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Don’t Panic! How to Handle Inherited IRAs Without Losing Sleep (or Money)

Inheriting an IRA can feel like discovering a treasure chest… that comes with a 10-year timer and a stack of IRS instructions. With the SECURE Act (2019) and SECURE Act 2.0 (2022–2023 updates), the rules for inherited retirement accounts have changed. Knowing the rules can save you from unnecessary taxes, penalties, or the stress of mismanaging the account.


Using a megaphone to communicate with someone right in front of you.

The Basics: What Changed with SECURE and SECURE 2.0


Before 2020, beneficiaries could “stretch” an inherited IRA over their own life expectancy, allowing money to grow tax-deferred for decades.


SECURE Act (2019) introduced key changes:

  • Most non-spouse beneficiaries must fully distribute inherited IRAs within 10 years of the original owner’s death.

  • If the decedent had already started RMDs, beneficiaries must continue taking annual RMDs during that 10-year period, based on life expectancy.

  • Eligible designated beneficiaries (EDBs) — surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the decedent — can still take distributions over life expectancy.


SECURE Act 2.0 (2022–2023 updates) clarified other RMD rules, but the 10-year distribution requirement for most beneficiaries remains the key rule.


Who Counts as an Eligible Designated Beneficiary?


Eligible designated beneficiaries (EDBs) include:

  • Surviving spouse

  • Minor children of the deceased (until they reach the age of majority)

  • Disabled or chronically ill individuals

  • Individuals not more than 10 years younger than the deceased


All other beneficiaries are subject to the 10-year rule, meaning the IRA must be fully depleted by the end of year 10.


Required Minimum Distributions (RMDs) vs. 10-Year Rule


  • If the decedent had already started RMDs:

    Beneficiaries must take annual RMDs during the 10-year period based on life expectancy.


  • If the decedent had NOT started RMDs:

    Beneficiaries do not have to take annual distributions. They simply need to empty the account by the end of year 10.


  • Spouses have additional flexibility: they can treat the IRA as their own, delaying distributions until their own RMD age, or roll it into their retirement account.


Roth vs. Traditional Accounts


  • Traditional IRAs: Distributions are taxable. Planning withdrawals carefully can prevent a large tax bill.


  • Roth IRAs: Distributions are generally tax-free, but non-eligible beneficiaries still need to follow the 10-year rule.


Strategies to Optimize an Inherited IRA


  • Spread distributions across low-income years to manage taxes.

  • Coordinate with other accounts and consider Roth conversions.

  • Charitable giving using Qualified Charitable Distributions (QCDs) can reduce taxable income.


Common Mistakes to Avoid


  • Assuming the IRA can be stretched indefinitely (it can’t).

  • Missing the 10-year deadline.

  • Taking large withdrawals in a single year and spiking taxes.

  • Leaving inherited assets concentrated rather than balanced.


Planning Steps for Beneficiaries


  1. Confirm RMD status: Did the decedent take their RMD this year?

  2. Identify your classification: Eligible or non-eligible?

  3. Develop a distribution schedule: Consider the 10-year rule and required annual RMDs.

  4. Integrate with your overall financial plan to avoid tax surprises.

  5. Consult a tax professional.


Conclusion


Inheriting an IRA can be a powerful opportunity if handled wisely. For most beneficiaries, the 10-year rule is the law: empty the account by the end of year 10. By understanding RMD requirements, planning withdrawals strategically, and avoiding common mistakes, you can make your inheritance work for you without unnecessary stress.


5 Key Takeaways


  1. 10-Year Rule: Most beneficiaries must fully deplete the inherited IRA within 10 years — no exceptions.

  2. Annual RMDs: Required only if the decedent had already started RMDs.

  3. Spousal Flexibility: Spouses can treat the IRA as their own and delay distributions until their own RMD age.

  4. Account Type Matters: Traditional IRAs are taxable; Roth IRAs are generally tax-free, but the 10-year rule still applies.

  5. Plan Strategically: Spread withdrawals, coordinate with other accounts, consider charitable giving, and diversify investments.

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