Inherited IRA Distribution Options Under the 10-Year Rule

Key Definitions

These four terms govern the distribution rules on this page. Confirm each one before reviewing distribution options with a client.

Some distribution methods help preserve an Inherited IRA’s tax-advantaged status, while others may steer a beneficiary into unintended consequences. Understanding the options matters – once a distribution is taken, a non-spouse beneficiary cannot roll it over to the Inherited IRA or their own IRA within 60 days.

Who Qualifies as a Designated Beneficiary?

There are three beneficiary categories when the IRA owner dies after 2019: Non-Designated Beneficiary (NDB), Designated Beneficiary (DB), and Eligible Designated Beneficiary (EDB). For EDB rules, see our Eligible Designated Beneficiary insight. The EDB category and 10-year rule didn’t exist before 2020 — non-spouse and qualified trust beneficiaries who inherited before 2020 generally use the life expectancy option.

A Designated Beneficiary is one of the following:

• A child of the IRA owner, or the child’s qualified trust (QT), who has surpassed age 21
• An individual who is more than 10 years younger than the IRA owner
• An individual who is not chronically ill or disabled
• The primary beneficiary of a QT who is not the surviving spouse, chronically ill, or disabled

DB Distribution Options by Beneficiary Type

With the beneficiary category confirmed, two key factors determine the available distribution options: the IRA owner’s RBD and RMD Age.

1. The duration an Inherited IRA can remain open depends on several factors, including the QT type (accumulation or conduit), the primary beneficiary, and the number of primary beneficiaries. Trustees should consult an attorney to understand the specific trust distribution options available.
2. In some instances an entity may be able to disclaim.

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The 10-Year Rule: How It Works

An Inherited Traditional or Roth IRA must be fully emptied by the end of the 10th year following the year the original IRA owner died.

When Annual RMDs Apply Under the 10-Year Rule

• If the IRA owner died on or after the RBD, RMDs are required for years 1-9.
• These RMDs are calculated using a divisor from the Single Life Expectancy Table.
• The divisor is based on the beneficiary’s age in the year following the IRA owner’s death and is reduced by one each subsequent year under the term certain method.
• In year 10, any remaining account balance must be distributed.
• If the IRA owner died before the RBD, there are no annual RMDs during years 1-9, only the year 10 deadline.

Avoiding a Year 10 Tax Spike: Even a modest Inherited IRA can grow substantially over a 10-year term. If a beneficiary delays distributions or takes only annual RMDs, the final year 10 distribution could create a significant tax event and potentially push the beneficiary into a higher tax bracket.

Lump-Sum Distribution and the Disclaimer Option

Lump-Sum Distribution

Some beneficiaries choose to empty the Inherited IRA in a single year. While this satisfies distribution requirements, it comes with a potential cost: the full taxable amount is included in income for that year, which may push the beneficiary into a higher tax bracket.

The Disclaimer Option

A beneficiary may choose to disclaim all or a portion of an Inherited IRA – essentially refusing the inheritance. This decision must generally be made within nine months of the IRA owner’s death. Minor beneficiaries have nine months after age 21. Specific requirements under the IRC must also be met for the disclaimer to be valid.

The beneficiary cannot direct where the disclaimed assets go. The IRA custodian will follow the instructions the IRA owner provided on the beneficiary designation form. If there are no other named beneficiaries, the IRA custodial agreement’s default provisions determine who inherits.