What to Know About the 10-Year Inherited IRA Rule

Starting in 2025, people with inherited individual retirement accounts will no longer be able to “stretch” their withdrawals for as long as they want.

The new regulation, known as the 10-year rule, has been delayed by the IRS previously, but is finally here next month. Anyone who inherited an IRA from someone who died on or after January 1, 2020, will be required to withdraw all funds by December 31 of the 10th full calendar year following the decedent’s death. 

While the regulation is going into effect in 2025, it is an important area for IRA inheritors to be aware of and, ideally, get some guidance on how to best manage their withdrawals, says Mark Gallegos, a certified public accountant and tax partner in Porte Brown LLC.

“Beneficiaries used to be able to stick to just the annual required minimum distribution and stretch the IRA out potentially for decades,” Gallegos says. “Now they need to consider how to best draw it down within the 10-year time limit.”

There are exceptions to the 10-year rule, including: surviving spouses; a child of the decendent under the age of 21; a beneficiary who is not more than 10 years younger than the decedent; and an individual who is disabled or chronically ill.

For those who are affected, the financial results of that decision can be significant, Gallegos says. If a beneficiary takes out too much during a given year, it may bump them into a higher income bracket and cause them to pay more taxes. But if they wait until the end of the 10-year period to take out the entire amount, they may face a “tax bomb.”

“Sometimes it makes sense, for someone making a good income, to stick to the [required minimum distribution] for a few years,” Gallegos says. “Then, if they are going into retirement and have less income, they can up the withdrawals.”

Gallegos calls the strategy “tax bracket management,” and because he advises on the tax side of things, he recommends that people work with a financial adviser to consider their full picture.

“With my clients, I always say, ‘Let’s talk to your financial adviser,’” he says. “We look at cash flow and calculate the tax effect—usually people just use the cash flow that makes the most sense.”

If beneficiaries do not make the withdrawal by the due date, the amount not withdrawn may be subject to an excise tax of 25%—or 10% if it is withdrawn within two years.