.
The weak version is that a breakthrough requires a minimum of 10 years' hard work and practice in a relevant domain—and it may take much longer. The medium version is more restrictive: a breakthrough requires a minimum of 10 years' hard work and practice focused on the particular problem solved by the breakthrough.