The SECURE Act of 2019 changed the rules for non-spouse beneficiaries of inherited IRAs. The rules now are that the beneficiary of such an IRA has 10 years to distribute it in its entirety.
An important nuance on annual RMDs: Whether annual required minimum distributions are necessary during the 10-year period depends on whether the original IRA owner had already reached their Required Beginning Date (RBD) at the time of death. If the original owner died after their RBD, the beneficiary must take annual RMDs in years 1–9 (based on the beneficiary’s life expectancy), with full distribution by the end of year 10. If the original owner died before their RBD, no annual RMDs are required — the beneficiary simply must distribute the entire account by the end of year 10. These rules were finalized by the IRS in 2024 and are effective beginning in 2025.
Note on Eligible Designated Beneficiaries: Certain beneficiaries are exempt from the 10-year rule and may still use the old life-expectancy stretch method. These include: surviving spouses, minor children of the deceased (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the deceased.
This is a big change from previous rules. Prior to the SECURE Act, a non-spouse beneficiary could “stretch” the IRA over his or her own life expectancy. Say granddad left an IRA to the grandson. The grandson’s life expectancy (from an IRS table) was 70 years. The year after death the grandson would take the beginning of year balance and divide it by 70. The following year he’d take the beginning of year balance and divide it by 69. And so on. The result was that the IRA could grow enormously during this time.
If You Are a Non-Spouse IRA Beneficiary, You Have Some Choices
You can simply sell the assets and distribute them to yourself at any point during the 10 years following the IRA owner’s death. Of course, the amount distributed is added to your taxable income for that year, and can run you right up the tax brackets. The taxation makes sense, in that the traditional IRA owner was generally never taxed on the contributions to the account, nor on the growth within the account. So at distribution the IRS gets its own.
Should You Distribute Now or Later?
You can distribute the account now and pay all the taxes. Then you can re-invest in an individual account, and have capital gains taxation rather than ordinary income taxation. The other extreme would be to leave the money in the IRA for the next 10 years. It will continue to grow tax-deferred, but the taxable event at distribution will be larger. And of course there’s the middle ground: distribute 10% or some other percentage of the account balance per year.
Other Considerations
Consider what your tax situation will be in 10 years. If you will be selling a business and have a large taxable event, that is an argument to distribute the IRA earlier. On the other hand, if you are charitably inclined, perhaps you could match the IRA distribution taxable event with a potentially large up-front tax deduction of a charitable remainder trust. In this way you could potentially wipe out the IRA’s taxable event, receive an income, and endow the charity or good work of your choice.
Review Your Beneficiary Arrangements
Please be sure the beneficiaries on all of your insurance policies and retirement accounts are the people you want! We worked with one client who had a very old life policy that would be left to an ex-wife! In fact, not the most recent ex-wife, but the first ex-wife!
Consider also using both primary and contingent beneficiaries. For example, your spouse could be the primary, and your children the contingents. Years pass, and you die leaving the spouse comfortably financially. She doesn’t need the IRA. What can she do? Disclaim it — refuse to accept the benefit, in other words. The disclaimer must be made within 9 months of the date of death, and the beneficiary cannot have accepted any benefits prior to disclaiming. The disclaimed assets then pass to the contingent beneficiaries — your children. This gives flexibility in estate planning when the time comes.
For more IRA information please see these related posts:
