Inherited IRA Rules: What Beneficiaries Need to Know in 2025

Last year, Jennifer's father passed away. He left her his $800,000 Traditional IRA — a legacy of decades of careful saving. Jennifer, 52, is a successful attorney earning $200,000 per year. She assumed she could take small distributions over decades, just like her friend's mother did when inheriting an IRA in 2015. But she was wrong.

Under the new rules, Jennifer must withdraw the entire $800,000 within 10 years. That's $80,000+ per year added to her already high income. Her marginal tax rate jumped from 24% to 32%. Over the decade, she'll pay roughly $256,000 in federal taxes on the inheritance — nearly a third of what her father left her.

"If I had known," Jennifer said, "I would have had Dad convert more to Roth while he was alive. He was in the 12% bracket during retirement. I'm paying 32%."

If you're thinking about what happens to your accounts when you die, start with your beneficiary designations. They override your will, and they decide who inherits the IRA in the first place.

How we got here: from stretch IRAs to the 10-year crunch

This is the harsh new reality for inherited IRAs, thanks to the SECURE Act of 2019 and SECURE 2.0 in 2022. The beloved "stretch IRA," where it was possible to spread distributions over a beneficiary's lifetime, is dead for most people. Whether you have just inherited one or you are estate planning, mastering these rules can save you a fortune.

Before 2020, anyone inheriting an IRA could stretch distributions over their life expectancy. A 30-year-old might draw minimally for 50 years, letting tax-deferred growth work its magic. IRAs became powerhouse wealth-transfer tools.

Post-SECURE Act, for deaths after January 1, 2020, most non-spouse beneficiaries must empty the account by December 31 of the 10th year following death. No balance left, but rules vary by who you are.

Your status will determine your strategy

The SECURE Act sorts beneficiaries into categories that have different rules.

1. Spouse Beneficiaries

Spouses draw the "golden ticket." As a spouse heir, you can roll the IRA into your own, delay RMDs until your required age, and stretch distributions over your lifetime. Most choose this path for maximum control.

2. Eligible Designated Beneficiaries (EDBs)

Eligible Designated Beneficiaries (EDBs) keep some stretch benefits too: minor children of the owner (until age 21), the disabled or chronically ill (per Social Security definitions), or anyone no more than 10 years younger than the deceased. After age 21, minors shift to the 10-year rule.

3. Non-Designated Beneficiaries

Everyone else falls under non-eligible designated beneficiaries. These are adult children like Jennifer, grandchildren, siblings, friends — everyone lands in the toughest category. Empty it within 10 years, no exceptions.

Non-designated beneficiaries like estates, charities, or non-qualifying trusts face tighter timelines: 5 years if the owner died before RMD age, or the owner's remaining life expectancy otherwise.

Three steps walking through the 10-year rule and RMDs

Step 1: Empty it by year 10

No matter what, the entire inherited IRA must be zero by December 31 of the 10th year after death.

Step 2: Check for yearly RMDs

• Owner died before starting RMDs? No yearly minimums. Just empty by year 10.
• Owner died after starting RMDs? You must take annual RMDs during those 10 years.

If you're unsure what "starting RMDs" means (or what the current deadlines are), see RMD rules and deadlines.

Step 3: How to calculate RMDs

• Year after death: find your life expectancy factor (IRS table, based on your age). Say it's 34.2.
• Each year after: Subtract 1 (33.2, 32.2, etc.).
• Divide that year's account balance by the factor. That's your minimum withdrawal.

And don't miss it — 25% IRS penalty will not wait (10% if corrected quickly).

Roth IRAs are easier. Same 10-year deadline, but tax-free withdrawals. Let it grow 9 years, empty in year 10, and there will be no tax bill.

Smart distribution strategies

Strategy 1: Spread distributions evenly

Take 1/10th of the balance each year to avoid tax bracket jumps.

Tax planning turns this burden into opportunity. Consider spreading withdrawals evenly, taking roughly one-tenth each year keeps you in lower brackets. A $500,000 inherited IRA? Withdraw $50,000 annually instead of a $500,000 tax bomb in year 10.

Strategy 2: Time distributions to low-income years

Time bigger distributions for low-income years, like early retirement or sabbaticals. Try to minimize distributions in high-earning years and adjust based on your marginal tax bracket.

Strategy 3: Coordinate with other income

Sync with capital loss years or hefty deductions. To do so, consider years with large capital losses (offset income), years with significant deductions, and years before other income sources start.

Strategy 4: Roth Conversion of Inherited Traditional IRA

You cannot convert an inherited Traditional IRA to a Roth IRA. This strategy doesn't work.

However, you can take distributions, pay the tax, and fund your own Roth IRA if eligible.

If you're the account owner (not the beneficiary) and you're trying to leave heirs a smaller tax bill, see Roth conversion strategies.

Strategy 5: Charitable donations

And last but not least, use distributions to offset donations through donor-advised funds.

Special cases

There can be some special cases.

Multiple beneficiaries: Split the account by December 31 of the year after death, letting each follow their own timeline. Miss this, and everyone gets stuck with the oldest beneficiary's rules.

Trusts: Picture how dad leaves his IRA to a trust for your kids. A conduit trust works like a pass-through — whatever RMDs the trust must take get passed directly to the kids, so they follow their beneficiary rules (like the 10-year clock if they're adults). An accumulation trust is stricter — the trust itself has to empty the IRA in just 5 years, no matter who benefits later.

Minor children: If you're the deceased's child under 21, you can stretch small distributions until your 21st birthday. Then the 10-year countdown starts, everything out by age 31. What if you pass away first? Your successor beneficiary doesn't get a new 10-year clock. They just finish your remaining time. If you had 3 years left, they have 3 years left.

What to do the moment you inherit

First of all, don't panic — withdrawals can't be undone, so first confirm your beneficiary category and timeline. One of the most rational decisions is to open a properly titled inherited IRA ("John Smith, deceased, for the benefit of Jane Smith") and transfer assets trustee-to-trustee.

For spouses: Roll into your own IRA for flexibility, or keep it inherited if you're under 59½ and need access.

For non-spouses: Pick your custodian and map a 10-year withdrawal plan.

Every distribution from a Traditional IRA counts as ordinary income, potentially spiking Medicare premiums, affecting ACA subsidies, or triggering state taxes. Roths stay tax-free, so maximize their growth.

At the same time it's important to not be caught in frequent traps. For example, heirs can miss required annual RMDs and say hi to penalties, or dump everything in year 10, facing tax nightmare. They can also forget to split multiple-beneficiary accounts, and try rolling non-spouse IRAs into their own, which is not allowed.

Common mistakes to avoid

Mistake 1: Missing the Annual RMD (When Required)

If the original owner had started RMDs, you must continue annual distributions. Missing these triggers a 25% penalty (10% if corrected promptly).

Mistake 2: Waiting Until Year 10

Taking a $500,000 distribution in year 10 creates a massive tax bill. Spread it out.

Mistake 3: Not Separating Accounts

If you're one of multiple beneficiaries, split the account by December 31 of the year after death to maximize your options.

Mistake 4: Treating It as Your Own (Non-Spouse)

Non-spouse beneficiaries cannot roll inherited IRAs into their own. It must remain an inherited IRA with proper titling.

Mistake 5: Ignoring State Taxes

Some states tax inherited IRA distributions differently. Plan for your state's rules.

Plan now, pay less later

Inherited IRAs lost their flexibility, hitting most non-spouses with a 10-year tax squeeze. From now on, success means knowing your category, spreading distributions wisely, syncing with your finances, and never procrastinating till year 10. If you're the account owner thinking about legacy, consider Roth conversions now to leave tax-free money to your heirs.

Need personalized guidance on inherited IRAs? Connect with a retirement advisor who specializes in estate and tax planning.